AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 2003
REGISTRATION NO. 333-106184
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SCANSOFT, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 3577 94-3156479
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
9 CENTENNIAL DRIVE
PEABODY, MA 01960
(978) 977-2000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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RICHARD S. PALMER
CHIEF FINANCIAL OFFICER
SCANSOFT, INC.
9 CENTENNIAL DRIVE
PEABODY, MA 01960
(978) 977-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
KATHARINE A. MARTIN, ESQ. MARK G. BORDEN, ESQ.
ROBERT SANCHEZ, ESQ. HALE AND DORR LLP
WILSON SONSINI GOODRICH & ROSATI 60 STATE STREET
PROFESSIONAL CORPORATION BOSTON, MASSACHUSETTS 02109
650 PAGE MILL ROAD (617) 526-6000
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the merger described herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering. [ ] ____________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE
AND MAY BE CHANGED. SCANSOFT MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 1, 2003
(SCANSOFT LOGO)
July 1, 2003
Dear ScanSoft, Inc. Stockholders:
We will hold a special meeting of our stockholders at the offices of our
headquarters, 9 Centennial Drive, Peabody, Massachusetts 01960, on Monday,
August 11, 2003 at 10:00 am Eastern time.
At the meeting, you will be asked to consider and vote upon the following
proposals:
Proposal No. 1 asks you to approve the issuance of shares of ScanSoft
common stock pursuant to a merger agreement with SpeechWorks International, Inc.
Upon completion of the merger, holders of SpeechWorks common stock will be
entitled to receive 0.860 of a share of ScanSoft common stock for each share of
SpeechWorks common stock they hold at that time. Immediately after the merger,
SpeechWorks stockholders are expected to own approximately 32.8% of the
outstanding shares of ScanSoft common stock, which assumes the exercise of
in-the-money SpeechWorks options as of June 27, 2003. ScanSoft common stock is
listed on the NASDAQ National Market under the trading symbol "SSFT."
Proposal No. 2 asks you to approve the amendment of ScanSoft's 1995
Employee Stock Purchase Plan to increase the number of shares of ScanSoft common
stock reserved for issuance under the plan from 1,000,000 to 1,500,000. The
purpose of this increase is to facilitate ScanSoft stock ownership by ScanSoft
employees and directors.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY APPROVED
THE PROPOSALS REFERRED TO ABOVE AND CONCLUDED THAT THEY ARE IN THE BEST
INTERESTS OF SCANSOFT AND ITS STOCKHOLDERS. YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THE PROPOSALS REFERRED TO ABOVE.
In the material accompanying this letter, you will find a notice of special
meeting of stockholders, a joint proxy statement/prospectus relating to the
actions to be taken by the ScanSoft stockholders at the ScanSoft special meeting
(as well as the actions to be taken by the SpeechWorks stockholders at their
special meeting) and a proxy. The joint proxy statement/prospectus more fully
describes the merger agreement and the proposed merger and includes information
about SpeechWorks and ScanSoft.
We encourage you to read the joint proxy statement/prospectus, which
includes important information about the merger. In addition, the section
entitled "Risk Factors" beginning on page 20 of the joint proxy
statement/prospectus contains a description of risks that you should consider in
evaluating the merger.
It is important that you use this opportunity to take part in the affairs
of ScanSoft by voting on the business to come before this meeting. WHETHER OR
NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR
SHARES MAY BE REPRESENTED AT THE MEETING. YOUR VOTE IS VERY IMPORTANT.
Returning the proxy does not deprive you of your right to attend the meeting and
to vote your shares in person.
Sincerely,
/s/ Paul Ricci
Paul A. Ricci
Chairman and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION OR THE SECURITIES OF
SCANSOFT TO BE ISSUED PURSUANT TO THE MERGER, OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus is dated July 1, 2003, and is first
being mailed to ScanSoft stockholders on or about July 3, 2003.
(SPEECHWORKS LOGO)
July 1, 2003
Dear SpeechWorks International, Inc. Stockholders:
We will hold a special meeting of our stockholders at the offices of Hale
and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, on Monday, August
11, 2003 at 10:00 am Eastern time.
At the meeting, you will be asked to consider and vote upon a proposal to
adopt the merger agreement and approve the merger of a wholly owned subsidiary
of ScanSoft, Inc. with SpeechWorks as described in detail in the attached notice
of special meeting of stockholders and joint proxy statement/prospectus. Upon
completion of the merger, holders of SpeechWorks common stock will be entitled
to receive 0.860 of a share of ScanSoft common stock for each share of
SpeechWorks common stock they hold at that time. SpeechWorks common stock is
listed on the NASDAQ National Market under the trading symbol "SPWX." ScanSoft
common stock is listed on the NASDAQ National Market under the trading symbol
"SSFT."
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE MERGER AND RELATED TRANSACTIONS WITH
SCANSOFT AND DETERMINED THAT THE MERGER AGREEMENT AND THE MERGER ARE FAIR TO AND
IN THE BEST INTERESTS OF SPEECHWORKS AND ITS STOCKHOLDERS. YOUR BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO ADOPT THE
MERGER AGREEMENT AND APPROVE THE MERGER.
In the material accompanying this letter, you will find a notice of special
meeting of stockholders, a joint proxy statement/prospectus relating to the
actions to be taken by SpeechWorks stockholders at the SpeechWorks special
meeting (as well as the actions to be taken by the ScanSoft stockholders at
their special meeting) and a proxy. The joint proxy statement/prospectus more
fully describes the merger agreement and the proposed merger and includes
information about SpeechWorks and ScanSoft.
We encourage you to read the joint proxy statement/prospectus, which
includes important information about the merger. In addition, the section
entitled "Risk Factors" beginning on page 20 of the joint proxy
statement/prospectus contains a description of risks that you should consider in
evaluating the merger.
It is important that you use this opportunity to take part in the affairs of
SpeechWorks by voting on the business to come before this meeting. WHETHER OR
NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR
SHARES MAY BE REPRESENTED AT THE MEETING. YOUR VOTE IS VERY IMPORTANT. Returning
the proxy does not deprive you of your right to attend the meeting and to vote
your shares in person.
Sincerely,
/s/ Stuart Patterson
Stuart R. Patterson
Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION OR THE SECURITIES OF
SCANSOFT TO BE ISSUED PURSUANT TO THE MERGER, OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus is dated July 1, 2003, and is first
being mailed to SpeechWorks stockholders on or about July 3, 2003.
SCANSOFT, INC.
9 CENTENNIAL DRIVE
PEABODY, MA 01960
(978) 977-2000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 11, 2003
Dear ScanSoft, Inc. Stockholders:
A special meeting of stockholders of ScanSoft, Inc. will be held at
ScanSoft's headquarters, 9 Centennial Drive, Peabody, Massachusetts 01960, on
Monday, August 11, 2003 at 10:00 am Eastern time for the purpose of considering
and acting upon the following proposals:
(1) To consider and vote upon a proposal to approve the issuance of shares
of ScanSoft common stock in connection with a merger of Spiderman Acquisition
Corporation with and into SpeechWorks International, Inc. contemplated by the
Agreement and Plan of Reorganization among ScanSoft, Spiderman Acquisition
Corporation and SpeechWorks;
(2) To consider and vote upon a proposal to amend ScanSoft's 1995 Employee
Stock Purchase Plan to increase the number of shares reserved for issuance under
the plan from 1,000,000 to 1,500,000; and
(3) To transact such other business as may properly come before the special
meeting or any postponement or adjournment thereof.
The ScanSoft Board of Directors has determined that the proposals described
above are advisable and in the best interests of ScanSoft and its stockholders,
and unanimously recommends that ScanSoft stockholders vote "FOR" each of the
proposals. The terms of the proposed merger with SpeechWorks and the related
merger agreement, as well as the other proposals described above, are more fully
described in the joint proxy statement/prospectus attached to this notice.
The ScanSoft Board of Directors has fixed the close of business on June 30,
2003 as the record date for determination of ScanSoft stockholders entitled to
notice of, and to vote at, the ScanSoft special meeting and at any postponements
or adjournments thereof. A list of stockholders entitled to vote will be
available at 9 Centennial Drive, Peabody, Massachusetts 01960 for ten days prior
to the ScanSoft special meeting during ordinary business hours.
WE ENCOURAGE YOU TO VOTE ON THESE IMPORTANT MATTERS.
By Order of the
Board of Directors
/s/ KATHARINE A. MARTIN
Katharine A. Martin
Secretary
Peabody, Massachusetts
July 1, 2003
YOU ARE CORDIALLY INVITED TO ATTEND THE SCANSOFT SPECIAL MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE SCANSOFT SPECIAL MEETING, PLEASE SIGN,
DATE AND RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE.
SPEECHWORKS INTERNATIONAL, INC.
695 ATLANTIC AVENUE
BOSTON, MASSACHUSETTS 02111
(617) 428-4444
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 11, 2003
Dear SpeechWorks International, Inc. Stockholders:
A special meeting of stockholders of SpeechWorks International, Inc. will
be held at Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, on
Monday, August 11, 2003 at 10:00 am Eastern time for the purpose of considering
and acting upon the following proposals:
(1) To consider and vote upon a proposal to adopt the Agreement and Plan of
Reorganization among ScanSoft, Inc., Spiderman Acquisition Corporation and
SpeechWorks, and approve the merger contemplated by the Agreement and Plan of
Reorganization; and
(2) To transact such other business as may properly come before the special
meeting or any postponement or adjournment thereof.
The SpeechWorks Board of Directors has determined that the merger agreement
and the merger are advisable and in the best interests of SpeechWorks and its
stockholders and that the terms of the merger are fair to SpeechWorks and to its
stockholders, and unanimously recommends that SpeechWorks stockholders vote
"FOR" the proposal to adopt the Agreement and Plan of Reorganization and approve
the merger. The terms of the proposed merger with ScanSoft and the related
merger agreement are more fully described in the joint proxy
statement/prospectus attached to this notice.
The SpeechWorks Board of Directors has fixed the close of business on June
30, 2003 as the record date for determination of SpeechWorks stockholders
entitled to notice of, and to vote at, the SpeechWorks special meeting and at
any postponements or adjournments thereof. A list of stockholders entitled to
vote will be available at 695 Atlantic Avenue, Boston, Massachusetts 02111 for
ten days prior to the SpeechWorks special meeting during ordinary business
hours.
WE ENCOURAGE YOU TO VOTE ON THIS IMPORTANT MATTER.
By Order of the
Board of Directors
/s/ WRKA
W. Robert Kellegrew, Jr.
Secretary
Boston, Massachusetts
July 1, 2003
YOU ARE CORDIALLY INVITED TO ATTEND THE SPEECHWORKS SPECIAL MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPEECHWORKS SPECIAL MEETING, PLEASE SIGN,
DATE AND RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE.
ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important business and
financial information about SpeechWorks from documents filed with the Securities
and Exchange Commission, which we refer to as the SEC, that are not included in
or delivered with this joint proxy statement/prospectus. SpeechWorks will
provide you with copies of this information, without charge, upon written or
oral request to:
SPEECHWORKS INTERNATIONAL, INC.
695 Atlantic Avenue
Boston, Massachusetts 02111
Attention: Legal Department
Telephone Number: (617) 428-4444
ScanSoft files annual, quarterly and current reports, proxy and information
statements and other information with the SEC. ScanSoft will provide you with
copies of this information without charge, upon written or oral request to:
SCANSOFT, INC.
9 Centennial Drive
Peabody, MA 01960
Attention: Investor Relations
Telephone Number: (978) 977-2000
PLEASE REQUEST DOCUMENTS FROM EITHER COMPANY NOT LATER THAN AUGUST 4, 2003.
UPON REQUEST, WE WILL MAIL ANY DOCUMENTS TO YOU BY FIRST CLASS MAIL BY THE NEXT
BUSINESS DAY.
See the section entitled "Where You Can Find More Information" on page 171
of this joint proxy statement/prospectus for more information about the
documents referred to in this joint proxy statement/ prospectus.
You should rely only on the information contained in, or incorporated by
reference into, this joint proxy statement/prospectus in deciding how to vote on
the respective ScanSoft and SpeechWorks proposals. No one has been authorized to
provide you with information that is different from that contained in, or
incorporated by reference into, this joint proxy statement/prospectus. This
joint proxy statement/prospectus is dated July 1, 2003. You should not assume
that the information contained in, or incorporated by reference into, this joint
proxy statement/prospectus is accurate as of any date other than that date.
This joint proxy statement/prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy, any securities, or the solicitation of a
proxy, in any jurisdiction to or from any person to whom it is unlawful to make
any such offer or solicitation in such jurisdiction. Information contained in
this joint proxy statement/prospectus regarding ScanSoft and Spiderman
Acquisition Corporation has been provided by ScanSoft and information contained
in this joint proxy statement/prospectus regarding SpeechWorks has been provided
by SpeechWorks.
TABLE OF CONTENTS
PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER OF SCANSOFT AND
SPEECHWORKS............................................... 1
SUMMARY OF THE MERGER....................................... 6
The Companies............................................. 6
Structure of the Merger................................... 7
Voting Requirements....................................... 7
Recommendation of the Boards of Directors................. 7
Opinions of Financial Advisors............................ 7
Completion and Effectiveness of the Merger................ 8
Conditions to Completion of the Merger.................... 8
Termination of the Merger Agreement....................... 8
Payment of Termination Fee................................ 9
SpeechWorks Prohibited from Soliciting Other Offers....... 9
Voting Agreements......................................... 9
Share Ownership of Directors and Executive Officers of
ScanSoft and SpeechWorks............................... 10
Interests of Directors and Executive Officers in the
Merger................................................. 10
Material United States Federal Income Tax Consequences.... 11
Restrictions on the Ability to Sell ScanSoft Stock........ 11
Regulatory Approvals...................................... 11
Listing of ScanSoft Common Stock.......................... 12
Appraisal Rights.......................................... 12
SUMMARY CONSOLIDATED FINANCIAL DATA OF SCANSOFT............. 13
SUMMARY CONSOLIDATED FINANCIAL DATA OF SPEECHWORKS.......... 14
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
FINANCIAL DATA............................................ 15
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA......... 16
COMPARATIVE PER SHARE MARKET PRICE DATA..................... 18
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 19
RISK FACTORS................................................ 20
Risks Related to the Merger............................... 20
Risks Related to ScanSoft and the Combined Company........ 24
Risks Related to SpeechWorks.............................. 32
THE SPECIAL MEETING OF SCANSOFT STOCKHOLDERS................ 40
General................................................... 40
Date, Time and Place...................................... 40
Purpose of the ScanSoft Special Meeting................... 40
Record Date, Shares Entitled to Vote...................... 40
Voting Procedures......................................... 40
Vote Required............................................. 41
Quorum, Abstentions and Broker Non-Votes.................. 41
Shares Owned and Voted by ScanSoft Directors and Executive
Officers............................................... 42
Revoking Your Proxy....................................... 42
Solicitation of Proxies and Expenses...................... 42
i
PAGE
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Other Matters............................................. 43
Recommendation of the ScanSoft Board of Directors......... 43
THE SPECIAL MEETING OF SPEECHWORKS STOCKHOLDERS............. 44
General................................................... 44
Date, Time and Place...................................... 44
Purpose of the SpeechWorks Special Meeting................ 44
Record Date, Shares Entitled to Vote...................... 44
Voting Procedures......................................... 44
Vote Required............................................. 45
Quorum, Abstentions and Broker Non-Votes.................. 45
Shares Owned and Voted by SpeechWorks Directors and
Executive Officers..................................... 46
Revoking Your Proxy....................................... 46
Solicitation of Proxies and Expenses...................... 46
Other Matters............................................. 46
Recommendation of the SpeechWorks Board of Directors...... 47
THE MERGER.................................................. 48
Background of the Merger.................................. 48
Consideration of the Merger by ScanSoft................... 51
ScanSoft's Reasons for the Merger and Recommendation of
the ScanSoft Board of Directors....................... 51
Opinion of ScanSoft Financial Advisor.................. 52
Consideration of the Merger by SpeechWorks................ 59
SpeechWorks' Reasons for the Merger and Recommendation
of the SpeechWorks Board of Directors................. 59
Opinion of SpeechWorks Financial Advisor............... 61
Interests of Certain Persons in the Merger................ 69
Interests of ScanSoft Directors and Executive Officers
in the Merger......................................... 69
Interests of SpeechWorks Directors and Executive
Officers in the Merger................................ 69
Board of Directors and Management of ScanSoft Following
the Merger............................................. 72
United States Federal Income Tax Consequences of the
Merger................................................. 72
Accounting Treatment of the Merger........................ 74
Regulatory Approvals...................................... 74
Listing on the NASDAQ National Market of ScanSoft Shares
Issued Pursuant to the Merger.......................... 74
Delisting and Deregistration of SpeechWorks Common Stock
After the Merger....................................... 74
Restrictions on Sales of Shares of ScanSoft Common Stock
Received in the Merger................................. 74
Appraisal Rights.......................................... 75
AGREEMENTS RELATED TO THE MERGER............................ 76
The Merger Agreement...................................... 76
Structure of the Merger................................ 76
Effective Time and Timing of Closing................... 76
Merger Consideration................................... 76
Fractional Shares...................................... 76
Exchange of SpeechWorks Stock Certificates for ScanSoft
Stock Certificates.................................... 77
Distributions with Respect to Unexchanged Shares....... 77
Transfers of Ownership and Lost Stock Certificates..... 77
ii
PAGE
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Treatment of SpeechWorks Stock Options................. 77
Treatment of Rights under the SpeechWorks Stock
Purchase Plan......................................... 78
Representations and Warranties......................... 78
Covenants of SpeechWorks............................... 79
Covenants of ScanSoft.................................. 81
Other Covenants........................................ 82
Indemnification and Insurance.......................... 83
Employee Benefits...................................... 83
Board of Directors and Management of ScanSoft Following
the Merger............................................ 84
Regulatory Approvals................................... 84
Limitation on Reasonable Efforts to Obtain Regulatory
Approvals............................................. 84
Conditions to Completion of the Merger................. 85
Alternative Transactions............................... 86
SpeechWorks Board of Directors Recommendations......... 88
ScanSoft Board of Directors Recommendations............ 88
Definition of Material Adverse Effect.................. 89
Termination of the Merger Agreement.................... 89
Payment of Termination Fee............................. 91
Costs and Expenses..................................... 92
ScanSoft Voting Agreements................................ 92
Agreement to Vote...................................... 92
Transfer Restrictions.................................. 93
Termination............................................ 93
SpeechWorks Voting Agreements............................. 93
Agreement to Vote...................................... 93
Transfer Restrictions.................................. 94
Termination............................................ 94
Affiliate Agreements...................................... 94
Employment Agreements..................................... 94
AMENDMENT OF THE SCANSOFT 1995 EMPLOYEE STOCK PURCHASE
PLAN...................................................... 96
Plan Description.......................................... 96
Vote Required; Recommendation of the ScanSoft Board of
Directors.............................................. 98
Equity Compensation Plan Information...................... 98
SELECTED FINANCIAL DATA OF SCANSOFT......................... 99
SELECTED QUARTERLY OPERATING RESULTS OF SCANSOFT............ 101
SELECTED FINANCIAL DATA OF SPEECHWORKS...................... 103
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA........ 105
ADDITIONAL INFORMATION CONCERNING SCANSOFT.................. 107
ScanSoft's Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 107
Recent Developments.................................... 107
Results of Operations.................................. 108
Liquidity and Capital Resources........................ 120
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.................... 122
iii
PAGE
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Quantitative and Qualitative Disclosures About Market
Risk................................................... 123
ScanSoft's Business....................................... 123
Business............................................... 123
Properties............................................. 134
Legal Proceedings...................................... 134
Management of ScanSoft.................................... 136
Compensation Committee Interlocks and Insider
Participation.......................................... 137
Compensation of Non-Employee Directors.................... 138
ScanSoft Executive Compensation........................... 138
ScanSoft Compensation Plans............................... 141
Limitations on Directors' Liability and Indemnification... 154
Certain Relationships and Related Transactions............ 155
Security Ownership of Certain Beneficial Owners and
Management of ScanSoft................................. 156
Description of ScanSoft's Capital Stock................... 158
Transfer Agent and Registrar.............................. 162
NASDAQ National Market Listing............................ 162
Market Price of ScanSoft's Common Stock................... 162
ScanSoft's Dividend Policy................................ 162
SPEECHWORKS 2000 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK
PLAN...................................................... 163
COMPARISON OF RIGHTS OF HOLDERS OF SCANSOFT COMMON STOCK AND
SPEECHWORKS COMMON STOCK.................................. 165
Authorized Capital Stock.................................. 165
Board of Directors........................................ 165
Removal of Directors...................................... 166
Filling Vacancies on the Board of Directors............... 166
Stockholder Action by Written Consent..................... 166
Ability to Call Special Meetings of Stockholders.......... 166
Advance Notice Provisions for Stockholder Nominations and
Proposals.............................................. 167
Amendment of Certificate of Incorporation................. 167
Amendment of Bylaws....................................... 167
Indemnification of Officers and Directors................. 168
Stockholder Rights Plan................................... 168
LEGAL MATTERS............................................... 170
EXPERTS..................................................... 170
DOCUMENTS INCORPORATED BY REFERENCE......................... 170
WHERE YOU CAN FIND MORE INFORMATION......................... 171
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEXES:
A -- Agreement and Plan of Reorganization................... A-1
B -- Opinion of Evercore Partners........................... B-1
C -- Opinion of Morgan Stanley & Co. Incorporated........... C-1
D -- Form of Amended and Restated ScanSoft Voting
Agreement................................................. D-1
E -- Form of Amended and Restated SpeechWorks Voting
Agreement................................................. E-1
iv
QUESTIONS AND ANSWERS ABOUT THE MERGER OF SCANSOFT AND SPEECHWORKS
GENERAL QUESTIONS AND ANSWERS
Q: WHY ARE SCANSOFT AND SPEECHWORKS PROPOSING THE MERGER?
A: We are proposing the merger because we believe the combination of our
two companies will bring together the broadest set of speech technologies,
products and professional services in a diversified organization that is able to
support partners and customers on a global scale more effectively and
efficiently. Furthermore, after reviewing numerous strategic alternatives for
enhancing stockholder value, the boards of directors of both ScanSoft and
SpeechWorks believes that the merger will:
- broaden our technical strengths and resources to develop and deliver
enhanced products;
- strengthen our channel and partner capabilities with an expanded
portfolio of technologies, applications and services;
- enhance our competitive position in key vertical markets, including
telecommunications, travel/ hospitality, financial services, automotive
and government;
- allow the combined company to utilize the skill and resources from both
companies' management and employee teams;
- provide a professional services organization to help the combined company
better serve our major enterprise accounts, channel partners and
telecommunications carriers; and
- generate cost synergies through headcount reductions, office site
consolidations and reductions in marketing and administrative expenses.
Q: WHAT WILL HAPPEN PURSUANT TO THE MERGER?
A: Pursuant to the merger, a wholly owned subsidiary of ScanSoft will
merge with SpeechWorks and SpeechWorks will survive the merger as a wholly owned
subsidiary of ScanSoft, and SpeechWorks stockholders will become ScanSoft
stockholders. Assuming the merger had been completed on June 27, 2003 and
in-the-money options to purchase shares of SpeechWorks common stock had been
exercised, SpeechWorks stockholders would have owned approximately 32.8% of the
outstanding shares of ScanSoft common stock immediately after the merger and
ScanSoft stockholders would have owned the remaining 67.2%. Under these same
assumptions, on a fully-diluted basis, SpeechWorks equity holders would have
owned approximately 26.1% of the fully-diluted shares of ScanSoft common stock
immediately after the merger. The calculation on a fully-diluted basis assumes:
the conversion or exercise of outstanding shares of ScanSoft preferred stock,
the Philips convertible debenture, outstanding warrants and options to purchase
shares of ScanSoft common stock, and in-the-money options to purchase shares of
SpeechWorks common stock.
Q: WHAT STOCKHOLDER APPROVALS ARE REQUIRED TO COMPLETE THE MERGER?
A: We cannot complete the merger unless, among other things, a majority of
the outstanding shares of SpeechWorks common stock entitled to vote at the
SpeechWorks special meeting vote to adopt the merger agreement and approve the
merger. As of June 27, 2003, SpeechWorks directors and executive officers and
certain of their affiliates were entitled to vote approximately 8.8% of the
outstanding shares of SpeechWorks common stock. These directors and executive
officers have already agreed with ScanSoft to vote their shares of SpeechWorks
common stock in favor of the adoption of the merger agreement and the approval
of the merger. The voting agreements permit the sale of certain shares of common
stock by SpeechWorks directors and executive officers.
In addition, a majority of the votes cast at the ScanSoft special meeting
on the proposal to approve the issuance of shares of ScanSoft common stock in
connection with the merger must be voted in favor of such issuance in order to
complete the merger. As of June 27, 2003, ScanSoft directors and officers were
entitled to vote approximately 1.0% of the outstanding shares of ScanSoft common
stock. These directors
1
and officers have already agreed with SpeechWorks to vote their shares of
ScanSoft common stock in favor of the issuance of shares of ScanSoft common
stock in connection with the merger. The voting agreements permit the sale of
certain shares of common stock by ScanSoft directors and executive officers.
Q: HOW DO THE BOARDS OF DIRECTORS OF SCANSOFT AND SPEECHWORKS RECOMMEND
THAT I VOTE?
A: The ScanSoft board of directors recommends that ScanSoft stockholders
vote "FOR" the proposal to approve the issuance of shares of ScanSoft common
stock in connection with the merger.
The SpeechWorks board of directors recommends that SpeechWorks stockholders
vote "FOR" the proposal to adopt the merger agreement and approve the merger.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We expect to complete the merger as quickly as possible once all the
conditions to the merger, including obtaining the approvals of ScanSoft and
SpeechWorks stockholders, are fulfilled. While we cannot predict the exact
timing, we currently expect to complete the merger in the third quarter of
calendar year 2003.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT SCANSOFT AND SPEECHWORKS?
A: You can find more information about ScanSoft and SpeechWorks from
reading this joint proxy statement/prospectus and the various sources described
in this joint proxy statement/prospectus under the section entitled "Where You
Can Find More Information."
QUESTIONS AND ANSWERS FOR SCANSOFT STOCKHOLDERS
Q: WHEN AND WHERE IS THE SCANSOFT SPECIAL MEETING?
A: The ScanSoft special meeting will be held at ScanSoft's offices at 9
Centennial Drive, Peabody, Massachusetts on August 11, 2003 at 10:00 am, Eastern
time.
Q: WHAT WILL HAPPEN AT THE SCANSOFT SPECIAL MEETING?
A: At the ScanSoft special meeting, ScanSoft stockholders will vote on the
issuance of shares of ScanSoft common stock in connection with the merger.
Q: ARE ANY OTHER MATTERS BEING VOTED UPON AT THE SCANSOFT SPECIAL MEETING?
A: ScanSoft stockholders are being asked to vote to adopt an amendment to
ScanSoft's 1995 Employee Stock Purchase Plan, which we sometimes refer to as the
1995 ESPP, to increase the number of shares of ScanSoft common stock reserved
for issuance under the 1995 ESPP. The completion of the merger is not
conditioned on the approval of the amendment to the 1995 ESPP, and the amendment
to the 1995 ESPP is not conditioned on the completion of the merger.
Q: WHAT DO I NEED TO DO TO VOTE?
A: After carefully reading and considering the information contained in
this joint proxy statement/ prospectus, please mail your completed and signed
proxy card in the enclosed postage-paid return envelope as soon as possible so
that your shares may be represented at the ScanSoft special meeting. In order to
assure that we obtain your vote, please vote as instructed on your proxy card
even if you currently plan to attend the ScanSoft special meeting and vote in
person.
If you sign and mail your proxy and do not indicate how you want to vote,
your proxy will be voted for the approval of the issuance of shares of ScanSoft
common stock in connection with the merger and for the adoption of the amendment
to the 1995 Employee Stock Purchase Plan.
2
Q: MAY I CHANGE MY VOTE EVEN AFTER RETURNING A PROXY CARD?
A: Yes. If you want to change your vote, you may do so at any time before
your proxy is voted at the ScanSoft special meeting. You can do this in one of
three ways. First, you can complete and send a proxy with a later date. Second,
you can send a written notice to the corporate secretary of ScanSoft stating
that you would like to revoke your proxy. Third, you can attend the ScanSoft
special meeting and vote in person. Your attendance at the ScanSoft special
meeting alone will not revoke your proxy.
Q: IF MY BROKER HOLDS MY SHARES IN "STREET NAME," HOW DO I VOTE MY SHARES?
A: You should contact your broker. You should follow the directions
provided by your broker to vote your shares. Your broker will not be permitted
to vote on the issuance of shares of common stock in connection with the merger
unless your broker receives appropriate instructions from you. However, your
broker will have discretionary voting authority to vote on the plan amendment if
you do not provide your broker with appropriate instructions.
If you have instructed your broker to vote your shares, you must follow
directions received from your broker to change those instructions. You cannot
vote shares held in "street name" by returning a proxy card directly to ScanSoft
or by voting in person at the ScanSoft special meeting.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
ISSUANCE OF SHARES OF SCANSOFT COMMON STOCK IN CONNECTION WITH THE MERGER?
A: Yes. You should consider the risk factors set out in the section
entitled "Risk Factors" beginning on page 20 of this joint proxy
statement/prospectus.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about the merger or if you need additional
copies of this joint proxy statement/prospectus or the enclosed proxy card, you
should contact:
SCANSOFT, INC.
9 Centennial Drive
Peabody, Massachusetts 01960
Attention: Chief Financial Officer
Telephone Number: (978) 977-2000
3
QUESTIONS AND ANSWERS FOR SPEECHWORKS STOCKHOLDERS
Q: WHEN AND WHERE IS THE SPEECHWORKS SPECIAL MEETING?
A: The SpeechWorks special meeting will be held at Hale and Dorr LLP, 60
State Street, Boston, Massachusetts on August 11, 2003 at 10:00 am, Eastern
time.
Q: WHAT WILL HAPPEN AT THE SPEECHWORKS SPECIAL MEETING?
A: At the SpeechWorks special meeting, SpeechWorks stockholders will be
asked to consider and vote upon a proposal to adopt the merger agreement and to
approve the merger.
Q: WHAT DO I NEED TO DO TO VOTE?
A: After carefully reading and considering the information contained in
this joint proxy statement/ prospectus and the other information to which you
have been referred, please mail your completed and signed proxy card in the
enclosed postage-paid return envelope as soon as possible so that your shares
may be represented at the SpeechWorks special meeting. In order to assure that
we obtain your vote, please vote as instructed on your proxy card even if you
currently plan to attend the SpeechWorks special meeting and vote in person.
If you sign and mail your proxy and do not indicate how you want to vote,
your proxy will be voted for the adoption of the merger agreement and the
approval of the merger.
Q: MAY I CHANGE MY VOTE EVEN AFTER RETURNING A PROXY CARD?
A: Yes. If you want to change your vote, you may do so at any time before
your proxy is voted at the SpeechWorks special meeting. You can do this in one
of three ways. First, you can complete and send a proxy with a later date.
Second, you can send a written notice to the corporate secretary of SpeechWorks
stating that you would like to revoke your proxy. Third, you can attend the
SpeechWorks special meeting and vote in person. Your attendance at the
SpeechWorks special meeting alone will not revoke your proxy.
Q: IF MY BROKER HOLDS MY SHARES IN "STREET NAME," WILL MY BROKER VOTE MY
SHARES FOR ME?
A: No. You should contact your broker. You should follow the directions
provided by your broker to vote your shares. Your broker will not vote your
shares on the merger proposal unless your broker receives appropriate
instructions from you. If you do not provide your broker with voting
instructions, your shares will be considered present at the SpeechWorks special
meeting for purposes of determining a quorum but will not be considered to have
been voted in favor of adoption of the merger agreement and approval of the
merger. As a result, your shares will have the effect of a vote against adoption
of the merger agreement and approval of the merger if you do not give voting
instructions to your broker.
If you have instructed your broker to vote your shares, you must follow
directions received from your broker to change those instructions. You cannot
vote shares held in "street name" by returning a proxy card directly to
SpeechWorks or by voting in person at the SpeechWorks special meeting.
Q: WHAT WILL SPEECHWORKS STOCKHOLDERS BE ENTITLED TO RECEIVE PURSUANT TO
THE MERGER?
A: If the merger is completed, SpeechWorks stockholders will be entitled
to receive 0.860 of a share of ScanSoft common stock for each share of
SpeechWorks common stock held at the effective time of the merger. Instead of a
fractional share of ScanSoft common stock, SpeechWorks stockholders will be
entitled to receive an amount of cash equal to the value of the fractional share
that the respective SpeechWorks stockholder would otherwise be entitled to
receive after aggregating all of such stockholder's SpeechWorks shares in a
single account, based on the average closing price of ScanSoft common stock as
reported on the NASDAQ National Market.
4
SpeechWorks will terminate and cancel all outstanding stock options to
purchase shares of SpeechWorks common stock that are not exercised immediately
before the effective time of the merger.
ScanSoft will assume all outstanding warrants to purchase shares of
SpeechWorks common stock that are not exercised immediately before the effective
time of the merger. Assumed warrants will become exercisable to purchase shares
of ScanSoft common stock and will generally have the same terms and conditions
as were applicable under the applicable SpeechWorks warrants, except that the
number of shares of ScanSoft common stock subject to such warrants, and the
exercise price of such warrants, will each be adjusted by the exchange ratio.
Q: WILL SPEECHWORKS STOCKHOLDERS BE ABLE TO TRADE THE SCANSOFT COMMON
STOCK THAT THEY RECEIVE PURSUANT TO THE MERGER?
A: Yes. The shares of ScanSoft common stock that SpeechWorks stockholders
receive pursuant to the merger will be listed on the NASDAQ National Market
under the symbol "SSFT." Certain persons who are deemed affiliates of
SpeechWorks will be required to comply with Rule 145 promulgated under the
Securities Act of 1933, as amended, which we refer to as the Securities Act, if
they sell their shares of ScanSoft common stock received pursuant to the merger.
Q: SHOULD I SEND IN MY SPEECHWORKS STOCK CERTIFICATES NOW?
A: No. If SpeechWorks stockholders adopt the merger agreement and approve
the merger, after the merger is completed, ScanSoft will send SpeechWorks
stockholders written instructions, including a letter of transmittal, that will
explain how to exchange SpeechWorks stock certificates for ScanSoft common stock
certificates. Please do not send in any SpeechWorks stock certificates until you
receive these written instructions and the letter of transmittal.
Q: AM I ENTITLED TO APPRAISAL RIGHTS IN CONNECTION WITH THE MERGER?
A: No. You are not entitled to appraisal rights in connection with the
merger.
Q: WHAT ARE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER?
A: Consummation of the merger is conditioned upon the receipt by ScanSoft
and SpeechWorks of legal opinions to the effect that the merger will qualify as
a reorganization under the Internal Revenue Code of 1986, as amended, which we
refer to as the Internal Revenue Code. Assuming that the merger so qualifies,
you will not recognize any gain or loss for U.S. federal income tax purposes on
the exchange of shares of SpeechWorks common stock for shares of ScanSoft common
stock pursuant to the merger, except for any gain or loss attributable to cash
received instead of fractional ScanSoft shares. The tax consequences to you of
the merger will depend on your particular circumstances. You should consult your
tax advisor for a full understanding of the tax consequences of the merger to
you.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER?
A: Yes. You should consider the risk factors set out in the section
entitled "Risk Factors" beginning on page 20 of this joint proxy
statement/prospectus.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about the merger or if you need additional
copies of this joint proxy statement/prospectus or the enclosed proxy card, you
should contact:
SPEECHWORKS INTERNATIONAL, INC.
695 Atlantic Avenue
Boston, Massachusetts 02111
Attention: Legal Department, W. Robert Kellegrew, Jr., Esq.
Telephone Number: (617) 428-4444
5
SUMMARY OF THE MERGER
The following is a summary of the information contained in this document
relating to the merger of ScanSoft and SpeechWorks. This summary may not contain
all of the information that is important to you. You should carefully read this
entire joint proxy statement/prospectus and the other documents to which we
refer. In particular, you should read the annexes attached to this joint proxy
statement/ prospectus, including the merger agreement which is attached as Annex
A and is incorporated by reference into this joint proxy statement/prospectus.
In addition, SpeechWorks incorporates by reference into this joint proxy
statement/prospectus important business and financial information about
SpeechWorks. You may obtain the information incorporated by reference into this
joint proxy statement/prospectus without charge by following the instructions in
the section entitled "Where You Can Find More Information" beginning on page
171.
THE COMPANIES
ScanSoft, Inc.
9 Centennial Drive
Peabody, MA 01960
(978) 977-2000
http://www.scansoft.com
ScanSoft is a leading provider of software that allows users to convert
documents, images and speech into information used within digital applications.
ScanSoft's products and technologies automate manual processes and help
enterprises, professionals and consumers increase productivity, reduce costs and
save time. ScanSoft's products are built upon digital capture and speech
technologies, and are sold as solutions into the financial, legal, healthcare,
government, telecommunications and automotive industries. ScanSoft's digital
capture technologies transform text and images into digital documents and
information. ScanSoft's speech technologies transform speech into text and text
into speech, and enable the voice control of hardware and software applications.
ScanSoft's common stock is traded on the NASDAQ National Market under the symbol
"SSFT."
SpeechWorks International, Inc.
695 Atlantic Avenue
Boston, Massachusetts 02111
(617) 428-4444
http://www.speechworks.com
SpeechWorks is a leading provider of software products and professional
services that enable enterprises, carriers and government organizations to offer
automated, speech-activated services over any telephone. SpeechWorks'
network-based speech recognition solutions enable consumers to direct their own
calls, obtain information and conduct transactions automatically, simply by
speaking naturally over any telephone, anytime. SpeechWorks' network-based
text-to-speech solutions enable consumers to experience natural-sounding
synthesized speech that supports a number of applications, including unified
messaging. SpeechWorks' embedded technologies in both speech recognition and
text-to-speech enable automobile and device manufacturers to support both speech
recognition and text-to-speech in the automobile or on the device itself.
SpeechWorks' common stock is traded on the NASDAQ National Market under the
symbol "SPWX."
Spiderman Acquisition Corporation
9 Centennial Drive
Peabody, MA 01960
(978) 977-2000
Spiderman Acquisition Corporation is a wholly owned subsidiary of ScanSoft
recently formed solely for the purpose of effecting the merger. It has no
business operations.
6
STRUCTURE OF THE MERGER (SEE PAGE 76)
We propose a merger pursuant to which Spiderman Acquisition Corporation, a
wholly owned subsidiary of ScanSoft, will merge with and into SpeechWorks, and
thereafter will cease to exist as a separate corporate entity. After the merger,
SpeechWorks will be a wholly owned subsidiary of ScanSoft, and SpeechWorks
stockholders will be entitled to become ScanSoft stockholders.
The terms and conditions of the merger are contained in the merger
agreement, which is attached as Annex A to this joint proxy
statement/prospectus. Please carefully read the merger agreement as it is the
legal document that governs the proposed merger.
VOTING REQUIREMENTS (SEE PAGES 41 AND 45)
ScanSoft and SpeechWorks cannot complete the merger unless ScanSoft
stockholders vote to approve the issuance of shares of ScanSoft common stock in
connection with the merger and SpeechWorks stockholders vote to adopt the merger
agreement and approve the merger.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS REGARDING THE MERGER (SEE PAGES 51
AND 59)
After careful consideration of numerous factors, the ScanSoft board of
directors has determined that the proposed merger is advisable, and is fair to
and in the best interests of ScanSoft and its stockholders and recommends that
ScanSoft stockholders vote "FOR" the proposal to approve the issuance of shares
of ScanSoft common stock in connection with the merger.
After careful consideration of numerous factors, the SpeechWorks board of
directors has determined that the merger agreement and the merger are advisable,
and are fair to and in the best interests of SpeechWorks and its stockholders
and recommends that SpeechWorks stockholders vote "FOR" the proposal to adopt
the merger agreement and approve the merger.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 52 AND 61)
On April 23, 2003, Evercore Partners delivered its written opinion to the
ScanSoft board of directors that, as of that date and based upon and subject to
the assumptions, considerations and limitations set forth in its opinion, the
exchange ratio in the merger agreement was fair, from a financial point of view,
to the holders of ScanSoft common stock. The opinion of Evercore Partners does
not constitute a recommendation as to how any ScanSoft stockholder should vote
with respect to the issuance of shares of ScanSoft common stock in connection
with the merger.
The full text of the written opinion of Evercore Partners, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached to this joint proxy
statement/prospectus as Annex B. ScanSoft stockholders are urged to read the
opinion carefully and in its entirety. ScanSoft stockholders should carefully
consider the discussion of Evercore Partners' analysis in the section entitled
"Opinion of ScanSoft Financial Advisor" beginning on page 52 of this joint proxy
statement/prospectus.
On April 23, 2003, Morgan Stanley & Co. Incorporated delivered its written
opinion to the SpeechWorks board of directors that, as of that date and based
upon and subject to the assumptions, considerations and limitations set forth in
its opinion, the exchange ratio in the merger agreement was fair, from a
financial point of view, to the holders of SpeechWorks common stock. The opinion
of Morgan Stanley does not constitute a recommendation as to how any SpeechWorks
stockholder should vote with respect to the merger.
The full text of the written opinion of Morgan Stanley, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached to this joint proxy
statement/prospectus as Annex C. SpeechWorks stockholders are urged to read the
opinion carefully and in its entirety. SpeechWorks stockholders should carefully
consider the discussion of Morgan
7
Stanley's analysis in the section entitled "Opinion of SpeechWorks Financial
Advisor" beginning on page 61 of this joint proxy statement/prospectus.
COMPLETION AND EFFECTIVENESS OF THE MERGER (SEE PAGE 76)
We will complete the merger when all of the conditions to completion of the
merger are satisfied or waived. The merger will become effective when we file a
certificate of merger with the State of Delaware or at a later time if so
specified in the certificate.
While we cannot predict the exact timing, we currently expect to complete
the merger in the third quarter of calendar year 2003.
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE 85)
Each of ScanSoft's and SpeechWorks' obligation to complete the merger is
subject to the satisfaction or waiver of a number of conditions, including:
- receipt of required approvals from ScanSoft stockholders and SpeechWorks
stockholders;
- the absence of any statute, rule, regulation, executive order, decree,
injunction or other order which has the effect of making the merger or
the issuance of shares of ScanSoft common stock pursuant to the merger
agreement illegal or otherwise prohibiting consummation of the merger or
the issuance of shares of ScanSoft common stock pursuant to the merger
agreement;
- expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and similar merger
notification laws or regulations of foreign governmental entities;
- the absence of any pending or overtly threatened suit, action or
proceeding asserted by any governmental authority (i) challenging or
seeking to restrain or prohibit the consummation of the merger or (ii)
seeking to require ScanSoft or SpeechWorks to effect an action of
divestiture;
- effectiveness of the registration statement, of which this joint proxy
statement/prospectus is a part;
- receipt by each company of an opinion from its legal counsel that, for
U.S. federal income tax purposes, the merger will be treated as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code;
- each company's representations and warranties in the merger agreement
being true and correct, to the extent set forth in the merger agreement;
- compliance in all material respects by each company with its covenants
and agreements in the merger agreement, to the extent set forth in the
merger agreement;
- the absence of a material adverse effect on each company; and
- the shares of ScanSoft common stock to be issued pursuant to the merger
being authorized for listing on the NASDAQ National Market, subject to
official notice of issuance.
ScanSoft's obligation to complete the merger is also subject to (i) the
satisfaction or waiver of the condition that each non-competition agreement
entered into by and between SpeechWorks and each SpeechWorks' employee shall not
have been modified or amended since April 23, 2003, and shall be enforceable by
SpeechWorks and ScanSoft immediately following the merger to the full extent
enforceable by SpeechWorks immediately prior to the merger, and (ii) the receipt
of all required material consents, permits and approvals.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 89)
ScanSoft and SpeechWorks may mutually agree at any time to terminate the
merger agreement without completing the merger, even after receipt of the
requisite approvals of the stockholders of
8
ScanSoft and SpeechWorks. In addition, either of ScanSoft or SpeechWorks may,
without the consent of the other, terminate the merger agreement in any of the
following circumstances:
- if the merger is not completed by October 15, 2003, or a later specified
date if the closing of the merger is delayed by reason of a pending
acquisition of ScanSoft;
- if any governmental order, decree or ruling enjoining or prohibiting the
merger has become final and nonappealable;
- if the other party breaches the merger agreement in a way that would
entitle the party seeking to terminate the agreement not to consummate
the merger and, if permitted by the merger agreement, the breaching party
does not cure the breach within 30 days;
- if a material adverse effect (as defined in the merger agreement) on the
other party shall have occurred since April 23, 2003, the date of the
merger agreement, and is continuing;
- if ScanSoft stockholders do not approve the issuance of shares of
ScanSoft common stock pursuant to the merger agreement; or
- if SpeechWorks stockholders do not adopt the merger agreement and approve
the merger.
In addition, ScanSoft may, without the consent of SpeechWorks, terminate
the merger agreement prior to the adoption of the merger agreement and approval
of the merger by SpeechWorks stockholders if the SpeechWorks board of directors:
- fails to recommend adoption of the merger agreement and approval of the
merger;
- withdraws or adversely modifies its recommendation that SpeechWorks
stockholders adopt the merger agreement and approve the merger or fails
to reconfirm its recommendation of the merger following public
announcement of a third party acquisition proposal;
- recommends a third party acquisition proposal to SpeechWorks
stockholders; or
- fails to recommend against a tender offer or exchange offer that is
commenced by a third party.
PAYMENT OF TERMINATION FEE (SEE PAGE 91)
ScanSoft and SpeechWorks have each agreed to pay the other party a
termination fee of $6.5 million if the merger agreement is terminated under
certain circumstances.
SPEECHWORKS PROHIBITED FROM SOLICITING OTHER OFFERS (SEE PAGE 86)
SpeechWorks has agreed that it will not solicit or encourage the initiation
of any inquiries regarding any acquisition proposals by third parties.
SpeechWorks may respond to unsolicited superior acquisition proposals if
required by the SpeechWorks board of directors' fiduciary duties. SpeechWorks
must promptly notify ScanSoft if SpeechWorks receives any other acquisition
proposals.
VOTING AGREEMENTS (SEE PAGES 92 AND 93)
As a condition to ScanSoft entering into the merger agreement, each of
SpeechWorks' executive officers and directors entered into a voting agreement
with ScanSoft in which each has agreed, among other things, to vote his or her
shares of SpeechWorks common stock in favor of the adoption of the merger
agreement and approval of the merger and against any action that would delay or
prevent the merger and against any alternative transaction. These persons have
the right, as of June 27, 2003, to vote a total of 3,051,900 shares of
SpeechWorks common stock, or approximately 8.8% of the outstanding shares of
SpeechWorks common stock. In connection with the voting agreements, these
persons have granted an irrevocable proxy appointing members of the ScanSoft
board of directors, and each of them individually, as their sole and exclusive
attorneys and proxies to vote their shares in accordance with the terms of the
voting agreements.
9
As a condition to SpeechWorks entering into the merger agreement, each of
ScanSoft's executive officers and directors entered into a voting agreement with
SpeechWorks in which each has agreed, among other things, to vote his or her
shares of ScanSoft common stock in favor of the issuance of shares of ScanSoft
common stock in connection with the merger and against any action that would
delay or prevent the merger and against any alternative transaction. These
persons have the right, as of June 27, 2003, to vote a total of 579,948 shares
of ScanSoft common stock, or approximately 1.0% of the outstanding shares of
ScanSoft common stock as of such date. In connection with the voting agreements,
these persons have granted an irrevocable proxy appointing members of the
SpeechWorks board of directors, and each of them individually, as their sole and
exclusive attorneys and proxies to vote their shares in accordance with the
terms of the voting agreements.
SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS OF SCANSOFT AND SPEECHWORKS
(SEE PAGES 42 AND 46)
At the close of business on June 27, 2003, directors and executive officers
of ScanSoft and their affiliates beneficially owned and were entitled to vote
approximately 1.0% of the 66,206,640 shares of ScanSoft common stock outstanding
on that date. The vote required for approval of the issuance of shares of
ScanSoft common stock in connection with the merger is a majority of the votes
cast on the matter.
At the close of business on June 27, 2003, directors and executive officers
of SpeechWorks and certain of their affiliates beneficially owned and were
entitled to vote approximately 8.8% of the 34,874,927 shares of SpeechWorks
common stock outstanding on that date. The vote required for the adoption of the
merger agreement and approval of the merger is a majority of the outstanding
shares of SpeechWorks common stock.
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER (SEE PAGE 69)
You should be aware that certain ScanSoft and SpeechWorks executive
officers and directors have interests in the merger that may be different from,
or in addition to, interests of ScanSoft and SpeechWorks stockholders generally.
These interests include, among others:
- existing agreements and new employment agreements with ScanSoft that
provide, among other things, for severance and other benefits as a result
of the merger;
- continued director and officer indemnification and insurance; and
- acceleration of all SpeechWorks options held by officers and directors
and the partial acceleration of shares of SpeechWorks restricted common
stock held by officers.
In order to eliminate the ongoing compensation expense and limit the number
of outstanding options that would result from SpeechWorks options remaining
outstanding as ScanSoft options after the merger, ScanSoft has required that all
SpeechWorks options be accelerated and, to the extent not exercised, terminated
prior to the closing of the merger. SpeechWorks cannot determine the number of
options that SpeechWorks employees, officers and directors will exercise and,
with respect to the shares of SpeechWorks common stock issued upon exercise,
sell prior to the effective time of the merger. SpeechWorks expects, however,
that all optionholders will exercise their in-the-money options prior to the
closing of the merger and that most optionholders, including SpeechWorks
executive officers and directors, will elect to sell at least the portion of the
shares issued upon exercise as is necessary to recoup the exercise price and pay
any tax liabilities which the optionholder incurs in connection with the option
exercise. In addition, executive officers and directors and other employees may
for personal reasons, including to diversify their investment holdings, elect to
sell some or all of the remaining shares acquired upon exercise of options prior
to the closing of the merger.
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The ScanSoft and SpeechWorks boards of directors were aware of these
interests in approving the merger.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 72)
Consummation of the merger is conditioned upon the receipt by ScanSoft and
SpeechWorks of legal opinions to the effect that the merger will qualify as a
reorganization under the Internal Revenue Code. Assuming that the merger so
qualifies, SpeechWorks stockholders will not recognize any gain or loss for U.S.
federal income tax purposes on the exchange of shares of SpeechWorks common
stock for shares of ScanSoft common stock pursuant to the merger, except for any
gain or loss attributable to cash received instead of fractional shares of
ScanSoft common stock.
THIS TAX TREATMENT MAY NOT APPLY TO CERTAIN STOCKHOLDERS, AND YOU MAY BE SUBJECT
TO TAXES OTHER THAN U.S. FEDERAL INCOME TAXES. SPEECHWORKS STOCKHOLDERS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS FOR A FULL UNDERSTANDING OF THE
TAX CONSEQUENCES OF THE MERGER TO THEM.
RESTRICTIONS ON THE ABILITY TO SELL SCANSOFT STOCK (SEE PAGE 74)
SpeechWorks will use all commercially reasonable efforts to deliver to
ScanSoft from each person who may reasonably be deemed to be an affiliate of
SpeechWorks an executed affiliate agreement pursuant to which such affiliate
shall agree to be bound by the provisions of Rule 145 promulgated under the
Securities Act. ScanSoft will give stop transfer instructions to its transfer
agent with respect to any ScanSoft common stock received pursuant to the merger
by any stockholder of SpeechWorks who may reasonably be deemed to be an
affiliate. The certificates will contain a legend stating that the shares were
issued in a transaction to which Rule 145 applies and may only be transferred
(i) in conformity with Rule 145 or (ii) in accordance with a written opinion of
counsel, reasonably acceptable to ScanSoft, in form and substance that such
transfer is exempt from registration under the Securities Act.
REGULATORY APPROVALS (SEE PAGE 84)
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
the merger may not be consummated unless certain filings have been submitted to
the Federal Trade Commission, or the FTC, and the Antitrust Division of the U.S.
Department of Justice, or the Antitrust Division, and certain waiting period
requirements have been satisfied. ScanSoft and SpeechWorks filed the appropriate
notification and report forms with the FTC and with the Antitrust Division and
notice of the early termination of the waiting period was received on June 5,
2003.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions like the proposed merger. At any time before
or after the completion of the merger, the FTC or the Antitrust Division could
take any action under the antitrust laws that it deems necessary or advisable in
the public interest, including seeking to enjoin the completion of the merger or
seeking the divestiture of substantial assets of ScanSoft or SpeechWorks. In
addition, certain private parties, as well as state attorneys general and other
antitrust authorities, may challenge the transaction under antitrust laws under
certain circumstances.
In addition, the merger may be subject to various foreign antitrust laws.
ScanSoft and SpeechWorks believe that the completion of the merger will not
violate any antitrust laws. There can be no assurance that a challenge to the
merger on antitrust grounds will not be made, or, if such a challenge is made
that the result will be favorable.
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LISTING OF SCANSOFT COMMON STOCK (SEE PAGE 74)
ScanSoft will use all commercially reasonable efforts to cause the shares
of ScanSoft common stock issued pursuant to the merger to be authorized for
listing on the NASDAQ National Market.
APPRAISAL RIGHTS (SEE PAGE 75)
Under Delaware law, ScanSoft and SpeechWorks stockholders are not entitled
to appraisal rights in connection with the merger.
12
SUMMARY CONSOLIDATED FINANCIAL DATA OF SCANSOFT
The following table presents summary historical consolidated financial data
of ScanSoft for the five most recent fiscal years and the first three months of
the current year comparative to the same period in the prior year. The financial
data are derived from ScanSoft's consolidated financial statements. Since the
information in this table is only a summary and does not provide all of the
information contained in ScanSoft's financial statements, including related
notes, you should read "ScanSoft's Management's Discussion and Analysis of
Financial Condition and Results of Operations," and ScanSoft's consolidated
financial statements, including related notes, contained elsewhere in this joint
proxy statement/prospectus or as filed by ScanSoft with the SEC. See "Where You
Can Find More Information" on page 171.
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------------
2003(4) 2002 2002 2001 2000 1999 1998
------- ------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenue.................... $27,836 $23,765 $106,619 $ 62,717 $ 47,961 $31,629 $79,070
Income (loss) from
operations(1)(2)............... 149 (2,601) 6,603 (16,931) (52,497) (3,613) (3,858)
Income (loss) before income
taxes.......................... 171 (2,676) 6,587 (17,194) (52,779) (2,598) (3,805)
Net income (loss)................ $ 76 $(2,882) $ 6,333 $(16,877) $(53,251) $(2,748) $(3,805)
Net income (loss) per share:
basic and diluted.............. $ 0.00 $ (0.05) $ 0.09 $ (0.34) $ (1.26) $ (0.11) $ (0.19)
Weighted average common shares
outstanding
Basic.......................... 67,689 62,304 67,010 49,693 42,107 25,630 19,728
Diluted........................ 77,220 62,304 72,796 49,693 42,107 25,630 19,728
AS OF
MARCH 31, AS OF DECEMBER 31,
--------- -------------------------------------------------
2003 2002 2001 2000 1999 1998
--------- -------- -------- -------- ------- ------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments......... $ 20,277 $ 18,853 $ 14,324 $ 2,633 $ 5,224 $8,123
Working capital (deficit)........ 5,314 16,842 9,318 (6,484) 7,031 6,569
Total assets..................... 197,756 143,690 142,070 109,480 29,982 28,445
Long-term liabilities............ 30,969(3) 725 6,370 2,172 -- 91
Total stockholders' equity....... $125,625 $119,378 $114,534 $ 87,461 $21,924 $7,582
---------------
(1) See Notes 4, 5, 8 and 18 to Notes to Consolidated Financial Statements.
(2) See Notes 5 and 9 to Notes to Unaudited Consolidated Financial Statements.
(3) See Note 5 to Notes to Unaudited Consolidated Financial Statements.
(4) On January 30, 2003, ScanSoft acquired the Philips Speech Processing
Telephony and Voice Control business units of Royal Philips Electronics
("PSP"). The acquisition was accounted for under the purchase method of
accounting. The pro forma combined ScanSoft/PSP statement of operations data
for the three months ended March 31, 2003 and the year ended December 31,
2002 reflecting the impact of the PSP acquisition as if it had occurred at
the beginning of each period presented is set forth on pages F-6 and F-5,
respectively.
13
SUMMARY CONSOLIDATED FINANCIAL DATA OF SPEECHWORKS
The following table presents summary historical consolidated financial data
of SpeechWorks for the five most recent fiscal years and the first three months
of the current year comparative to the same period in the prior year. The
financial data are derived from SpeechWorks' consolidated financial statements.
Since the information in this table is only a summary and does not provide all
of the information contained in SpeechWorks' financial statements, including
related notes, you should read SpeechWorks' "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and SpeechWorks'
consolidated financial statements, including related notes, incorporated by
reference into this joint proxy statement/prospectus or as filed by SpeechWorks
with the SEC. See "Where You Can Find More Information" on page 171.
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
--------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenue................. $ 8,731 $ 9,473 $ 36,007 $ 43,136 $ 29,338 $ 14,011 $ 5,850
Loss from operations.......... (9,518) (11,673) (52,364) (50,562) (32,531) (15,739) (5,979)
Loss before income taxes...... (9,430) (11,501) (52,072) (46,804) (29,287) (15,463) (5,760)
Net loss...................... $(9,395) $(11,568) $(51,897) $(46,849) $(29,596) $(15,463) $ (5,760)
Accretion and deemed dividends
on redeemable convertible
preferred stock............. -- -- -- -- (6,955) (1,904) (789)
Net loss attributable to
common stockholders......... $(9,395) $(11,568) $(51,897) $(46,849) $(36,551) $(17,367) $ (6,549)
Basic and diluted net loss per
common share................ $ (0.28) $ (0.36) $ (1.58) $ (1.46) $ (2.29) $ (3.28) $ (1.44)
Shares used in computing basic
and diluted net loss per
common share................ 33,152 32,426 32,750 31,981 15,935 5,298 4,537
AS OF AS OF DECEMBER 31,
MARCH 31, ---------------------------------------------------
2003 2002 2001 2000 1999 1998
--------- ------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents...... $42,675 $46,901 $ 55,534 $ 99,203 $ 11,474 $ 4,486
Marketable securities.......... -- 2,009 24,264 14,370 -- --
Working capital................ 41,579 47,212 79,002 115,920 12,133 5,156
Total assets................... 79,338 87,829 124,788 144,374 20,566 9,162
Long-term liabilities.......... 6,763 6,622 1,201 292 833 161
Redeemable convertible
preferred stock.............. -- -- -- -- 43,507 17,749
Total stockholders' equity
(deficit).................... $57,801 $65,266 $107,859 $131,439 $(28,248) $(11,457)
14
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL DATA
The following table presents summary unaudited pro forma combined financial
data which reflects the acquisition of the Philips Speech Processing Telephony
and Voice Control business units of Royal Philips Electronics by ScanSoft, which
was completed on January 30, 2003, and the proposed acquisition of SpeechWorks.
The summary unaudited pro forma combined financial data are derived from and
should be read in conjunction with the unaudited pro forma combined financial
statements and related notes thereto included in this joint proxy
statement/prospectus. See "Unaudited Pro Forma Financial Information" on page
F-2.
YEAR ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, 2003 2002
------------------ ------------
(IN THOUSANDS)
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
Total revenue............................................... $37,683 $158,429
Loss from operations........................................ (9,288) (55,736)
Loss before income taxes.................................... (9,202) (55,743)
Net loss.................................................... (9,262) $(55,822)
Net loss per share:
Basic and diluted......................................... $ (0.10) $ (0.60)
======= ========
Weighted average common shares outstanding:
Basic and diluted......................................... 94,902 93,202
======= ========
AS OF
MARCH 31,
2003
--------------
(IN THOUSANDS)
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 65,470
Working capital............................................. 45,734
Total assets................................................ 390,910
Long-term liabilities....................................... 39,708
Total stockholders' equity.................................. 292,232
15
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following table reflects (i) the historical income (loss) from
continuing operations and book value per share of ScanSoft common stock in
comparison with the pro forma loss from continuing operations and book value per
share after giving effect to the acquisition of the Philips Speech Processing
Telephony and Voice Control Division of Royal Philips Electronics N.V. ("PSP")
and to the proposed merger with SpeechWorks; and (ii) the historical loss from
continuing operations and book value per share of SpeechWorks common stock in
comparison with the equivalent pro forma loss from continuing operations and
book value per share. The equivalent pro forma loss from continuing operations
and book value per share are equal to the pro forma loss from continuing
operations and book value per share of ScanSoft, after giving effect to the
acquisition of PSP and to the proposed merger with SpeechWorks, multiplied by
0.860, the number of shares of ScanSoft common stock to be issued in exchange
for each share of SpeechWorks common stock. The comparative historical and pro
forma per share data should be read in conjunction with the unaudited pro forma
combined financial statements and related notes thereto and the historical
consolidated financial statements of ScanSoft and notes thereto, included in
this joint proxy statement/prospectus, and the historical consolidated financial
statements of SpeechWorks, which information is incorporated by reference in
this joint proxy statement/prospectus.
The pro forma combined financial data are not necessarily indicative of the
operating results of future operations or the actual results that would have
occurred had the merger been completed at the beginning of the period presented.
The historical book value per common share was calculated by dividing
stockholders' equity by the number of shares of common stock outstanding at
March 31, 2003. ScanSoft's pro forma combined book value per share was computed
by dividing pro forma stockholders' equity by the pro forma number of shares of
ScanSoft common stock which would have been outstanding had the merger been
completed as of the balance sheet date.
16
ScanSoft and SpeechWorks did not declare or pay cash dividends on their
common stock during the year ended December 31, 2002 or during the quarter ended
March 31, 2003. They do not intend to pay dividends on their common stock in the
foreseeable future. See "Comparative Per Share Market Price Data."
YEAR ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, 2003 2002
------------------ ------------
ScanSoft:
Income (loss) from continuing operations per share:
Historical
Basic..................................................... $ 0.00 $ 0.09
Diluted................................................... $ 0.00 $ 0.09
Pro forma (ScanSoft and PSP only) -- basic and diluted...... $(0.01) $(0.11)
Pro forma -- basic and diluted.............................. $(0.10) $(0.60)
Book value per share:
Historical.................................................. $ 1.85
======
Pro forma................................................... $ 2.93
======
YEAR ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, 2003 2002
------------------ ------------
SpeechWorks:
Loss from continuing operations per share:
Historical -- basic and diluted............................. $(0.28) $(1.58)
====== ======
Equivalent pro forma -- basic and diluted................... $(0.08) $(0.52)
====== ======
Book Value per share:
Historical.................................................. $ 1.71
======
Equivalent pro forma........................................ $ 2.52
======
---------------
(1) Historical book value per share is computed by dividing stockholders' equity
by the number of shares of ScanSoft or SpeechWorks common stock outstanding
at the end of each period. Pro forma book value per share is computed by
dividing pro forma stockholders' equity by the pro forma number of shares of
ScanSoft common stock outstanding at the end of each period.
(2) The SpeechWorks equivalent pro forma combined per share amounts are
calculated by multiplying ScanSoft combined pro forma share amounts by the
0.860 exchange ratio for the merger.
17
COMPARATIVE PER SHARE MARKET PRICE DATA
SpeechWorks common stock trades on the NASDAQ National Market under the
symbol "SPWX." ScanSoft common stock trades on the NASDAQ National Market under
the symbol "SSFT."
The following table shows the high and low prices per share of SpeechWorks
common stock and ScanSoft common stock each as reported on the NASDAQ National
Market on (1) April 23, 2003, the last full trading day preceding public
announcement that ScanSoft and SpeechWorks had entered into the merger
agreement, and (2) June 30, 2003, the last full trading day for which high and
low prices were available at the time of the printing of this joint proxy
statement/prospectus.
The table also includes the equivalent high and low price per share of
SpeechWorks common stock on those dates. This equivalent high and low price per
share reflects the fluctuating value of the ScanSoft common stock that
SpeechWorks stockholders would receive in exchange for each share of SpeechWorks
common stock if the merger was completed on either of these dates applying the
exchange ratio of 0.860 shares of ScanSoft common stock for each share of
SpeechWorks common stock exchanged in the merger.
As of June 30, 2003, there were approximately 303 holders of record of
SpeechWorks common stock and 34,874,927 shares of SpeechWorks common stock
outstanding.
SPEECHWORKS SCANSOFT EQUIVALENT
COMMON STOCK COMMON STOCK PRICE PER SHARE
------------- ------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
----- ----- ----- ----- ------ ------
April 23, 2003.................................. $2.63 $2.54 $5.60 $5.40 $4.81 $4.64
June 30, 2003................................... $4.72 $4.25 $5.45 $5.10 $4.69 $4.39
The foregoing table shows only historical comparisons. These comparisons
may not provide meaningful information to you in determining whether to adopt
the merger agreement and approve the merger. Because the number of shares of
ScanSoft common stock to be issued for each share of SpeechWorks common stock is
fixed, changes in the market price of ScanSoft common stock will affect the
dollar value of ScanSoft common stock to be received by SpeechWorks stockholders
pursuant to the merger. SpeechWorks stockholders are urged to obtain current
market quotations for ScanSoft common stock and to review carefully the other
information contained in this joint proxy statement/prospectus or incorporated
by reference into this joint proxy statement/prospectus in considering whether
to adopt the merger agreement and approve the merger. See the section entitled
"Where You Can Find More Information" on page 171.
18
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus and the documents incorporated by
reference into this joint proxy statement/prospectus contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties, as well as assumptions, that, if they
never materialize or prove incorrect, could cause the results of ScanSoft, on
the one hand, or SpeechWorks, on the other, to differ materially from those
expressed or implied by such forward-looking statements. Forward-looking
statements generally are identified by the words "expects," "anticipates,"
"believes," "intends," "estimates," "should," "would," "strategy," "plan" and
similar expressions. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements. For example,
forward-looking statements include projections of earnings, revenues, synergies,
accretion or other financial items; any statements of the plans, strategies and
objectives of management for future operations, including the execution of
integration and restructuring plans and the anticipated timing of filings,
approvals and the closing relating to the merger; any statements concerning
proposed new products, services, developments or industry rankings; any
statements regarding future economic conditions or performance; statements of
belief and any statement of assumptions underlying any of the foregoing. The
risks, uncertainties and assumptions referred to above include the challenge of
managing asset levels, including inventory; the difficulty of maintaining
expense growth while increasing revenues; the assumption of maintaining revenues
on a combined company basis following the merger; and other risks and
uncertainties described in the section entitled "Risk Factors" and in the
documents that are incorporated by reference into this joint proxy
statement/prospectus.
If any of these risks or uncertainties materializes or any of these
assumptions proves incorrect, results of ScanSoft and SpeechWorks could differ
materially from the expectations in these statements. The forward-looking
statements included in this joint proxy statement/prospectus are made only as of
the date of this joint proxy statement/prospectus, and neither ScanSoft nor
SpeechWorks is under any obligation to update their respective forward-looking
statements and neither party intends to do so.
19
RISK FACTORS
You should carefully consider the risks described below before making your
decision to approve the issuance of shares of ScanSoft common stock to
SpeechWorks stockholders, or to adopt the merger agreement and approve the
merger, as the case may be. The risks and uncertainties described below are not
the only ones facing ScanSoft and SpeechWorks. Additional risks and
uncertainties not presently known to us or that we do not currently believe are
important to an investor may also harm our respective business operations. If
any of the events, contingencies, circumstances or conditions described in the
following risks actually occur, our respective businesses, financial condition
or our results of operations could be seriously harmed. If that happens, the
trading price of ScanSoft common stock or SpeechWorks common stock could decline
and you may lose part or all of the value of any ScanSoft shares or SpeechWorks
shares held by you.
RISKS RELATED TO THE MERGER
By voting to adopt the merger agreement and approve the merger, SpeechWorks
stockholders will be choosing to invest in ScanSoft common stock. In deciding
whether to adopt the merger agreement and approve the merger, you should
consider all of the information we have included in this joint proxy
statement/prospectus and its annexes and all of the information included in the
documents SpeechWorks has incorporated by reference into this joint proxy
statement/prospectus. See the sections entitled "Documents Incorporated by
Reference" and "Where You Can Find More Information." Additional risks and
uncertainties not presently known to us or that we do not currently believe are
important to an investor may also harm our respective business operations. If
any of the events, contingencies, circumstances or conditions described in the
following risks actually occur, our respective businesses, financial condition
or our results of operations could be seriously harmed. If that happens, the
trading price of ScanSoft common stock or SpeechWorks common stock could decline
and you may lose part or all of the value of any ScanSoft shares or SpeechWorks
shares held by you.
You should pay particular attention to the following risks relating to the
merger.
SPEECHWORKS STOCKHOLDERS WILL RECEIVE A FIXED RATIO OF 0.860 OF A SHARE OF
SCANSOFT COMMON STOCK FOR EACH SHARE OF SPEECHWORKS COMMON STOCK EXCHANGED IN
THE MERGER REGARDLESS OF ANY CHANGES IN MARKET VALUE OF SPEECHWORKS COMMON
STOCK OR SCANSOFT COMMON STOCK BEFORE THE COMPLETION OF THE MERGER.
Upon completion of the merger, each share of SpeechWorks common stock will
be converted into the right to receive 0.860 of a share of ScanSoft common
stock. The market values of ScanSoft common stock and SpeechWorks common stock
have varied since ScanSoft and SpeechWorks entered into the merger agreement and
will continue to vary in the future due to changes in the business, operations
or prospects of ScanSoft and SpeechWorks, market assessments of the merger,
regulatory considerations, market and economic considerations, and other
factors. The dollar value of ScanSoft common stock that SpeechWorks stockholders
will receive upon completion of the merger will depend on the market value of
ScanSoft common stock at the time of completion of the merger, which may be
different from, and lower than, the closing price of ScanSoft common stock on
the last full trading day preceding the public announcement that ScanSoft and
SpeechWorks entered into the merger agreement, the last full trading day prior
to the date of this joint proxy statement/prospectus or the date of the special
meetings. Moreover, completion of the merger may occur some time after the
requisite stockholder approvals have been obtained. There will be no adjustment
to the exchange ratio (except for adjustments to reflect the effect of any stock
split or other recapitalization of ScanSoft common stock or SpeechWorks common
stock), and the parties do not have a right to terminate the merger agreement,
based upon changes in the market price of either ScanSoft common stock or
SpeechWorks common stock.
20
SCANSOFT MAY FAIL TO INTEGRATE SUCCESSFULLY SCANSOFT'S AND SPEECHWORKS'
OPERATIONS. AS A RESULT, SCANSOFT AND SPEECHWORKS MAY NOT ACHIEVE THE
ANTICIPATED BENEFITS OF THE MERGER, WHICH COULD ADVERSELY AFFECT THE PRICE OF
SCANSOFT COMMON STOCK.
ScanSoft and SpeechWorks entered into the merger agreement with the
expectation that the merger will result in benefits to ScanSoft and SpeechWorks,
including establishing a greater global presence, stronger channel and partner
capabilities, and ScanSoft's ability to sell complementary products and
technologies to a wider range of customers. However, these expected benefits may
not be fully realized. Failure of the combined company to meet the challenges
involved with successfully integrating the personnel, products, technology and
sales operations of the two companies following the merger or to realize any of
the other anticipated benefits of the merger, could have a material adverse
effect on the business, financial condition and results of operations of
ScanSoft and its subsidiaries, including SpeechWorks. These integration efforts
may be difficult and time consuming, especially considering the highly technical
and complex nature of each company's products. The challenges involved in this
integration include the following:
- coordinating software development operations in a rapid and efficient
manner to ensure timely release of products to market;
- combining product offerings and product lines quickly and effectively;
- successfully managing difficulties associated with transitioning current
customers to new product lines;
- demonstrating to our existing and potential customers that the merger
will not result in adverse changes in customer service standards or
business focus;
- retaining key alliances with partners and suppliers;
- coordinating sales and marketing efforts to communicate effectively the
capabilities of the combined company;
- absorbing costs and delays in implementing overlapping systems and
procedures, including financial accounting systems;
- persuading employees that ScanSoft's and SpeechWorks' business cultures
are compatible, maintaining employee morale and retaining key employees;
and
- overcoming potential distraction of management attention and resources
from the business of the combined company.
The combined company may not successfully integrate the operations and
technology of ScanSoft and SpeechWorks in a timely manner, or at all, and the
combined company may not realize the anticipated benefits of the merger to the
extent, or in the timeframe, anticipated, which could significantly harm its
business.
SCANSOFT'S OPERATING RESULTS COULD BE ADVERSELY AFFECTED AS A RESULT OF
PURCHASE ACCOUNTING TREATMENT, AND THE CORRESPONDING IMPACT OF AMORTIZATION OF
OTHER INTANGIBLES RELATING TO ITS PROPOSED MERGER WITH SPEECHWORKS, IF THE
RESULTS OF THE COMBINED COMPANY DO NOT OFFSET THESE ADDITIONAL EXPENSES.
Under accounting principles generally accepted in the United States of
America, ScanSoft will account for the merger using the purchase method of
accounting. Under purchase accounting, ScanSoft will record the market value of
its common stock issued in connection with the merger and the amount of direct
transaction costs as the cost of acquiring the business of SpeechWorks. ScanSoft
will allocate that cost to the individual assets acquired and liabilities
assumed, including various identifiable intangible assets such as acquired
technology, acquired trade names, and acquired customer relationships and
assumed above-market lease liabilities based on their respective fair values.
Intangible assets generally will be amortized over a four to ten year period.
The amount of purchase price allocated to goodwill will be approximately $112.8
million and the amount allocated to identifiable intangible assets will be
21
approximately $13.9 million. Goodwill is not subject to amortization but is
subject to at least an annual impairment analysis, which may result in an
impairment charge if the carrying value exceeds its implied fair value. If other
identifiable intangible assets were amortized in equal quarterly amounts over a
six-year period following completion of the merger, the accounting charge
attributable to these items would be approximately $0.6 million per quarter and
$2.3 million per fiscal year. As a result, purchase accounting treatment of the
merger could decrease net income for ScanSoft in the foreseeable future, which
could have a material and adverse effect on the market value of ScanSoft common
stock following completion of the merger.
SCANSOFT AND SPEECHWORKS EXPECT TO INCUR SIGNIFICANT COSTS ASSOCIATED WITH THE
MERGER.
ScanSoft estimates that it will incur direct transaction costs of
approximately $4.5 million associated with the merger, which will be included as
a part of the total purchase cost for accounting purposes. In addition,
SpeechWorks estimates that it will incur direct transaction costs for
accounting, investment banking and legal services of approximately $3.4 million,
which are expensed in the quarter in which they are incurred. A portion of the
SpeechWorks costs will be determined upon the closing. ScanSoft and SpeechWorks
believe the combined entity may incur charges to operations, which currently are
not reasonably estimable, in the quarter in which the merger is completed or the
following quarters, to reflect costs associated with integrating the two
companies. There can be no assurance that the combined company will not incur
additional material charges in subsequent quarters to reflect additional costs
associated with the merger.
SPEECHWORKS EXECUTIVE OFFICERS AND DIRECTORS HAVE INTERESTS THAT ARE DIFFERENT
FROM, OR IN ADDITION TO, INTERESTS OF SPEECHWORKS STOCKHOLDERS GENERALLY,
WHICH MAY INFLUENCE THEM TO SUPPORT THE MERGER.
When considering the recommendation of the SpeechWorks board of directors
regarding the merger, you should be aware of the interests that executive
officers and directors of SpeechWorks have in the merger that are different
from, or in addition to, interests of SpeechWorks stockholders generally. These
interests include, among others:
- existing agreements and new employment agreements with ScanSoft that
provide, among other things, for severance and other benefits as a result
of the merger;
- continued director and officer indemnification and insurance; and
- acceleration of all SpeechWorks options held by officers and directors
and the partial acceleration of shares of SpeechWorks restricted stock
held by officers.
As a result, these directors and officers may be more likely to vote to
adopt the merger agreement and approve the merger than if they did not have
these other interests. As of June 27, 2003, SpeechWorks executive officers and
their directors and certain of their affiliates, who together beneficially owned
approximately 3,051,900 shares of SpeechWorks common stock (excluding options to
purchase shares of SpeechWorks common stock), which represented approximately
8.8% of the outstanding shares of SpeechWorks common stock entitled to vote at
the SpeechWorks special meeting, have agreed to vote in favor of the adoption of
the merger agreement and the approval of the merger. The voting agreements
permit the sale of certain shares of common stock by SpeechWorks directors and
executive officers.
WHETHER OR NOT THE MERGER IS COMPLETED, THE ANNOUNCEMENT AND PENDENCY OF THE
PROPOSED MERGER HAS CAUSED DISRUPTIONS IN THE BUSINESS OF SPEECHWORKS AND MAY
CAUSE FURTHER DISRUPTIONS IN THE BUSINESS OF SPEECHWORKS OR DISRUPTIONS IN THE
BUSINESS OF SCANSOFT, WHICH COULD HAVE MATERIAL ADVERSE EFFECTS ON EACH
COMPANY'S OR THE COMBINED COMPANY'S BUSINESS AND OPERATIONS.
Whether or not the merger is completed, ScanSoft's and SpeechWorks'
customers, in response to the announcement and pendency of the merger, may delay
or defer purchase decisions, which could have a material adverse effect on the
business of each company or the combined company. In addition, current and
prospective ScanSoft and SpeechWorks employees may experience uncertainty about
their future roles with the
22
combined company. This uncertainty may adversely affect ScanSoft's and
SpeechWorks' ability to attract and retain key management, sales, marketing and
technical personnel. The extent of this adverse effect could depend on the
length of time prior to completion of the merger or termination of the merger
agreement.
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT SPEECHWORKS' STOCK
PRICE, FUTURE BUSINESS AND OPERATIONS.
If the merger is not completed for any reason, SpeechWorks may be subject
to a number of material risks, including the following:
- SpeechWorks would not realize any anticipated benefits from being a part
of a combined company with ScanSoft;
- SpeechWorks may be obligated to pay ScanSoft a fee of $6.5 million in
liquidated damages if the merger agreement is terminated in certain
circumstances in connection with an alternative transaction proposal;
- the price of SpeechWorks common stock may decline to the extent that its
current market price reflects a market assumption that the merger will be
completed;
- SpeechWorks may experience difficulties in attracting strategic customers
and partners who were expecting to use the products proposed to be
offered by the combined company;
- SpeechWorks must pay certain costs relating to the merger, such as legal,
accounting, financial advisor and printing fees, even if the merger is
not completed, which costs will be substantial; and
- SpeechWorks may not be able to find another buyer willing to pay an
equivalent or higher price in an alternative transaction than the price
that would be paid pursuant to the merger.
REGULATORY AGENCIES, PRIVATE PARTIES, STATE ATTORNEYS GENERAL AND OTHER
ANTITRUST AUTHORITIES MAY RAISE CHALLENGES TO THE MERGER ON ANTITRUST GROUNDS.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
the merger may not be consummated unless certain filings have been submitted to
the Federal Trade Commission ("FTC") and the Antitrust Division and certain
waiting period requirements have been satisfied. ScanSoft and SpeechWorks filed
the appropriate notification and report forms with the FTC and with the
Antitrust Division and notice of the early termination of the waiting period was
received on June 5, 2003.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions like the merger. At any time before or after
the completion of the merger, the FTC or the Antitrust Division could take any
action under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the completion of the merger or seeking
the divestiture of substantial assets of ScanSoft or SpeechWorks. In addition,
certain private parties, as well as state attorneys general and other antitrust
authorities, may challenge the transaction under antitrust laws under certain
circumstances.
In addition, the merger may be subject to various foreign antitrust laws.
ScanSoft and SpeechWorks believe that the completion of the merger will not
violate any antitrust laws. There can be no assurance, however, that a challenge
to the merger on antitrust grounds will not be made, or, if such a challenge is
made, what the result will be.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF SPEECHWORKS COMMON STOCK IN
CONNECTION WITH THE ACCELERATION OF OPTIONS AND SHARES OF RESTRICTED COMMON
STOCK MAY CAUSE THE PRICE OF SPEECHWORKS COMMON STOCK TO DECLINE.
In order to eliminate the ongoing compensation expense and limit the number
of outstanding options that would result from SpeechWorks options remaining
outstanding as ScanSoft options after the merger,
23
ScanSoft has required that all SpeechWorks options be accelerated and, to the
extent not exercised, terminated prior to the closing of the merger. The vesting
of options held by non-officer employees will accelerate as of the second
business day following the filing date of the registration statement of which
this joint proxy statement/prospectus is a part. The vesting of all options and
50% of the shares of restricted stock held by officers and directors will
accelerate prior to the closing of the merger on a date to be determined by the
SpeechWorks board of directors. SpeechWorks cannot determine the number of
options that SpeechWorks employees, officers and directors will exercise and,
with respect to the shares of SpeechWorks common stock issued upon exercise,
sell prior to the effective time of the merger. SpeechWorks expects, however,
that all optionholders will exercise their in-the-money options prior to the
closing of the merger and that many optionholders, including SpeechWorks
executive officers and directors, will elect to sell at least the portion of the
shares issued upon exercise as is necessary to recoup the exercise price and pay
any tax liabilities which the optionholder incurs in connection with the option
exercise. In addition, executive officers and directors and other employees may
for personal reasons, including to diversify their investment holdings, elect to
sell some or all of the remaining shares acquired upon exercise of options prior
to the closing of the merger. As of May 28, 2003, officers and directors of
SpeechWorks owned options to purchase an aggregate of 1,637,131 shares of
SpeechWorks common stock, of which 513,032 were then unvested, and all other
employees held options to purchase an aggregate of 3,451,222 shares of
SpeechWorks common stock, of which 1,811,155 were then unvested, with an
exercise price less than $4.95. The market price of SpeechWorks common stock
could decline as a result of the sale of some or all of these shares or the
perception that substantial sales could occur. See the section entitled "The
Merger -- Interests of Certain Persons in the Merger -- Interests of SpeechWorks
Directors and Executive Officers in the Merger."
THE PRICE OF SCANSOFT COMMON STOCK MAY BE AFFECTED BY FACTORS DIFFERENT FROM
THOSE AFFECTING THE PRICE OF SPEECHWORKS COMMON STOCK.
When the merger is completed, holders of SpeechWorks common stock will
become holders of ScanSoft common stock. ScanSoft's business differs from that
of SpeechWorks, and ScanSoft's results of operations, as well as the price of
ScanSoft common stock, may be affected by factors different from those affecting
SpeechWorks' results of operations and the price of SpeechWorks common stock.
RISKS RELATED TO SCANSOFT AND THE COMBINED COMPANY
SCANSOFT'S QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND
SEASONALITY. IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR
INVESTORS, SCANSOFT'S SHARE PRICE MAY DECREASE SIGNIFICANTLY.
ScanSoft's revenue and operating results have fluctuated in the past and
may not meet the expectations of securities analysts or investors in the future.
If this occurs, the price of ScanSoft common stock would likely decline. Factors
that may cause fluctuations in ScanSoft's operating results include the
following:
- slowing sales by ScanSoft's distribution and fulfillment partners to
their customers, which may place pressure on these partners to reduce
purchases of ScanSoft's products;
- volume, timing and fulfillment of customer orders;
- customers delaying their purchase decisions in anticipation of new
versions of products;
- customers delaying, canceling or limiting their purchases as result of
the threat or results of terrorism or military actions taken by the
United States or its allies;
- introduction of new products by ScanSoft or ScanSoft's competitors;
- seasonality;
- reduction in the prices of ScanSoft's products in response to competition
or market conditions;
- returns and allowance charges in excess of recorded amounts;
24
- timing of significant marketing and sales promotions;
- increased expenditures incurred pursuing new product or market
opportunities;
- inability to adjust ScanSoft's operating expenses to compensate for
shortfalls in revenue against forecast;
- demand for products; and
- general economic trends as they affect retail and corporate sales.
Due to the foregoing factors, among others, ScanSoft's revenue and
operating results are difficult to forecast. ScanSoft's expense levels are based
in significant part on ScanSoft's expectations of future revenue. Therefore,
ScanSoft's failure to meet revenue expectations would seriously harm ScanSoft's
business, operating results, financial condition and cash flows. Further, an
unanticipated decline in revenue for a particular quarter may disproportionately
affect ScanSoft's profitability because a relatively small amount of ScanSoft's
expenses are intended to vary with ScanSoft's revenue in the short term.
SCANSOFT HAS A HISTORY OF LOSSES. SCANSOFT MAY INCUR LOSSES IN THE FUTURE.
ScanSoft sustained recurring losses from operations in each reporting
period through December 31, 2001. ScanSoft reported net income of $0.1 million
and $6.3 million for the three months ended March 31, 2003 and the fiscal year
ended December 31, 2002, respectively. If ScanSoft cannot maintain
profitability, the market price for ScanSoft's stock may decline, perhaps
substantially.
SCANSOFT'S BUSINESS COULD BE HARMED IF SCANSOFT DOES NOT SUCCESSFULLY MANAGE
THE INTEGRATION OF THE BUSINESSES THAT SCANSOFT ACQUIRES, INCLUDING SCANSOFT'S
PLANNED MERGER WITH SPEECHWORKS AND THE RECENTLY COMPLETED ACQUISITION OF THE
SPEECH PROCESSING TELEPHONY AND VOICE CONTROL BUSINESS UNITS OF PHILIPS.
As part of ScanSoft's business strategy, ScanSoft has in the past acquired,
and expects to continue to acquire, other businesses and technologies.
ScanSoft's recent acquisitions of the speech and language technology operations
of Lernout & Hauspie Speech Products N.V. and certain of its affiliates,
including L&H Holdings USA, Inc. (collectively, L&H), and the Telephony and
Voice Control business units of Philips Speech Processing required substantial
integration and management efforts. ScanSoft's pending acquisition of
SpeechWorks will pose similar, and potentially greater, challenges. Acquisitions
of this nature involve a number of risks, including:
- difficulty in transitioning and integrating the operations and personnel
of the acquired businesses;
- potential disruption of ScanSoft's ongoing business and distraction of
management;
- difficulty in incorporating acquired technology and rights into
ScanSoft's products and technology;
- unanticipated expenses and delays in completing acquired development
projects and technology integration;
- management of geographically remote units both in the United States and
internationally;
- impairment of relationships with partners and customers;
- entering markets or types of businesses in which ScanSoft has limited
experience; and
- potential loss of key employees of the acquired company.
As a result of these and other risks, ScanSoft may not realize anticipated
benefits from ScanSoft's acquisitions. Any failure to achieve these benefits or
failure to successfully integrate acquired businesses and technologies could
seriously harm ScanSoft's business. The size of the SpeechWorks merger
significantly increases both the scope and consequences of ScanSoft's
integration risks.
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THE COMBINED COMPANY WILL BE MANAGED BY A MANAGEMENT TEAM CONSISTING OF
CURRENT SCANSOFT AND SPEECHWORKS EXECUTIVES, AND THIS MANAGEMENT TEAM MAY
UNDERTAKE A STRATEGY AND BUSINESS DIRECTION WHICH IS DIFFERENT FROM THAT WHICH
WOULD BE UNDERTAKEN BY SCANSOFT'S CURRENT MANAGEMENT TEAM.
After the merger, the new management team of the combined company will
consist of certain current ScanSoft and SpeechWorks executives. The manner in
which the new management team conducts the business of the combined company, and
the direction in which the new management team moves the business, may differ
from the manner and direction in which the current management of either ScanSoft
or SpeechWorks would direct the combined or separate companies on a stand-alone
basis. Such control by the new management team, together with the effects of
future market factors and conditions, could ultimately evolve into an
integration and business strategy that, when implemented, differs from the
strategy and business direction currently recommended by ScanSoft's or
SpeechWorks' current respective management and board of directors. The new
management team, and any change in business or direction, may not improve, and
could adversely impact, the combined company's financial condition and results
of operations.
A LARGE PART OF SCANSOFT'S REVENUE IS DEPENDENT ON CONTINUED DEMAND FOR
SCANSOFT'S PRODUCTS FROM ORIGINAL EQUIPMENT MANUFACTURERS, OR OEM, PARTNERS. A
SIGNIFICANT REDUCTION IN OEM REVENUE WOULD SERIOUSLY HARM SCANSOFT'S BUSINESS,
RESULTS OF OPERATIONS, FINANCIAL CONDITION AND STOCK PRICE.
Many of ScanSoft's technologies are licensed to partners that incorporate
ScanSoft's technologies into solutions that they sell to their customers. The
commercial success of these licensed products depends to a substantial degree on
the efforts of these licensees in developing and marketing products
incorporating ScanSoft's technologies. The integration of ScanSoft's
technologies into their products takes significant time, effort and investment,
and products incorporating ScanSoft's technologies may not be successfully
implemented or marketed by ScanSoft's licensees.
OEM revenue represented 36% and 38% of ScanSoft's consolidated revenue for
the three-month periods ended March 31, 2003 and 2002, respectively. A select
few of ScanSoft's OEM partners account for a majority of ScanSoft's OEM
revenues. ScanSoft's partners are not required to continue to bundle or embed
ScanSoft's software, and they may choose the software products of ScanSoft's
competitors in addition to, or in place of, ScanSoft's products. A significant
reduction in OEM revenue would seriously harm ScanSoft's business, results of
operations, financial condition and stock price.
SPEECH TECHNOLOGIES MAY NOT ACHIEVE WIDESPREAD ACCEPTANCE BY BUSINESSES, WHICH
COULD LIMIT SCANSOFT'S ABILITY TO GROW ITS SPEECH BUSINESS.
The market for speech technologies is relatively new and rapidly evolving.
ScanSoft's ability to increase revenue in the future depends in large measure on
acceptance by both its customers and the end users of speech technologies in
general and ScanSoft's products in particular. The continued development of the
market for ScanSoft's current and future speech solutions will also depend on
the following factors:
- widespread deployment and acceptance of speech technologies;
- consumer demand for speech-enabled applications;
- development by third-party vendors of applications using speech
technologies; and
- continuous improvement in speech technology.
Sales of ScanSoft's speech products would be harmed if the market for
speech software does not continue to develop or develops more slowly than
ScanSoft expects.
SCANSOFT HAS GROWN AND MAY CONTINUE TO GROW, THROUGH ACQUISITIONS, WHICH MAY
RESULT IN SIGNIFICANT INTANGIBLE ASSETS, DILUTION OF SCANSOFT'S EXISTING
STOCKHOLDERS, USE OF CASH AND OTHER RISKS.
ScanSoft has made several significant acquisitions over the last two years,
has recently completed the purchase of certain businesses and intellectual
property from Philips and has announced the pending
26
acquisition of SpeechWorks and may acquire additional complementary assets,
technologies or businesses in the future. ScanSoft's past acquisitions have
given rise to, and future acquisitions may result in, substantial levels of
intangible assets that will be amortized or subject to impairment analyses in
future periods, and ScanSoft's future results will be adversely affected if
ScanSoft does not realize benefits from these acquisitions commensurate with
amortization and potential impairment charges. In addition, ScanSoft's
acquisition of Caere Corporation included a substantial write-off of acquired
in-process research and development costs, and similar write-offs may also occur
as a result of other acquisitions.
In connection with the Caere and L&H acquisitions, ScanSoft issued 19.0
million and 7.4 million shares of ScanSoft common stock, respectively, and in
connection with the proposed SpeechWorks acquisition, ScanSoft expects to issue
approximately 32.6 million shares of ScanSoft common stock, subject to
adjustment based on the number of shares of SpeechWorks common stock outstanding
at the closing of the merger. ScanSoft may continue to issue equity securities
for future acquisitions and working capital purposes that could dilute
ScanSoft's existing stockholders. In connection with the L&H acquisition,
ScanSoft issued a promissory note for $3.5 million. Under the terms of the
Philips acquisition, ScanSoft paid 3.1 million euros ($3.4 million) in cash at
closing, subject to adjustment in accordance with the provisions of the purchase
agreement, as amended, and agreed to a deferred payment of 1.0 million euros in
cash prior to December 31, 2003, issued a 5.0 million euro note due December 31,
2003 and bearing 5.0% interest per annum and issued a $27.5 million three-year,
zero-interest subordinated debenture, convertible at any time at Philips' option
into shares of ScanSoft common stock at $6.00 per share. Future acquisitions may
also require ScanSoft to expend significant funds or incur debt. If ScanSoft
expends funds or incurs additional debt, ScanSoft's ability to obtain financing
for working capital or other purposes could decrease.
SALES OF SCANSOFT'S DOCUMENT AND PDF CONVERSION PRODUCTS AND SCANSOFT'S
DIGITAL PAPER MANAGEMENT PRODUCTS REPRESENTED APPROXIMATELY 43% OF SCANSOFT'S
REVENUE FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2003 AND APPROXIMATELY 51%
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2002. ANY REDUCTION IN REVENUE FROM
THESE PRODUCT AREAS COULD SERIOUSLY HARM SCANSOFT'S BUSINESS.
Historically, a few product areas have generated a substantial portion of
ScanSoft's revenues. For the three months ended March 31, 2003, ScanSoft's
document and PDF conversion products represented approximately 26% of ScanSoft's
revenue and ScanSoft's digital paper management products represented
approximately 17% of its revenue. For the three months ended March 31, 2002,
ScanSoft's document and PDF conversion products represented approximately 36% of
its revenue, and ScanSoft's digital paper management products represented
approximately 15% of its revenue. Although the relative share of ScanSoft's
revenue derived from these products decreased due to the inclusion of sales of
its speech products after the L&H acquisition, a reduction in the revenue
contribution from these product areas could seriously harm ScanSoft's business,
results of operations, financial condition, cash flows and stock price.
THE PROTECTION OF SCANSOFT'S PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
IS KEY TO SCANSOFT'S SUCCESS.
ScanSoft relies heavily on its proprietary technology, trade secrets and
other intellectual property. Unauthorized parties may attempt to copy aspects of
ScanSoft's products or to obtain and use information that ScanSoft regards as
proprietary. Policing unauthorized use of ScanSoft's products is difficult and
ScanSoft may not be able to protect ScanSoft's technology from unauthorized use.
Additionally, ScanSoft's competitors may independently develop technologies that
are substantially the same as or superior to ScanSoft's technologies. In
addition, the laws of some foreign countries do not protect ScanSoft's
proprietary rights to the same extent as the laws of the United States. Although
the source code for ScanSoft's proprietary software is protected both as a trade
secret and as a copyrighted work, litigation may be necessary to enforce
ScanSoft's intellectual property rights, to protect ScanSoft's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Litigation, regardless of
the outcome, can be very expensive and can divert management efforts.
27
THIRD PARTIES HAVE CLAIMED AND MAY CLAIM IN THE FUTURE THAT SCANSOFT IS
INFRINGING THEIR INTELLECTUAL PROPERTY. SCANSOFT COULD BE EXPOSED TO
SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROM SELLING
SCANSOFT'S PRODUCTS IF SUCH CLAIMS ARE SUCCESSFUL.
Like other technology companies, from time to time, ScanSoft is subject to
claims that ScanSoft or its customers may be infringing or contributing to the
infringement of the intellectual property rights of others. ScanSoft may be
unaware of the intellectual property rights of others that may cover some of
ScanSoft's technologies and products. If it appears necessary or desirable,
ScanSoft may seek licenses for these intellectual property rights. However,
ScanSoft may not be able to obtain licenses from some or all claimants, the
terms of any offered licenses may not be acceptable to ScanSoft, or ScanSoft may
not be able to resolve disputes without litigation. Any litigation regarding
intellectual property could be costly and time-consuming and could divert the
attention of ScanSoft's management and key personnel from ScanSoft's business
operations. In the event of a claim of intellectual property infringement,
ScanSoft may be required to enter into costly royalty or license agreements.
Third parties claiming intellectual property infringement may be able to obtain
injunctive or other equitable relief that could effectively block ScanSoft's
ability to develop and sell ScanSoft's products.
On November 27, 2002, AllVoice Computing plc filed an action against
ScanSoft in the United States District Court for the Southern District of Texas
claiming patent infringement. Damages are sought in an unspecified amount.
ScanSoft filed an Answer on December 23, 2002. ScanSoft believes this claim has
no merit, and ScanSoft intends to defend the action vigorously.
On December 28, 2001, ScanSoft was sued for patent infringement initiated
by the Massachusetts Institute of Technology and Electronics For Imaging, Inc.
ScanSoft was one of more than 200 defendants named in this lawsuit. Damages are
sought in an unspecified amount. ScanSoft filed an Answer and Counterclaim on
June 28, 2002. ScanSoft believes this claim has no merit, and ScanSoft intends
to defend the action vigorously.
On August 16, 2001, ScanSoft was sued by Horst Froessl for patent
infringement. Damages are sought in an unspecified amount. ScanSoft filed an
Answer and Counterclaim on September 19, 2001. ScanSoft believes this claim has
no merit, and ScanSoft intends to defend the action vigorously.
ScanSoft believes that the final outcome of the current litigation matters
described above will not have a significant adverse effect on its financial
position and results of operations, and ScanSoft believes that ScanSoft will not
be required to expend a significant amount of resources defending such claims.
However, should ScanSoft not prevail in these litigation matters or if ScanSoft
is required to expend a significant amount of resources defending such claims,
ScanSoft's operating results, financial position and cash flows could be
adversely impacted. If any third parties are successful in intellectual property
infringement claims against ScanSoft, ScanSoft may be subject to significant
damages or injunctions, and ScanSoft's operating results and financial position
could be harmed.
THE MARKETS IN WHICH SCANSOFT OPERATES ARE HIGHLY COMPETITIVE AND RAPIDLY
CHANGING. SCANSOFT MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS
AND ESTABLISHED COMPANIES WITH GREATER RESOURCES.
There are a number of companies that develop or may develop products that
compete in ScanSoft's targeted markets; however, there is no one company that
competes with ScanSoft in all of its product areas. The individual markets in
which ScanSoft competes are highly competitive, and are rapidly changing. Within
digital capture, ScanSoft competes directly with ABBYY, I.R.I.S. and NewSoft.
Within speech, ScanSoft competes with AT&T, IBM, Loquendo, Microsoft, Nuance
Communications, Rhetorical and Temic Speech Processing, among others. Vendors
such as Adobe and Microsoft offer solutions that can be considered alternatives
to some of ScanSoft's solutions. In addition, a number of smaller companies
produce technologies or products that are in some markets competitive with
ScanSoft's solutions. Current and potential competitors have established, or may
establish, cooperative relationships among themselves or with third parties to
increase the ability of their technologies to address the needs of ScanSoft's
prospective customers.
28
The competition in these markets could adversely affect ScanSoft's
operating results by reducing the volume of the products ScanSoft sells or the
prices ScanSoft can charge. Some of ScanSoft's current or potential competitors
have significantly greater financial, technical and marketing resources than
ScanSoft does. These competitors may be able to respond more rapidly than
ScanSoft can to new or emerging technologies or changes in customer
requirements. They may also devote greater resources to the development,
promotion and sale of their products than ScanSoft does. The price and
performance of ScanSoft's products and technologies may not be superior relative
to the products of ScanSoft's competitors. As a result, ScanSoft may lose
competitive position, which loss could result in lower prices, fewer customer
orders, reduced revenue, reduced gross margins and loss of market share.
ScanSoft's products and technologies may not achieve market acceptance or sell
at favorable prices, which could hurt ScanSoft's revenue, results of operations
and the price of ScanSoft common stock.
Some of ScanSoft's customers, such as Microsoft, have developed or acquired
products or technologies that compete with ScanSoft's products and technologies.
These customers may give higher priority to the sale of these competitive
products or technologies. To the extent they do so, market acceptance and
penetration of ScanSoft's products, and therefore ScanSoft's revenue, may be
adversely affected.
ScanSoft's success will depend substantially upon its ability to enhance
its products and technologies and to develop and introduce, on a timely and
cost-effective basis, new products and features that meet changing customer
requirements and incorporate technological advancements. If ScanSoft is unable
to develop new products and enhance functionalities or technologies to adapt to
these changes, or is unable to realize synergies among its acquired products and
technologies, ScanSoft's business will suffer.
SCANSOFT'S SOFTWARE PRODUCTS MAY HAVE BUGS, WHICH COULD RESULT IN DELAYED OR
LOST REVENUE, EXPENSIVE CORRECTION, LIABILITY TO ITS CLIENTS AND CLAIMS
AGAINST SCANSOFT.
Complex software products such as ScanSoft's may contain errors, defects or
other software bugs. Defects in the solutions or products that ScanSoft develops
and sells to its customers could require expensive corrections and result in
delayed or lost revenue, adverse client reaction and negative publicity about
ScanSoft or its products and services. Customers who are not satisfied with any
of ScanSoft's products could bring claims against ScanSoft for damages, which,
even if unsuccessful, would likely be time-consuming to defend, and could result
in costly litigation and payment of damages. Such claims could harm ScanSoft's
financial results and competitive position.
SCANSOFT RELIES ON A SMALL NUMBER OF DISTRIBUTION AND FULFILLMENT PARTNERS,
INCLUDING 1450, DIGITAL RIVER, INGRAM MICRO AND TECH DATA, TO DISTRIBUTE MANY
OF ITS PRODUCTS. ANY DISRUPTION IN THESE CHANNELS COULD HARM SCANSOFT'S
RESULTS OF OPERATIONS.
ScanSoft's products are sold through, and a substantial portion of its
revenue is derived from, a network of over 2000 channel partners, including
value-added resellers, computer superstores, consumer electronic stores, mail
order houses, office superstores and eCommerce Web sites. ScanSoft relies on a
small number of distribution and fulfillment partners, including 1450, Digital
River, Ingram Micro and Tech Data to serve this network of channel partners. For
the three-month period ended March 31, 2003, two distribution and fulfillment
partners, Ingram Micro and Digital River, accounted for 25% and 17% of
ScanSoft's consolidated revenue, respectively. During the three-month period
ended March 31, 2002, Ingram Micro and Digital River accounted for 27% and 11%
of ScanSoft's consolidated revenue, respectively. A disruption in these
distribution and fulfillment partner relationships could negatively affect
ScanSoft's results of operations in the short term. Any disruption for which
ScanSoft is unable to compensate could have a more sustained impact on
ScanSoft's results of operations.
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A SIGNIFICANT PORTION OF SCANSOFT'S ACCOUNTS RECEIVABLE IS CONCENTRATED AMONG
SCANSOFT'S THREE LARGEST DISTRIBUTION AND FULFILLMENT PARTNERS, INGRAM MICRO,
INC., TECH DATA CORPORATION, AND DIGITAL RIVER, INC.
ScanSoft's products are sold through, and a substantial portion of its
accounts receivable is derived from, three distribution and fulfillment
partners. At March 31, 2003, Ingram Micro, Tech Data and Digital River
represented 16%, 3% and 15% of ScanSoft's net accounts receivable, respectively.
At March 31, 2002, Ingram Micro, Tech Data and Digital River represented 16%,
11% and 9%, of ScanSoft's net accounts receivable, respectively. In addition,
although ScanSoft performs ongoing credit evaluations of its distribution and
fulfillment partners' financial condition and maintain reserves for potential
credit losses, ScanSoft does not require collateral. While, to date, such losses
have been within ScanSoft's expectations, ScanSoft cannot assure you that these
actions will be sufficient to meet future contingencies. If any of these
distribution and fulfillment partners were unable to pay ScanSoft in a timely
fashion or if ScanSoft were to experience significant credit losses in excess of
its reserves, ScanSoft's results of operations, cash flows and financial
condition would be seriously harmed.
A SIGNIFICANT PORTION OF SCANSOFT'S REVENUE IS DERIVED FROM SALES IN EUROPE
AND ASIA. SCANSOFT'S RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL,
REGULATORY AND OTHER RISKS ASSOCIATED WITH THESE AND OTHER INTERNATIONAL
REGIONS.
Since ScanSoft sells its products worldwide, ScanSoft's business is subject
to risks associated with doing business internationally. ScanSoft anticipates
that revenue from international operations will represent an increasing portion
of its total revenue. Reported international revenue for the three-month periods
ended March 31, 2003 and March 31, 2002, represented 26% and 22% of ScanSoft's
consolidated revenue for those periods, respectively. Most of these
international revenues are produced by sales in Europe and Asia. A number of
ScanSoft's OEM partners distribute their products throughout the world and do
not provide ScanSoft with the geographical dispersion of their products.
However, based on an estimate that factors ScanSoft's OEM partners' geographical
revenue mix into ScanSoft's revenue generated from these OEM partners,
international revenue would have represented approximately 33% and 30% of
ScanSoft's consolidated revenue for the three-month periods ended March 31, 2003
and March 31, 2002, respectively.
Therefore, in addition to risks to ScanSoft's business based on a potential
downturn in the world economy, a region-specific downturn affecting countries in
Western Europe and/or Asia could have a negative effect on ScanSoft's future
results of operations.
In addition, some of ScanSoft's products are developed and manufactured
outside the United States. A significant portion of the development and
manufacturing of ScanSoft's speech products are completed in Belgium, and a
significant portion of ScanSoft's digital capture research and development is
conducted in Hungary. In addition, in connection with the Philips acquisition,
ScanSoft has added an additional research and development location in Germany.
ScanSoft's future results could be harmed by a variety of factors associated
with international sales and operations in addition to the risks the company as
a whole faces, including:
- changes in a specific country's or region's political or economic
conditions;
- trade protection measures and import or export licensing requirements
imposed by the United States or by other countries;
- negative consequences from changes in applicable tax laws;
- difficulties in staffing and managing operations in multiple locations in
many countries;
- difficulties in collecting trade accounts receivable in other countries;
and
- less effective protection of intellectual property.
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SCANSOFT IS EXPOSED TO FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES.
Because ScanSoft has international subsidiaries and distributors that
operate and sell its products outside the United States, ScanSoft is exposed to
the risk of changes in foreign currency exchange rates or declining economic
conditions in these countries. ScanSoft generally does not engage in hedging
transactions to manage its exposure to currency fluctuations. However, in
connection with the Philips acquisition, on January 30, 2003, ScanSoft entered
into a forward hedge in the amount of $5.3 million to meet ScanSoft's obligation
to pay a 5.0 million euro promissory note issued to Philips as part of the
acquisition. ScanSoft's exposure to currency rate fluctuations could affect its
results of operations and cash flows.
IF SCANSOFT IS UNABLE TO ATTRACT AND RETAIN TECHNICAL AND OPERATIONAL
PERSONNEL, SCANSOFT'S BUSINESS COULD BE HARMED.
If any of ScanSoft's key employees were to leave ScanSoft, ScanSoft could
face substantial difficulty in hiring qualified successors and could experience
a loss in productivity while any successor obtains the necessary training and
experience. ScanSoft's employment relationships are generally at-will and
ScanSoft has had key employees leave ScanSoft in the past. ScanSoft cannot
assure you that one or more key employees will not leave ScanSoft in the future.
ScanSoft intends to continue to hire additional highly qualified personnel,
including software engineers and operational personnel, but ScanSoft may not be
able to attract, assimilate or retain qualified personnel in the future. Any
failure to attract, integrate, motivate and retain these employees could harm
ScanSoft's business.
THE STOCKHOLDINGS OF SCANSOFT'S TWO LARGEST STOCKHOLDERS MAY ENABLE THEM TO
INFLUENCE MATTERS REQUIRING STOCKHOLDER APPROVAL.
As of May 30, 2003, Xerox beneficially owned approximately 22.7% of
ScanSoft's outstanding common stock, including warrants exercisable for up to
525,732 shares of ScanSoft common stock and 3,562,238 shares of ScanSoft's
outstanding Series B Preferred Stock, each of which is convertible into one
share of ScanSoft common stock. The number of shares of common stock issuable
upon exercise of the Xerox warrants may increase in accordance with a formula
defined in the warrant agreement. The State of Wisconsin Investment Board, or
SWIB, is ScanSoft's second largest stockholder, owning approximately 17.7% of
ScanSoft's common stock as of May 30, 2003. Because of their large holdings of
ScanSoft's capital stock relative to other stockholders, Xerox and SWIB, acting
individually or together, could have a strong influence over matters requiring
approval by ScanSoft stockholders.
THE MARKET PRICE OF SCANSOFT'S COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE
SUBJECT TO WIDE FLUCTUATIONS.
ScanSoft's stock price historically has been and may continue to be
volatile. Various factors contribute to the volatility of ScanSoft's stock
price, including, for example, quarterly variations in ScanSoft's financial
results, new product introductions by ScanSoft or ScanSoft's competitors and
general economic and market conditions. While ScanSoft cannot predict the
individual effect that these factors may have on the market price of ScanSoft's
common stock, these factors, either individually or in the aggregate, could
result in significant volatility in ScanSoft's stock price during any given
period of time. Moreover, companies that have experienced volatility in the
market price of their stock often are subject to securities class action
litigation. If ScanSoft was the subject of such litigation, it could result in
substantial costs and divert management's attention and resources.
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SCANSOFT HAS IMPLEMENTED ANTI-TAKEOVER PROVISIONS, WHICH COULD DISCOURAGE OR
PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO SCANSOFT
STOCKHOLDERS.
Provisions of ScanSoft's amended and restated certificate of incorporation,
bylaws and Delaware law could make it more difficult for a third party to
acquire ScanSoft, even if doing so would be beneficial to ScanSoft stockholders.
These provisions include:
- a preferred shares rights agreement;
- authorized "blank check" preferred stock;
- a prohibition on cumulative voting in the election of directors;
- a limitation on the ability of stockholders to call special meetings of
stockholders;
- a requirement that all stockholder actions be taken at meetings of
ScanSoft stockholders; and
- a requirement for advance notice for nominations of directors and for
stockholder proposals.
RISKS RELATED TO SPEECHWORKS
SPEECHWORKS HAS A HISTORY OF LOSSES AND SPEECHWORKS EXPECTS TO CONTINUE TO
INCUR NET LOSSES FOR THE FORESEEABLE FUTURE, WHICH LOSSES MAY DEPRESS
SPEECHWORKS' COMMON STOCK PRICE.
SpeechWorks had an accumulated deficit of $174.1 million at March 31, 2003,
and SpeechWorks expects to incur net losses for the foreseeable future. Net
losses were $9.4 million for the three-month period ended March 31, 2003, $51.9
million for the year ended December 31, 2002, $46.8 million for the year ended
December 31, 2001 and $29.6 million for the year ended December 31, 2000.
SpeechWorks anticipates continuing to incur significant sales and marketing,
research and development and general and administrative expenses and, as a
result, SpeechWorks will need to generate higher revenues to achieve and sustain
profitability. SpeechWorks cannot be certain that it will realize sufficient
revenues to achieve profitability. Moreover, if SpeechWorks were to achieve
profitability, SpeechWorks may not be able to sustain or increase its
profitability on a quarterly or annual basis. Any additional financing that
SpeechWorks may require in the future may not be available at all or, if
available, may be on terms unfavorable to SpeechWorks. Failure to achieve or
maintain profitability may depress the market price of SpeechWorks' common
stock.
SPEECHWORKS EXPECTS ITS QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE.
IF SPEECHWORKS' QUARTERLY OPERATING RESULTS FAIL TO MEET THE EXPECTATIONS OF
FINANCIAL ANALYSTS AND INVESTORS, THE TRADING PRICE OF SPEECHWORKS' COMMON
STOCK MAY DECLINE.
SpeechWorks' revenues and operating results can vary significantly from
quarter to quarter. A number of important factors are likely to cause these
variations, including:
- the timing of sales of SpeechWorks' products and services, particularly
in light of SpeechWorks' dependence on a relatively small number of large
orders, including international orders,
- the mix of domestic and international sales,
- the timing of product implementations, particularly large client design
projects,
- unexpected delays in introducing new products and services,
- variation in capital spending budgets of SpeechWorks' clients and
potential clients,
- variation in SpeechWorks' expenses, whether related to sales and
marketing, product development or administration,
- deferral of recognition of SpeechWorks' revenue in accordance with
applicable accounting principles due to the time required to complete
projects,
- the mix of product license and services revenue, and
32
- costs related to possible acquisitions of technology or businesses or
strategic business combinations involving the company.
Because of the volatility of SpeechWorks' quarterly results and the
difficulty in predicting SpeechWorks' future performance, SpeechWorks' operating
results may fall below the expectations of analysts or investors and, as a
result, the price of SpeechWorks' common stock may decline.
IF THE ESTIMATES SPEECHWORKS MAKES, AND THE ASSUMPTIONS ON WHICH SPEECHWORKS
RELIES, IN PREPARING ITS FINANCIAL STATEMENTS PROVE INACCURATE, SPEECHWORKS'
ACTUAL RESULTS MAY VARY FROM THOSE REFLECTED IN SPEECHWORKS' PROJECTIONS AND
ACCRUALS.
SpeechWorks' financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires SpeechWorks to make estimates
and judgments that affect the reported amounts of SpeechWorks' assets,
liabilities, revenues and expenses, the amounts of charges accrued by
SpeechWorks, such as those made in connection with SpeechWorks' restructurings,
and related disclosure of contingent assets and liabilities. SpeechWorks bases
its estimates on historical experience and on various other assumptions that
SpeechWorks believes to be reasonable under the circumstances. There can be no
assurance, however, that SpeechWorks' estimates, or the assumptions underlying
them, will be correct.
THE SLOWDOWN IN THE ECONOMY HAS AFFECTED THE MARKET FOR INFORMATION TECHNOLOGY
PRODUCTS, AND SPEECHWORKS' FUTURE FINANCIAL RESULTS WILL DEPEND IN PART UPON
WHETHER THIS SLOWDOWN CONTINUES.
As a result of prolonged unfavorable economic conditions and reduced
capital spending by SpeechWorks' customers and potential customers, demand for
SpeechWorks' products and services has been adversely affected. This has
resulted in decreased revenues. Many of SpeechWorks' customers are in the
telecommunications and airline industries, which have been severely affected by
the current economic downturn. If the current economic conditions continue or
worsen, SpeechWorks may experience a material adverse impact on its business,
operating results and financial condition.
SOME OF SPEECHWORKS' CUSTOMERS AND PARTNERS ARE NEWLY FORMED BUSINESSES OR
BUSINESSES THAT ARE NOT YET PROFITABLE. IF THESE COMPANIES FAIL OR EXPERIENCE
FINANCIAL DIFFICULTIES, SPEECHWORKS' BUSINESS COULD BE NEGATIVELY AFFECTED.
Some of SpeechWorks' customers and partners are financed by investments
from venture capital investors. Given the current general economic conditions
and investment climate, these companies could face difficulties in securing
additional financing to fund their operations. If these companies are not yet
profitable or self-sustaining based on their operations, they could be unable to
satisfy their commitments to SpeechWorks. Even if they are able to meet current
obligations to SpeechWorks, they may not be able to buy additional products and
services from SpeechWorks. If these companies cannot meet their current
obligations to SpeechWorks or fail, SpeechWorks' business could be significantly
harmed and its revenue could decline.
SPEECH-ACTIVATED SYSTEMS ARE RELATIVELY NEW PRODUCTS, AND SPEECHWORKS' SUCCESS
WILL DEPEND ON ITS ABILITY TO CONTINUE TO EDUCATE PROSPECTIVE CLIENTS ON THE
COMMERCIAL VIABILITY OF THE PRODUCTS. IF SPEECHWORKS' POTENTIAL CLIENTS AND
THEIR CUSTOMERS DO NOT ACCEPT SPEECH-ACTIVATED SYSTEMS, SPEECHWORKS' BUSINESS
WILL BE HARMED.
SpeechWorks' business would be harmed if use of speech-activated,
e-business solutions does not continue to develop, or develops more slowly than
SpeechWorks expects. SpeechWorks' market is relatively new and rapidly evolving.
SpeechWorks' future success depends on the acceptance by current and future
clients and their customers of speech-activated services as an integral part of
their businesses. The size of SpeechWorks' market will depend in part on
consumer acceptance of automated speech systems and the actual and perceived
quality of these systems. The adoption of speech-activated services could be
hindered by the perceived costs of this new technology, as well as the
reluctance of enterprises
33
that have invested substantial resources in existing call centers,
touch-tone-based systems or internet-based infrastructures to replace or enhance
their current systems with this new technology. Accordingly, in order to achieve
commercial acceptance, SpeechWorks will have to educate prospective clients,
including large, established telecommunications companies, about the uses and
benefits of speech-activated services in general and SpeechWorks' products in
particular. If these efforts fail, or if speech-activated software platforms do
not achieve broad commercial acceptance, SpeechWorks' business could be
significantly harmed and its revenues could decline. In addition, the continued
development of new and evolving wireless technologies using a visual web browser
interface could adversely affect the demand for speech-activated services.
SPEECHWORKS CURRENTLY RELIES ON A LIMITED NUMBER OF LARGE ORDERS FOR A
SIGNIFICANT PORTION OF ITS REVENUES. AS A RESULT, SPEECHWORKS' INABILITY TO
SECURE ADDITIONAL SIGNIFICANT CLIENTS DURING A GIVEN PERIOD OR THE LOSS OF ONE
MAJOR CLIENT COULD CAUSE SPEECHWORKS' QUARTERLY RESULTS OF OPERATIONS TO
SUFFER. SPEECHWORKS' STOCK PRICE MAY ALSO BE ADVERSELY AFFECTED BY UNEXPECTED
QUARTERLY REVENUE DECLINES CAUSED BY DELAYS IN REVENUE RECOGNITION.
Due to the nature of SpeechWorks' business, in any quarter SpeechWorks is
dependent upon a limited number of orders that are relatively large in relation
to its overall revenues. There was no single customer that represented more than
10% of SpeechWorks' total revenues during the three-month period ended March 31,
2003 or for the year ended December 31, 2002. However, one of SpeechWorks'
resellers accounted for 19.3% of SpeechWorks' total revenue in 2001 and 16.1% of
SpeechWorks' total revenue in 2000. For the year ended December 31, 2002, there
was a decline in demand from this reseller to less than 10% of SpeechWorks'
total revenues. SpeechWorks' speech-activated products and services require
significant expenditures by SpeechWorks' clients and typically involve lengthy
sales cycles. SpeechWorks may spend significant time and incur substantial
expenses educating and providing information to prospective clients. Any failure
to complete a sale to a prospective client during a quarter could result in
revenues and operating results for the quarter that are lower than expected.
In addition, as a result of the significant time required to deliver or
perform a client order, SpeechWorks may be unable to recognize revenue related
to a client order until well after SpeechWorks receives the order. SpeechWorks'
dependence on large client orders and the delay in recognizing revenue relating
to these orders makes it difficult to forecast quarterly operating results. This
could cause SpeechWorks' stock price to be volatile or to decline.
SPEECHWORKS RELIES ON RESELLERS AND ORIGINAL EQUIPMENT MANUFACTURERS FOR A
PORTION OF ITS SALES. THE LOSS OF ONE OR MORE RESELLERS OR ORIGINAL EQUIPMENT
MANUFACTURERS COULD LIMIT SPEECHWORKS' ABILITY TO SUSTAIN AND GROW ITS
REVENUES.
For the three-month period ended March 31, 2003, 59.4% of SpeechWorks'
sales were attributable to its resellers and original equipment manufacturers,
or OEMs. For the year ended December 31, 2002, 60.1% of SpeechWorks' sales were
attributable to its resellers and OEMs. In 2001, 58.1% of SpeechWorks' sales
were attributable to its resellers and OEMs, especially InterVoice, Inc., which
accounted for 19.3% of SpeechWorks' sales in 2001. SpeechWorks intends to
increase its sales through resellers in the future. As a result, SpeechWorks is
in part dependent upon the continued success and viability of its resellers and
OEMs, as well as their continued interest in selling SpeechWorks' products. The
loss of a key reseller or OEM or SpeechWorks' failure to develop and sustain new
reseller and OEM relationships could limit SpeechWorks' ability to sustain and
grow its revenues.
SpeechWorks' contracts with its resellers and OEMs generally do not require
them to purchase SpeechWorks' products. SpeechWorks' resellers and OEMs are
independent companies over which SpeechWorks has limited control. SpeechWorks'
resellers and OEMs could cease to market its products or devote significant
resources to the sale of its products. Any failure of SpeechWorks' resellers or
OEMs to successfully market and sell its products could result in revenues that
are lower than anticipated. In addition, SpeechWorks' resellers and OEMs possess
confidential information concerning its products and operations. Although
SpeechWorks has nondisclosure agreements with its resellers and OEMs, a reseller
or
34
OEM could use SpeechWorks' confidential information in competition with
SpeechWorks, which competition could adversely affect SpeechWorks' competitive
position and revenues.
SPEECHWORKS HAS EXPANDED ITS INTERNATIONAL OPERATIONS. BECAUSE OF RISKS
INVOLVED WITH OPERATING A BUSINESS IN FOREIGN COUNTRIES, SPEECHWORKS MAY NOT
BE SUCCESSFUL IN MAINTAINING ITS INTERNATIONAL BUSINESS OPERATIONS AND
SPEECHWORKS' BUSINESS COULD BE HARMED.
SpeechWorks' international sales represented 19.1% of its revenue for the
three-month period ended March 31, 2003, 21.4% of its revenue for the year ended
December 31, 2002, 9.5% of its revenue in 2001 and 14.0% of its revenue in 2000.
SpeechWorks expanded its direct and indirect international sales force in 2001,
which helped SpeechWorks increase its international revenues in 2002.
SpeechWorks has limited experience in international operations and international
product and service sales, and there can be no assurance SpeechWorks will be
successful in its international business. SpeechWorks is subject to a variety of
risks associated with conducting business internationally, in addition to the
risks its business as a whole faces, any of which could harm SpeechWorks'
business. These risks include:
- difficulties and costs of staffing and managing foreign operations,
- difficulties in establishing and maintaining an effective international
reseller network,
- the burden of complying with a wide variety of foreign laws, particularly
with respect to intellectual property and license requirements,
- political and economic instability outside the United States,
- import or export licensing and product certification requirements,
- tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers imposed by foreign countries,
- potential adverse tax consequences, including higher marginal rates,
- unfavorable fluctuations in currency exchange rates, and
- limited ability to enforce agreements, intellectual property rights and
other rights in some foreign countries.
IN ORDER TO INCREASE SPEECHWORKS' INTERNATIONAL SALES, SPEECHWORKS MUST
DEVELOP LOCALIZED VERSIONS OF ITS PRODUCTS. IF SPEECHWORKS IS UNABLE TO DO SO,
SPEECHWORKS MAY BE UNABLE TO GROW ITS REVENUE AND EXECUTE ITS BUSINESS
STRATEGY.
In order to expand SpeechWorks' international sales, SpeechWorks intends to
continue to invest significant resources to create and refine different speech
recognition and synthesis models for particular languages or dialects. These
speech-processing models are required to create versions of SpeechWorks'
products that understand or reproduce the local language or dialect. If
SpeechWorks fails to develop localized versions of its products, SpeechWorks'
ability to address international market opportunities and to grow its business
will be limited. In addition, SpeechWorks is required to invest resources to
develop these versions of its products in advance of the receipt of revenues.
SpeechWorks may be unable to recognize revenues sufficient to render these
products profitable.
IF SPEECHWORKS FAILS TO DEVELOP NEW PRODUCTS AND SERVICES IN THE FACE OF THE
INDUSTRY'S RAPIDLY EVOLVING TECHNOLOGY, SPEECHWORKS' FUTURE OPERATING RESULTS
MAY BE ADVERSELY AFFECTED.
SpeechWorks' growth and future operating results will depend, in part, on
SpeechWorks' ability to keep pace with:
- rapidly changing speech recognition and speech synthesis technology,
- evolving industry standards and practices,
35
- frequent new speech-activated service and product introductions and
enhancements, and
- changing client requirements and preferences for their automated speech
systems.
Any delay or failure on SpeechWorks' part in responding quickly,
cost-effectively and sufficiently to these developments could render
SpeechWorks' existing speech-activated products and services noncompetitive or
obsolete and have an adverse effect on SpeechWorks' competitive position.
SpeechWorks may have to incur substantial expenditures to modify or adapt its
speech-activated products and services to respond to technological changes.
SpeechWorks must stay abreast of cutting-edge technological developments and
evolving service offerings to remain competitive and increase the utility of its
speech-activated services. SpeechWorks must be able to incorporate new
technologies into the speech-activated solutions SpeechWorks designs and
develops to address the increasingly complex and varied needs of SpeechWorks'
client base. If SpeechWorks is unable, for technological or other reasons, to
develop and introduce new and enhanced products and to respond to changing
client requirements and preferences in a timely manner, SpeechWorks may lose
existing customers and fail to attract new customers, which could result in a
significant decline in SpeechWorks' revenues.
IF SPEECHWORKS DOES NOT MANAGE ITS OPERATIONS IN ACCORDANCE WITH CHANGING
ECONOMIC CONDITIONS, SPEECHWORKS' RESOURCES MAY BE STRAINED, WHICH COULD HARM
SPEECHWORKS' ABILITY TO BECOME PROFITABLE.
SpeechWorks' business operations have changed due to volatility in
SpeechWorks' industry. SpeechWorks has experienced significant growth in the
past. From December 31, 2000 to December 31, 2001, the number of SpeechWorks
employees increased from 317 to 409. However, in July 2002, SpeechWorks reduced
its headcount by approximately 17%. In January 2003, SpeechWorks further reduced
its headcount by approximately 6%. SpeechWorks' headcount as of March 31, 2003
was 309. SpeechWorks may be required to expand or contract its business
operations in the future, and as a result may need to expand or contract its
management, operational, financial and human resources, as well as management
information systems and controls, to respond to any such growth or contraction.
SpeechWorks' failure to manage these types of changes would place a burden on
SpeechWorks' business and its management team, which could cause SpeechWorks'
business to suffer.
SPEECHWORKS' APPLICATION SOFTWARE MAY CONTAIN DEFECTS, WHICH COULD RESULT IN
DELAYED OR LOST REVENUE, EXPENSIVE CORRECTIONS, LIABILITY TO SPEECHWORKS'
CLIENTS AND CLAIMS AGAINST SPEECHWORKS.
SpeechWorks designs, develops and implements complex speech-activated
solutions that are often crucial to the operation of SpeechWorks' clients'
products and businesses. Defects in the solutions SpeechWorks develops could
result in delayed or lost revenue, adverse client reaction and negative
publicity about SpeechWorks or its products and services or require expensive
and time consuming corrections. Also, due to the developing nature of speech
recognition technology, text-to-speech technology and speaker verification
technology, SpeechWorks' products are not currently and may never be accurate in
every instance. In addition, third party technology that is included in
SpeechWorks' products could contain errors or defects. Clients who are not
satisfied with SpeechWorks' products or services could bring claims against
SpeechWorks for substantial damages, which, even if unsuccessful, would likely
be time consuming and could result in costly litigation and payment of damages.
Such claims could have an adverse effect on SpeechWorks' financial results and
competitive position.
SPEECHWORKS' CURRENT AND POTENTIAL COMPETITORS IN THE SPEECH-ACTIVATED
SOLUTIONS MARKET, SOME OF WHOM HAVE GREATER RESOURCES AND EXPERIENCE THAN
SPEECHWORKS DOES, MAY OFFER PRODUCTS AND SERVICES THAT MAY CAUSE DEMAND FOR,
AND THE PRICES OF, SPEECHWORKS' PRODUCTS TO DECLINE.
A number of companies have developed, or are expected to develop, products
that compete with SpeechWorks' products. Competitors in speech technology
include AT&T, Elan, Fonix, IBM, Lucent Technologies, Microsoft, Nuance
Communications, Philips Communications, Phonetic Systems, Rhetorical, Telisma
and Temic speech processing. Furthermore, other companies may enter SpeechWorks'
markets by acquiring, or entering into strategic relationships with,
SpeechWorks' competitors. Current and
36
potential competitors have established, or may establish, cooperative
relationships among themselves or with third parties to increase the abilities
of their advanced speech and language technology products to address the needs
of SpeechWorks' prospective customers.
Many of SpeechWorks' current and potential competitors have longer
operating histories, significantly greater financial, technical, product
development and marketing resources, greater name recognition and/or larger
client bases than SpeechWorks does. SpeechWorks' present or future competitors
may be able to develop speech-activated products and services comparable or
superior to those SpeechWorks offers, adapt more quickly than SpeechWorks does
to new technologies, evolving industry trends and standards or client
requirements, or devote greater resources to the development, promotion and sale
of their products and services than SpeechWorks does. Accordingly, SpeechWorks
may not be able to compete effectively in its markets, competition may intensify
and future competition may cause demand for and the prices of SpeechWorks'
products to decline, which could adversely affect SpeechWorks' sales and
profitability.
IF THE STANDARDS SPEECHWORKS HAS SELECTED TO SUPPORT ARE NOT ADOPTED AS THE
INDUSTRY STANDARDS FOR SPEECH-ACTIVATED SOFTWARE, BUSINESSES MIGHT NOT USE
SPEECHWORKS' SPEECH-ACTIVATED SOFTWARE PLATFORMS FOR DELIVERY OF APPLICATIONS
AND SERVICES, AND SPEECHWORKS REVENUES COULD BE NEGATIVELY AFFECTED.
The market for speech-activated services software is new and emerging and
industry software standards have not yet been fully established. SpeechWorks may
not be competitive unless its products support changing industry software
standards. The emergence of industry standards other than those SpeechWorks has
selected to support, whether through adoption by official standards committees
or widespread usage, could require costly and time consuming redesign of
SpeechWorks' products. If these standards become widespread and SpeechWorks'
products do not support them, SpeechWorks' clients and potential clients may not
purchase SpeechWorks' products, and SpeechWorks' revenues could be adversely
affected. Multiple standards in the marketplace could also make it difficult for
SpeechWorks to design its products to support all applicable standards, which
could also result in decreased sales of SpeechWorks' products.
SPEECHWORKS RELIES ON SPEECHWORKS' INTELLECTUAL PROPERTY RIGHTS AND IF
SPEECHWORKS IS UNABLE TO PROTECT THESE RIGHTS, SPEECHWORKS MAY FACE INCREASED
COMPETITION. PROTECTION OF SPEECHWORKS' INTELLECTUAL PROPERTY RIGHTS IS
UNCERTAIN AND MAY BE COSTLY.
Intellectual property rights are important in SpeechWorks' industry.
SpeechWorks relies on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality, assignment of rights to inventions,
and/or license agreements with its employees, consultants and corporate or
strategic partners to protect its intellectual property rights. These legal
protections afford only limited protection and may be time-consuming and
expensive to obtain, maintain and enforce. Further, despite SpeechWorks'
efforts, SpeechWorks may be unable to prevent third parties from unauthorized
use of SpeechWorks' intellectual property. Monitoring unauthorized use of
SpeechWorks' intellectual property is difficult, and SpeechWorks cannot be
certain that the steps it has taken will be effective to prevent unauthorized
use.
Litigation may be necessary to enforce SpeechWorks' intellectual property
rights and trade secrets. These lawsuits, regardless of their success, would
likely be time consuming and expensive to resolve and would divert management's
time and attention away from SpeechWorks' business.
IF THE PROPOSED MERGER DOES NOT CLOSE, SPEECHWORKS MAY UNDERTAKE STRATEGIC
ACQUISITIONS OR INVESTMENTS IN THE FUTURE AND ANY DIFFICULTIES FROM
INTEGRATING SUCH ACQUISITIONS OR INVESTMENTS COULD DAMAGE SPEECHWORKS' ABILITY
TO ATTAIN OR MAINTAIN PROFITABILITY. THE ANTICIPATED BENEFITS OF STRATEGIC
ACQUISITIONS OR INVESTMENTS MAY NEVER BE REALIZED.
If the proposed merger transaction does not close, SpeechWorks may acquire
or make significant investments in businesses and technologies that complement
or augment SpeechWorks' existing business and technologies. Integrating any
newly acquired businesses or technologies could be expensive and time-consuming
and could divert management's time and attention away from SpeechWorks' on-going
business.
37
SpeechWorks may not be able to integrate any acquired business, products,
employees or technology successfully and SpeechWorks' failure to do so could
harm its business. SpeechWorks cannot guarantee that it will realize any
anticipated benefits from such acquisitions or investments. Moreover,
SpeechWorks may need to raise additional funds through public or private debt or
equity financing to acquire or make significant investments in any businesses or
technologies, which may result in dilution to SpeechWorks' current stockholders
and the incurrence of indebtedness. SpeechWorks may not be able to operate
acquired businesses profitably.
SOME OF SPEECHWORKS' CUSTOMER CONTRACTS INCLUDE RIGHTS OF INDEMNIFICATION FOR
INTELLECTUAL PROPERTY INFRINGEMENT. IN THE EVENT THAT SPEECHWORKS IS REQUIRED
TO INDEMNIFY ITS CUSTOMERS THERE COULD BE A MATERIAL ADVERSE AFFECT ON ITS
RESULTS OF OPERATIONS.
SpeechWorks enters into standard indemnification agreements in the ordinary
course of business through its customer contracts. Pursuant to these agreements,
SpeechWorks indemnifies, holds harmless, and agrees to reimburse the indemnified
party for losses suffered or incurred by the indemnified party, generally
SpeechWorks' business partners or customers, in connection with any U.S. patent,
or any copyright or other intellectual property infringement claim by any third
party with respect to SpeechWorks' products. The term of these indemnification
agreements is generally perpetual from the date of the agreement. The maximum
potential amount of future payments SpeechWorks could be required to make under
these indemnification agreements is unlimited. Although SpeechWorks has not
incurred any material costs to date related to these indemnification agreements,
in the event that any of SpeechWorks' products or solutions were found to
violate intellectual property rights, then amounts paid to SpeechWorks'
customers could have a material adverse effect on SpeechWorks' ongoing
operations.
SPEECHWORKS MAY EXPEND SIGNIFICANT RESOURCES TO DEFEND AGAINST CLAIMS OF
INFRINGEMENT BY THIRD PARTIES, AND IF SPEECHWORKS IS NOT SUCCESSFUL
SPEECHWORKS MAY LOSE SIGNIFICANT RIGHTS OR BE REQUIRED TO ENTER INTO
DISADVANTAGEOUS LICENSE OR ROYALTY AGREEMENTS.
Currently, in the software industry there are frequent assertions of patent
infringement by owners of patents, and assertions of other violations of
intellectual property rights such as trademarks, copyrights, and trade secrets.
In addition, there are a large number of patents in the speech processing area.
Although SpeechWorks does not believe that it is infringing on any patent
rights, the holders of patents may claim that SpeechWorks is doing so. If any
claim were made against SpeechWorks, SpeechWorks' business could be harmed,
particularly if SpeechWorks is unsuccessful in defending such claim. If
SpeechWorks is forced to defend any claim, whether it is with or without merit
or is determined in SpeechWorks' favor, then SpeechWorks may face costly
litigation, diversion of technical and management personnel, delays in future
product releases or injunctions preventing SpeechWorks from selling its products
and services. SpeechWorks may also be required to enter into costly and
burdensome royalty and licensing agreements. Any royalty or licensing
agreements, if required, may not be available on terms acceptable to
SpeechWorks, or at all.
SPEECHWORKS' PRODUCTS INCORPORATE TECHNOLOGY SPEECHWORKS LICENSES FROM OTHERS.
SPEECHWORKS' INABILITY TO MAINTAIN THESE LICENSES COULD HAVE A MATERIAL
ADVERSE EFFECT ON ITS BUSINESS.
Some of the technology included in, or operating in conjunction with,
SpeechWorks' products is licensed by SpeechWorks from others. For example,
SpeechWorks currently licenses certain text-to-speech technology from IBM,
text-to-speech and other technology relating to computer processing of the human
voice from AT&T, speaker verification technology from Rutgers University and
software and technology from MIT. Certain of these license agreements are for
limited terms. If for any reason these license agreements terminate, SpeechWorks
may be required to seek alternative vendors and may be unable to obtain similar
technology on favorable terms, or at all. If SpeechWorks is unable to obtain
alternative license agreements, SpeechWorks could be required to modify some
features of its products, which could adversely affect sales of its products and
services.
38
SPEECHWORKS RELIES UPON THE CONTINUED SERVICE AND PERFORMANCE OF A RELATIVELY
SMALL NUMBER OF SENIOR MANAGEMENT AND KEY TECHNICAL PERSONNEL. SPEECHWORKS MAY
NOT BE ABLE TO RETAIN OR RECRUIT NECESSARY PERSONNEL, WHICH COULD AFFECT THE
MANAGEMENT AND DEVELOPMENT OF SPEECHWORKS' BUSINESS.
SpeechWorks' future success depends on its retention of a small number of
senior management and key technical personnel, such as Stuart R. Patterson,
SpeechWorks' President and Chief Executive Officer, and Michael S. Phillips,
SpeechWorks' Chief Technology Officer and co-founder. SpeechWorks does not have
key person life insurance policies covering any of its employees. The loss of
services of any of SpeechWorks' executive officers or key personnel could have a
negative effect on SpeechWorks' ability to grow its business.
SpeechWorks needs to attract and retain managerial and highly skilled
technical personnel. If SpeechWorks is unable to attract and retain managerial
and qualified technical personnel, SpeechWorks' operations could suffer and
SpeechWorks may never achieve profitability.
SPEECHWORKS' BUSINESS WILL BE HARMED IF SPEECHWORKS FAILS TO HIRE OR RETAIN
QUALIFIED SALES PERSONNEL, OR IF NEWLY HIRED SALES PEOPLE FAIL TO DEVELOP THE
NECESSARY SALES SKILLS OR DEVELOP THESE SKILLS MORE SLOWLY THAN SPEECHWORKS
ANTICIPATES.
SpeechWorks' financial success depends to a large degree on the ability of
its direct and indirect sales force to increase sales. Therefore, SpeechWorks'
ability to increase revenue in the future depends considerably upon SpeechWorks'
success in recruiting, training and retaining additional direct and indirect
sales personnel and the success of its sales force. Also, a new salesperson may
require a number of months before he or she becomes a productive member of
SpeechWorks' sales force.
39
THE SPECIAL MEETING OF SCANSOFT STOCKHOLDERS
GENERAL
ScanSoft is furnishing this joint proxy statement/prospectus to ScanSoft
stockholders in connection with the solicitation of proxies by the ScanSoft
board of directors for use at the special meeting of ScanSoft stockholders,
including any adjournment or postponement of the meeting.
DATE, TIME AND PLACE
The special meeting will be held at the ScanSoft headquarters, 9 Centennial
Drive, Peabody, Massachusetts 01960, on August 11, 2003 at 10:00 am Eastern
time.
PURPOSE OF THE SCANSOFT SPECIAL MEETING
At the ScanSoft special meeting, including any adjournment or postponement
thereof, ScanSoft stockholders will be asked:
1. To consider and vote upon a proposal to approve the issuance of
shares of ScanSoft common stock in connection with a merger of Spiderman
Acquisition Corporation with and into SpeechWorks as contemplated by the
Agreement and Plan of Reorganization among ScanSoft, Spiderman Acquisition
Corporation and SpeechWorks, with SpeechWorks surviving as a wholly owned
subsidiary of ScanSoft;
2. To consider and vote upon a proposal to amend ScanSoft's 1995
Employee Stock Purchase Plan to increase the number of shares reserved for
issuance under the plan from 1,000,000 to 1,500,000; and
3. To transact such other business as may properly come before the
ScanSoft special meeting or any postponement or adjournment thereof.
A copy of the merger agreement is attached to this joint proxy
statement/prospectus as Annex A. ScanSoft stockholders are encouraged to read
the merger agreement in its entirety.
THE MATTERS TO BE CONSIDERED AT THE SCANSOFT SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO SCANSOFT STOCKHOLDERS. ACCORDINGLY, SCANSOFT STOCKHOLDERS ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED PRE-ADDRESSED POSTAGE-PAID ENVELOPE.
RECORD DATE, SHARES ENTITLED TO VOTE
Only holders of ScanSoft common stock at the close of business on June 30,
2003, the record date for the ScanSoft special meeting, are entitled to notice
of and to vote at the ScanSoft special meeting. On the record date,
approximately 66,206,640 shares of ScanSoft common stock were issued and
outstanding and there were approximately 568 holders of record. ScanSoft
stockholders on the record date are each entitled to one vote per share of
ScanSoft common stock on the proposals described above.
VOTING PROCEDURES
You may vote in person at the ScanSoft special meeting or by proxy.
ScanSoft recommends that you vote by proxy even if you plan to attend the
special meeting and vote in person. You can change your vote at the ScanSoft
special meeting at any time before the voting has been completed.
ScanSoft stockholders holding shares of ScanSoft common stock directly as
stockholders of record or in "street name" may direct the voting of their shares
without attending the ScanSoft special meeting.
40
ScanSoft stockholders may vote by granting proxies or, for shares held in street
name, by submitting voting instructions to their brokers or nominees.
ScanSoft stockholders of record may submit proxies by completing, signing
and dating the enclosed proxy card for the ScanSoft special meeting and mailing
them in the enclosed pre-addressed postage-paid envelopes. All shares of
ScanSoft common stock represented by properly executed proxies received in time
for the ScanSoft special meeting and not revoked will be voted at the ScanSoft
special meeting, and at any adjournment or postponement of the ScanSoft special
meeting, in accordance with the instructions contained in the proxies. Properly
executed proxies from ScanSoft stockholders holding shares directly as
stockholders of record that do not contain voting instructions will be voted FOR
the approval of the issuance of shares of ScanSoft common stock in connection
with the merger and FOR the approval of the amendment of the 1995 Employee Stock
Purchase Plan.
If your broker holds your shares of ScanSoft common stock for you in
"street name," you should instruct your broker to vote your shares, following
the directions your broker provides to you. Most brokers have procedures for
telephone or Internet voting. Check the material your broker sends you or call
your account representative for more information. In the event you do not
instruct your broker how to vote any shares held for you in street name, your
shares will not be counted as a vote cast on the proposal to approve the
issuance of shares of ScanSoft common stock in connection with the merger, and
will therefore have no effect on that proposal. In addition, your broker will
have discretionary voting authority on the proposal to approve the amendment of
ScanSoft's 1995 Employee Stock Purchase Plan to increase the number of shares
reserved for issuance under the plan from 1,000,000 to 1,500,000.
ScanSoft stockholders of record may also vote in person at the special
meeting by submitting their proxy cards or by filling out a ballot at the
ScanSoft special meeting.
VOTE REQUIRED
Under applicable rules of the NASDAQ National Market, the issuance of
shares of ScanSoft common stock in connection with the merger requires an
affirmative vote of a majority of the votes cast at the ScanSoft special
meeting.
The proposal to amend the ScanSoft 1995 Employee Stock Purchase Plan
requires an affirmative vote of a majority of the votes cast at the ScanSoft
special meeting.
QUORUM, ABSTENTIONS AND BROKER NON-VOTES
A quorum of ScanSoft stockholders is required to have a valid ScanSoft
special meeting of stockholders. A majority of the shares of ScanSoft common
stock issued and outstanding and entitled to vote on the record date must be
present in person or by proxy at the ScanSoft special meeting in order for a
quorum to be established. ScanSoft's transfer agent will act as inspector of
elections at the ScanSoft special meeting and will ascertain whether a quorum is
present, tabulate the votes and determine the voting results on all matters
presented to the ScanSoft stockholders at the special meeting. If a quorum is
not present, ScanSoft expects that the ScanSoft special meeting will be
adjourned to allow additional time to obtain additional proxies or votes, and at
any subsequent reconvening of the ScanSoft special meeting, all proxies will be
voted in the same manner as the proxies would have been voted at the original
convening of the special meeting, except for any proxies that have been
effectively revoked or withdrawn prior to the reconvening of the ScanSoft
special meeting.
Under the rules that govern brokers who have record ownership of shares
that are held in "street name" for their clients, the beneficial owners of the
shares, brokers have discretion to vote these shares on routine matters but not
on non-routine matters. The approval of the issuance of shares of ScanSoft
common stock in connection with the merger is considered a non-routine matter,
and the adoption of the amendment to the 1995 Employee Stock Purchase Plan at
the special meeting is considered a routine matter. Accordingly, brokers will
have discretionary voting authority to vote your shares at the special
41
meeting on the proposal to approve the plan amendment, but not on the proposal
to approve the issuance of shares of ScanSoft common stock in connection with
the merger.
A "broker non-vote" occurs when a broker returns a signed and dated proxy
but fails to vote on a proposal, such as when a broker does not have
discretionary voting authority and has not received instructions from the
beneficial owners of the shares. A broker will not be permitted to vote on the
share issuance without instruction from the owner of the shares of ScanSoft
common stock held by that broker. Broker "non-votes" count as present for
purposes of establishing a quorum described above, but will not be counted as a
vote cast on either the proposal to approve the issuance of shares of ScanSoft
common stock in connection with the merger or the proposal to approve the plan
amendment, and will therefore have no effect on those proposals. ScanSoft
stockholders are urged to return the enclosed proxy card marked to indicate
their vote or to instruct their broker to vote shares held in "street name."
Abstentions will have the effect of being cast against the proposal to
approve the issuance of shares of ScanSoft common stock in connection with the
merger and against the proposal to approve the plan amendment, even though the
stockholder so abstaining may intend a different interpretation.
SHARES OWNED AND VOTED BY SCANSOFT DIRECTORS AND EXECUTIVE OFFICERS
At the close of business on June 27, 2003, directors and executive officers
of ScanSoft and certain of their affiliates beneficially owned and were entitled
to vote, in the aggregate, 579,948 shares of ScanSoft common stock. These shares
represent approximately 1.0% of the ScanSoft common stock outstanding as of such
date.
Each of these individuals has entered into a voting agreement with
SpeechWorks in which he or she has agreed, among other things, to vote all
shares of ScanSoft common stock beneficially owned by him or her in favor of the
approval of the issuance of shares of ScanSoft common stock in connection with
the merger, against any other acquisition proposal and against any action that
would delay or prevent the merger. In connection with and in support of the
voting agreements, these persons have granted an irrevocable proxy to an
affiliate of SpeechWorks to vote the shares in accordance with the terms of the
voting agreements.
REVOKING YOUR PROXY
You may revoke your proxy at any time before the proxy is voted at the
ScanSoft special meeting by:
- submitting a written notice of revocation to the corporate secretary of
ScanSoft at 9 Centennial Drive, Peabody, Massachusetts 01960 bearing a
later date than the proxy;
- granting a duly executed proxy relating to the same shares and bearing a
later date (which automatically revokes the earlier proxy) and delivering
it to the corporate secretary of ScanSoft; or
- by attending the ScanSoft special meeting and voting in person.
Simply attending the ScanSoft special meeting will not revoke a proxy. If
you do not hold your shares of ScanSoft common stock in your own name, you may
revoke a previously granted proxy by following the revocation instructions
provided by the bank, broker or other party that is the registered owner of the
shares.
SOLICITATION OF PROXIES AND EXPENSES
ScanSoft and SpeechWorks will share equally expenses incurred in connection
with the filing, printing and mailing of this joint proxy statement/prospectus.
ScanSoft will be responsible for any fees incurred in connection with the
solicitation of proxies for the ScanSoft special meeting. In addition to
solicitation by mail, the directors, officers, employees and agents of ScanSoft
may solicit proxies from ScanSoft stockholders by telephone or other electronic
means or in person. Some of these individuals may have interests in the merger
that are different from, or in addition to, the interests of ScanSoft
stockholders generally. See the section entitled "The Merger -- Interests of
Certain Persons in the Merger -- Interests
42
of ScanSoft Directors and Executive Officers in the Merger." Brokerage houses
and other custodians, nominees and fiduciaries will be requested to forward
soliciting materials to the beneficial owners of shares held of record by these
persons, and ScanSoft will reimburse them for their reasonable out-of-pocket
expenses in sending proxy materials to beneficial owners.
OTHER MATTERS
The ScanSoft board of directors is not aware of any other business to be
brought before the ScanSoft special meeting or any adjournment or postponement
of the meeting. If, however, other matters are properly brought before the
ScanSoft special meeting (including any proposal to adjourn the special meeting
to allow ScanSoft additional time to solicit proxies in favor of the proposal to
approve the issuance of shares of ScanSoft common stock in connection with the
merger or the proposal to approve the amendment to the 1995 Employee Stock
Purchase Plan) or an adjournment or postponement thereof, the persons appointed
as proxies will have discretionary authority to vote the ScanSoft shares
represented by duly executed proxies in accordance with their discretion and
judgment.
RECOMMENDATION OF THE SCANSOFT BOARD OF DIRECTORS
After careful consideration, the ScanSoft board of directors has
unanimously determined it advisable and in the best interests of ScanSoft and
its stockholders that ScanSoft proceed with the merger and that the terms of the
merger agreement are fair to ScanSoft and its stockholders, and unanimously
recommends that you vote FOR the proposal to approve the issuance of shares of
ScanSoft common stock in connection with the merger and FOR the proposal to
approve the amendment to the 1995 Employee Stock Purchase Plan.
In considering such recommendation, ScanSoft stockholders should be aware
that some ScanSoft directors and officers have interests in the merger that are
different from, or in addition to, those of ScanSoft stockholders generally. See
the section entitled "The Merger -- Interests of Certain Persons in the
Merger -- Interests of ScanSoft Directors and Executive Officers in the Merger."
43
THE SPECIAL MEETING OF SPEECHWORKS STOCKHOLDERS
GENERAL
SpeechWorks is furnishing this joint proxy statement/prospectus to
SpeechWorks stockholders in connection with the solicitation of proxies by the
SpeechWorks board of directors for use at the special meeting of SpeechWorks
stockholders, including any adjournment or postponement of the meeting.
DATE, TIME AND PLACE
The special meeting will be held at Hale and Dorr LLP, 60 State Street,
Boston, Massachusetts 02109, on August 11, 2003 at 10:00 am Eastern time.
PURPOSE OF THE SPEECHWORKS SPECIAL MEETING
At the SpeechWorks special meeting, including any adjournment or
postponement thereof, SpeechWorks stockholders will be asked:
1. To consider and vote upon a proposal to adopt the Agreement and
Plan of Reorganization among ScanSoft, Spiderman Acquisition Corporation
and SpeechWorks, and approve the merger contemplated by the Agreement and
Plan of Reorganization, pursuant to which SpeechWorks will become a wholly
owned subsidiary of ScanSoft; and
2. To transact such other business as may properly come before the
SpeechWorks special meeting or any postponement or adjournment thereof.
A copy of the merger agreement is attached to this joint proxy
statement/prospectus as Annex A. SpeechWorks stockholders are encouraged to read
the merger agreement in its entirety.
THE MATTERS TO BE CONSIDERED AT THE SPEECHWORKS SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO SPEECHWORKS STOCKHOLDERS. ACCORDINGLY, SPEECHWORKS STOCKHOLDERS
ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS AND THE OTHER INFORMATION INCORPORATED BY REFERENCE
HEREIN, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD
IN THE ENCLOSED PRE-ADDRESSED POSTAGE-PAID ENVELOPE.
RECORD DATE, SHARES ENTITLED TO VOTE
Only holders of SpeechWorks common stock at the close of business on June
30, 2003, the record date for the SpeechWorks special meeting, are entitled to
notice of and to vote at the SpeechWorks special meeting. On the record date,
approximately 34,874,927 shares of SpeechWorks common stock were issued and
outstanding and there were approximately 303 holders of record. SpeechWorks
stockholders on the record date are each entitled to one vote per share of
SpeechWorks common stock on the proposal to adopt the merger agreement and
approve the merger.
VOTING PROCEDURES
You may vote in person at the SpeechWorks special meeting or by proxy.
SpeechWorks recommends that you vote by proxy even if you plan to attend the
special meeting and vote in person. You can change your vote at the SpeechWorks
special meeting at any time before the voting has been completed.
SpeechWorks stockholders holding shares of SpeechWorks common stock
directly as stockholders of record or in "street name" may direct the voting of
their shares without attending the SpeechWorks special meeting. SpeechWorks
stockholders may vote by granting proxies or, for shares held in street name, by
submitting voting instructions to their brokers or nominees.
44
SpeechWorks stockholders of record may submit proxies by completing,
signing and dating the enclosed proxy card for the SpeechWorks special meeting
and mailing them in the enclosed pre-addressed postage-paid envelopes. All
shares of SpeechWorks common stock represented by properly executed proxies
received in time for the special meeting and not revoked will be voted at the
SpeechWorks special meeting, and at any adjournment or postponement of the
meeting, in accordance with the instructions contained in the proxies. Properly
executed proxies that do not contain voting instructions will be voted FOR the
adoption of the merger agreement and approval of the merger.
If your broker holds your shares of SpeechWorks common stock for you in
"street name," you should instruct your broker to vote your shares, following
the directions your broker provides to you. Most brokers have procedures for
telephone or Internet voting. Check the material your broker sends you or call
your account representative for more information. In the event you do not
instruct your broker how to vote any shares held for you in street name, your
shares will not be voted for the adoption of the merger agreement and approval
of the merger.
SpeechWorks stockholders of record may also vote in person at the
SpeechWorks special meeting by submitting their proxy cards or by completing a
ballot at the SpeechWorks special meeting.
VOTE REQUIRED
In order for the merger to become effective, the holders of a majority of
the outstanding shares of SpeechWorks common stock as of the record date must
vote to adopt the merger agreement and approve the merger. As discussed below,
abstentions and broker non-votes will each have the same effect as a vote
against the proposal to adopt the merger agreement and approve the merger.
QUORUM, ABSTENTIONS AND BROKER NON-VOTES
A quorum of SpeechWorks stockholders is required to have a valid
SpeechWorks special meeting of stockholders. A majority of the shares of
SpeechWorks common stock issued and outstanding and entitled to vote on the
record date must be present in person or by proxy at the SpeechWorks special
meeting in order for a quorum to be established. SpeechWorks' transfer agent
will act as inspector of elections at the special meeting and will ascertain
whether a quorum is present, tabulate the votes and determine the voting results
on all matters presented to the SpeechWorks stockholders at the special meeting.
If a quorum is not present, SpeechWorks expects that the SpeechWorks special
meeting will be adjourned to allow additional time to obtain additional proxies
or votes, and at any subsequent reconvening of the SpeechWorks special meeting,
all proxies will be voted in the same manner as the proxies would have been
voted at the original convening of the special meeting, except for any proxies
that have been effectively revoked or withdrawn prior to the reconvening of the
SpeechWorks special meeting.
Under the rules that govern brokers who have record ownership of shares
that are held in "street name" for their clients, the beneficial owners of the
shares, brokers have discretion to vote these shares on routine matters but not
on non-routine matters. The adoption of the merger agreement and the approval of
the merger at the special meeting are considered non-routine matters.
Accordingly, brokers will not have discretionary voting authority to vote your
shares at the special meeting. A "broker non-vote" occurs when brokers do not
have discretionary voting authority and have not received instructions from the
beneficial owners of the shares. A broker will not be permitted to vote on the
merger proposal without instruction from the beneficial owner of the shares of
SpeechWorks common stock held by that broker. Abstentions and broker "non-votes"
count as present for purposes of establishing a quorum described above, but will
not be voted on the proposal to adopt the merger agreement and approve the
merger. Consequently, an abstention and broker non-vote will have the same
effect as a vote against the proposal. SpeechWorks stockholders are urged to
return the enclosed proxy card marked to indicate their vote or to instruct
their broker to vote shares held in "street name."
45
SHARES OWNED AND VOTED BY SPEECHWORKS DIRECTORS AND EXECUTIVE OFFICERS
At the close of business on June 27, 2003, directors and executive officers
of SpeechWorks beneficially owned and were entitled to vote, in the aggregate,
3,051,900 shares of SpeechWorks common stock. These shares represent
approximately 8.8% of the SpeechWorks common stock outstanding as of such date.
Each of these individuals has entered into a voting agreement with ScanSoft
in which he or she has agreed, among other things, to vote all shares of
SpeechWorks common stock beneficially owned by him or her in favor of the merger
agreement and the merger, against any other acquisition proposal and against any
action that would delay or prevent the merger. In connection with and in support
of the voting agreements, these persons have granted an irrevocable proxy to an
affiliate of ScanSoft to vote the shares in accordance with the terms of the
voting agreements. See "Agreements Related to the Merger -- SpeechWorks Voting
Agreements."
REVOKING YOUR PROXY
You may revoke your proxy at any time before the proxy is voted at the
SpeechWorks special meeting by:
- submitting a written notice of revocation to the corporate secretary of
SpeechWorks at 695 Atlantic Avenue, Boston, Massachusetts 02111 bearing a
later date than the proxy;
- granting a duly executed proxy relating to the same shares and bearing a
later date (which automatically revokes the earlier proxy) and delivering
it to the corporate secretary of SpeechWorks; or
- by attending the SpeechWorks special meeting and voting in person.
Simply attending the SpeechWorks special meeting will not revoke a proxy.
If you do not hold your shares of SpeechWorks common stock in your own name, you
may revoke a previously granted proxy by following the revocation instructions
provided by the bank, broker or other party that is the registered owner of the
shares.
SOLICITATION OF PROXIES AND EXPENSES
ScanSoft and SpeechWorks will share equally expenses incurred in connection
with the filing, printing and mailing of this joint proxy statement/prospectus.
SpeechWorks will be responsible for any fees incurred in connection with the
solicitation of proxies for the SpeechWorks special meeting. In addition to
solicitation by mail, the directors, officers, employees and agents of
SpeechWorks may solicit proxies from SpeechWorks stockholders by telephone or
other electronic means or in person. Some of these individuals may have
interests in the merger that are different from, or in addition to, the
interests of SpeechWorks stockholders generally. See the section entitled "The
Merger -- Interests of Certain Persons in the Merger -- Interests of SpeechWorks
Directors and Executive Officers in the Merger." Brokerage houses and other
custodians, nominees and fiduciaries will be requested to forward soliciting
materials to the beneficial owners of shares held of record by these persons,
and SpeechWorks will reimburse them for their reasonable out-of-pocket expenses
in sending proxy materials to beneficial owners.
OTHER MATTERS
The SpeechWorks board of directors is not aware of any other business to be
brought before the SpeechWorks special meeting or any adjournment or
postponement of the meeting. If, however, other matters are properly brought
before the SpeechWorks special meeting (including any proposal to adjourn the
special meeting to allow SpeechWorks additional time to solicit proxies in favor
of the proposal to adopt the merger agreement) or an adjournment or postponement
thereof, the persons appointed as proxies will have discretionary authority to
vote the shares of SpeechWorks common stock represented by duly executed proxies
in accordance with their discretion and judgment.
46
RECOMMENDATION OF THE SPEECHWORKS BOARD OF DIRECTORS
After careful consideration, the SpeechWorks board of directors has
unanimously determined it advisable and in the best interests of SpeechWorks and
its stockholders that SpeechWorks proceed with the merger and that the terms of
the merger agreement are fair to SpeechWorks and its stockholders, and
unanimously recommends that you vote FOR the proposal to adopt the merger
agreement and approve the merger.
In considering such recommendation, SpeechWorks stockholders should be
aware that some SpeechWorks directors and officers have interests in the merger
that are different from, or in addition to, those of SpeechWorks stockholders
generally. See the section entitled "The Merger -- Interests of Certain Persons
in the Merger -- Interests of SpeechWorks Directors and Executive Officers in
the Merger."
47
THE MERGER
The following is a description of the material aspects of the proposed
merger and related transactions. The following description may not contain all
of the information that is important to you. You should read this entire joint
proxy statement/prospectus, including the section entitled "Agreements Related
to the Merger," and the other documents we refer to carefully for a more
complete understanding of the merger and the related transactions.
BACKGROUND OF THE MERGER
Both ScanSoft and SpeechWorks regularly evaluate different strategies for
improving their competitive positions and enhancing stockholder value, including
opportunities for mergers with other companies, acquisitions of other companies
or assets, and licensing, marketing and development alliances.
In September 2002, Mr. Stuart Patterson, Chief Executive Officer of
SpeechWorks, and Mr. Richard Westelman, Chief Financial Officer of SpeechWorks,
met with representatives of Morgan Stanley & Co. Incorporated to discuss the
possibility of retaining Morgan Stanley to advise SpeechWorks in connection with
its consideration of specific strategic business opportunities. In October 2002,
SpeechWorks engaged Morgan Stanley as its financial advisor.
On October 18, 2002, Mr. Paul Ricci, Chairman and Chief Executive Officer
of ScanSoft, and Mr. Patterson had a preliminary meeting to discuss ScanSoft's
recent announcement of its planned acquisition of Philips' speech processing
telephony and voice control business. At this meeting, they discussed the
possibility of a potential business combination of ScanSoft and SpeechWorks. Mr.
Ricci and Mr. Patterson discussed the complementary nature of the respective
companies' technologies, assets and business strategies.
On October 25, 2002, Mr. Ricci and Mr. Patterson, along with certain other
members of SpeechWorks management, met to discuss the benefits of a potential
business combination of ScanSoft and SpeechWorks and the potential synergies
resulting from a combined company, as well as potential structures of a combined
management team. They proposed a series of meetings between senior management
teams of the respective companies to identify synergies and investigate
strategic merits.
On November 8, 2002, Mr. Ricci and Mr. Patterson met and discussed
valuation methodologies. Mr. Ricci and Mr. Patterson concluded that it was
advisable to continue discussions concerning a potential merger.
On November 13, 2002, Ms. Jeanne McCann, Senior Vice President of Speech
and Language Research and Development of ScanSoft, and Mr. Michael Phillips,
Senior Vice President of SpeechWorks, met to discuss the resources and strengths
of their respective organizations. Mr. Michael Tivnan, former President and
Chief Operating Officer of ScanSoft, and Mr. William Wen, Manager of Mergers and
Acquisitions of ScanSoft, met with Mr. Alan Schwartz, Vice President of Business
Development of SpeechWorks, to evaluate the potential cost savings of a combined
organization. ScanSoft and SpeechWorks entered into a confidentiality agreement
dated as of November 19, 2002.
On November 20, 2002, Mr. Ricci and Mr. Patterson met to discuss next steps
and their respective teams' initial findings, and discussed potential terms and
conditions of a merger involving ScanSoft and SpeechWorks. Later on November 20,
2002, Mr. Patterson updated the SpeechWorks board of directors, at a special
meeting, on the status of discussions with ScanSoft.
On December 16, 2002, Mr. Patterson, Mr. Westelman, Mr. Phillips and Mr.
Schwartz and representatives of Morgan Stanley met with Mr. Ricci, Mr. Tivnan,
Mr. Richard Palmer, Senior Vice President and Chief Financial Officer of
ScanSoft, and Mr. Wen, and representatives of Evercore Partners, financial
advisors to ScanSoft, to discuss the economic terms of a potential merger and
potential synergies resulting from a merger. Each team provided an overview of
its respective businesses.
On December 19, 2002, Mr. Patterson updated the SpeechWorks board of
directors, at a special meeting, on the status of discussions with ScanSoft.
48
On January 14, 2003, the SpeechWorks board of directors held a regularly
scheduled meeting, during which there was discussion regarding a potential
merger of ScanSoft and SpeechWorks. Representatives of Morgan Stanley were
present at the meeting and participated in the discussion.
On January 21, 2003, Mr. Wen and Mr. Westelman met to discuss estimated
potential synergies from the combined organization.
On February 6, 2003, Mr. Ricci and Mr. Patterson met to discuss potential
transaction terms and appropriate follow-up steps.
Commencing in mid-February and continuing throughout March and April 2003,
various members of management of ScanSoft and SpeechWorks, assisted by their
financial, legal and accounting advisors, met from time to time to conduct
business, legal and accounting due diligence.
On February 12, 2003, representatives of Morgan Stanley, representing
SpeechWorks, met with representatives of Evercore Partners, representing
ScanSoft, to discuss the potential merger of ScanSoft and SpeechWorks, potential
transaction terms and valuation methodologies.
On February 14, 2003, Mr. Ricci and Mr. Patterson met to review the outcome
of the Evercore Partners and Morgan Stanley meeting. They agreed to have Mr.
Ricci meet with members of SpeechWorks board of directors.
On February 17, 2003, the ScanSoft board of directors was updated on the
status of discussions with SpeechWorks as part of a regularly scheduled meeting.
On February 24 and February 25, 2003, Mr. Ricci met with members of the
SpeechWorks board of directors to discuss ScanSoft's business and the strategic
merits of a business combination.
On February 25, 2003, Mr. Patterson updated the SpeechWorks board of
directors, at a special meeting, on the status of discussions with ScanSoft.
On March 5 and 6, 2003, Evercore Partners and Morgan Stanley met on behalf
of ScanSoft and SpeechWorks, respectively, and discussed potential terms and
conditions for a transaction.
On March 7, 2003, Mr. Ricci, Mr. Wen, Mr. Patterson, Mr. Westelman and Mr.
Schwartz met to discuss an analysis of anticipated cost synergies.
On March 14, 2003, Mr. Ricci and Mr. Patterson met to discuss potential
transaction terms and potential exchange ratios.
On March 14, 2003, Mr. Patterson updated the SpeechWorks board of
directors, at a special meeting, on the status of discussions with ScanSoft, and
there was discussion with respect to a potential exchange ratio.
On March 16, 2003, ScanSoft engaged PricewaterhouseCoopers LLP to assist it
in the accounting due diligence review of SpeechWorks.
In mid-March 2003, SpeechWorks engaged Ernst & Young LLP to assist it in
the accounting due diligence review of ScanSoft.
On April 2, 2003, Mr. Ricci updated the ScanSoft board of directors, at a
special meeting, on the status of discussions with SpeechWorks.
On April 4, 2003, Wilson Sonsini Goodrich & Rosati, outside legal counsel
to ScanSoft, distributed an initial draft of the merger agreement to Hale and
Dorr LLP, outside legal counsel to SpeechWorks.
Throughout April 2003, Mr. Ricci and Mr. Patterson, assisted by their
financial advisors, continued to discuss the economic and other terms of the
potential merger. At the same time, ScanSoft and SpeechWorks, assisted by their
advisors, continued to negotiate the terms of the merger agreement and related
agreements.
49
On April 10, 2003, the SpeechWorks board of directors, at a regularly
scheduled meeting, discussed the potential merger with ScanSoft and the proposed
terms of the merger agreement. At this meeting, representatives of Morgan
Stanley discussed a preliminary financial analysis of a potential merger.
Representatives of Hale and Dorr and Ernst & Young presented preliminary results
of their respective legal and accounting due diligence review.
During the week of April 14, 2003, the parties and their financial and
legal advisors continued to negotiate the terms of the final agreements and
conduct their due diligence reviews.
On April 16, 2003, the ScanSoft board of directors held a special meeting
to discuss the SpeechWorks transaction. Management presented strategic
rationale, expected synergies and the expected financial model of the combined
company, and representatives of Evercore Partners reviewed their preliminary
financial analyses with respect to the proposed merger.
On April 17, 2003, Mr. Patterson updated the SpeechWorks board of
directors, at a special meeting, on the status of discussions with ScanSoft.
On April 18, 2003, the parties and their financial advisors engaged in a
series of discussions concerning the exchange ratio and conveyed a series of
proposals and counterproposals.
On April 20, 2003, the SpeechWorks board of directors held a special
meeting to discuss the status of negotiations with ScanSoft.
On April 21, 2003, the ScanSoft board of directors held a special meeting
to discuss the current status and open issues in connection with the potential
merger. At this meeting, representatives of Evercore Partners reviewed their
financial analyses with respect to the proposed merger and delivered an oral
opinion (subsequently confirmed in writing), based on and subject to the
assumptions, considerations and limitations set forth in such opinion, that the
exchange ratio was fair to the ScanSoft stockholders from a financial point of
view. Representatives of Wilson Sonsini Goodrich & Rosati then reviewed with the
directors their fiduciary duties and summarized for the directors the material
terms of the merger agreement and related transaction documents.
On the evening of April 23, 2003, the SpeechWorks board of directors held a
special meeting to consider the proposed merger with ScanSoft. At this meeting,
representatives of Morgan Stanley reported to the directors on their financial
analyses of the merger and delivered their oral opinion (subsequently confirmed
in writing), based on and subject to the assumptions, considerations and
limitations set forth in such opinion, that the exchange ratio was fair to
SpeechWorks stockholders from a financial point of view. Representatives of Hale
and Dorr then reviewed with the directors their fiduciary duties and summarized
for the directors the material terms of the merger agreement and related
transaction documents. Following these presentations, the SpeechWorks board of
directors asked various questions and discussed the proposed merger, following
which, by unanimous vote, it approved the merger agreement and the merger and
recommended that stockholders of SpeechWorks vote in favor of the adoption of
the merger agreement and approval of the merger.
On the evening of April 23, 2003, the ScanSoft board of directors held a
special meeting at which management and representatives of Evercore Partners
reported on the terms of the merger agreement and related agreements. At this
meeting, representatives of Evercore Partners orally reviewed and confirmed its
opinion previously delivered to the ScanSoft board of directors on April 21,
2003 that the exchange ratio was fair to the ScanSoft stockholders from a
financial point of view. After consideration of the presentations made at the
April 21, 2003 and April 23, 2003 board meetings, the ScanSoft board of
directors unanimously approved the merger, the merger agreement and the issuance
of shares of ScanSoft common stock in connection with the merger.
During the late evening of April 23, 2003, ScanSoft and SpeechWorks
executed the definitive merger agreement and related transaction documents.
On April 24, 2003, ScanSoft and SpeechWorks jointly issued a press release
announcing the proposed merger.
50
CONSIDERATION OF THE MERGER BY SCANSOFT
SCANSOFT'S REASONS FOR THE MERGER AND RECOMMENDATION OF THE SCANSOFT BOARD OF
DIRECTORS
The ScanSoft board of directors considered a number of alternatives for
enhancing its competitive position in the speech technology markets and
increasing stockholder value. The ScanSoft board of directors believes that the
proposed merger is in the best interest of ScanSoft and its stockholders. The
ScanSoft board of directors unanimously approved the merger agreement and the
merger and determined to recommend that its stockholders approve the issuance of
shares of ScanSoft common stock in connection with the merger. This decision was
based on a number of factors, including the potential benefits that the ScanSoft
board of directors believes will contribute to the future success of the
combined company. These benefits include:
- the ability of the combined company to promote its products and
comprehensively address the needs of the system integrators in the United
States telephony markets;
- SpeechWorks' strong professional services organization would enable the
combined company to support major accounts, channel partners and
telecommunications firms, as well as deliver complete solutions;
- increased combined technical depth in the face of AT&T's, Microsoft's and
IBM's investments in speech technology;
- addition of strengths in key vertical markets, including multiple
deployments in travel/hospitality, financial services and government,
which would expand ScanSoft's expertise in developing applications and
solutions for these industries;
- the strength of the SpeechWorks management team and the ability of the
combined company to employ the skills and resources of the combined
management teams;
- the transaction is expected to achieve synergies from the research and
development, marketing, sales and administrative areas of the combined
company following the merger;
- the complementary nature of the technologies of the combined company;
- SpeechWorks' complete portfolio of technologies for distributed
conversational user interface applications; and
- SpeechWorks' position as a leading provider of Speech technologies to the
telephony market and the strength of their customer base.
The ScanSoft board of directors evaluated all of the potential benefits
described above in light of their knowledge of ScanSoft's business, financial
condition and prospects, SpeechWorks' business, financial condition and
prospects, and the market for speech technology solutions. The ScanSoft board of
directors also identified and considered potentially negative factors that could
result from the merger, including the risks posed by the necessary integration
of the businesses and operations of the two companies and the risk that the
combined company will not be able to fully realize potential synergies and cost
saving opportunities. In addition, the ScanSoft board of directors considered a
number of other factors in evaluating the proposed merger, including
presentations given by ScanSoft's management and the opinion of Evercore
Partners as financial advisor to ScanSoft. In view of the variety of factors
considered by the ScanSoft board of directors in its evaluation of the merger,
the ScanSoft board of directors did not find it practicable to, and did not,
quantify or otherwise assign relative weight to the specific factors considered
in reaching its decision. In addition, individual members of the ScanSoft board
of directors may have given different weight to different factors. While the
list of potential benefits described in this section as having been considered
by the ScanSoft board of directors is not intended to be the complete list of
all of the potential benefits considered, it is believed to include the
potential benefits considered by the ScanSoft board of directors to be material.
51
The ScanSoft board of directors believes that the merger is advisable, and
is fair to and in the best interests of ScanSoft and its stockholders, and
recommends that ScanSoft stockholders approve the issuance of shares of ScanSoft
common stock in connection with the merger.
OPINION OF SCANSOFT FINANCIAL ADVISOR
ScanSoft retained Evercore Partners to act as financial advisor to
ScanSoft. On April 23, 2003, Evercore Partners delivered its oral opinion, which
was subsequently confirmed in writing, to the ScanSoft board of directors that,
as of that date and based upon and subject to the factors and assumptions set
forth therein, the exchange ratio was fair, from a financial point of view, to
ScanSoft.
The full text of the written opinion of Evercore Partners is set forth as
Annex B to this joint proxy statement/prospectus and describes the assumptions
made, general procedures followed, matters considered and limits and
qualifications on the review undertaken by Evercore Partners and is incorporated
herein by reference. Evercore Partners' opinion is directed only to whether the
exchange ratio is fair, from a financial point of view, to ScanSoft and does not
constitute a recommendation to any ScanSoft stockholder as to how such
stockholder should vote with respect to the merger. The summary of the opinion
of Evercore Partners set forth below is qualified in its entirety by reference
to the full text of such opinion. STOCKHOLDERS OF SCANSOFT ARE URGED TO READ THE
OPINION CAREFULLY AND IN ITS ENTIRETY.
In connection with rendering its opinion, Evercore Partners, among other
things:
- analyzed certain publicly available financial statements and other
publicly available information relating to SpeechWorks and ScanSoft;
- analyzed certain internal financial statements and other non-public
financial and operating data relating to SpeechWorks and ScanSoft that
were prepared and furnished to Evercore Partners by the managements of
SpeechWorks and ScanSoft;
- analyzed certain internal financial projections relating to SpeechWorks
and ScanSoft that were prepared and furnished to Evercore Partners by the
managements of SpeechWorks and ScanSoft;
- discussed the past and current operations, financial projections and
current financial condition of SpeechWorks and ScanSoft with the
managements of SpeechWorks and ScanSoft;
- reviewed certain internal presentations that the management of ScanSoft
has previously made to the ScanSoft board of directors describing
ScanSoft's customers, competitors and strategy;
- reviewed the reported prices, trading activity and valuation multiples
for each of SpeechWorks common stock and ScanSoft common stock;
- compared the financial performance of SpeechWorks and the prices, trading
activity and valuation multiples of the SpeechWorks common stock with
that of certain other publicly-traded companies and their securities that
Evercore Partners deemed relevant;
- reviewed the financial terms, to the extent available, of certain
comparable transactions and compared them to the proposed financial terms
of the merger;
- reviewed certain information concerning cost savings and combination
benefits expected to result from the merger that was prepared by and
furnished to Evercore Partners by the management of ScanSoft, including
the amounts and timing of such synergies and related expenses;
- participated in discussions and negotiations among representatives of
SpeechWorks and ScanSoft, and their advisors;
- reviewed the merger agreement in substantially final form and assumed
that the final form of such merger agreement would not vary in any
respect material to Evercore Partners' analysis; and
- performed other examinations and analyses and considered other factors
that Evercore Partners deemed appropriate.
52
For purposes of its analysis and opinion, Evercore Partners assumed and
relied upon, without assuming any responsibility for independent verification
of, the accuracy and completeness of the information publicly available, and the
information supplied or otherwise made available to, discussed with, or reviewed
by or for Evercore Partners. With respect to the financial projections of
ScanSoft and SpeechWorks and the underlying analysis concerning the potential
synergies which were furnished to Evercore Partners, or discussed with Evercore
Partners or reviewed for Evercore Partners by the managements of ScanSoft and
SpeechWorks, Evercore Partners assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and good faith
judgments of the future competitive, operating and regulatory environments and
related financial performance of ScanSoft and SpeechWorks. Evercore Partners
further assumed that, in all material respects, such financial projections and
synergies would be realized in the amounts and times indicated thereby. Evercore
Partners expressed no view as to such financial projections or synergies, or the
assumptions on which they were based. Additionally, Evercore Partners relied on
ScanSoft management's views as to the future strategic benefits of the merger.
Evercore Partners did not make nor assume any responsibility for making any
independent valuation or appraisal of the assets or liabilities of ScanSoft and
SpeechWorks, nor was Evercore Partners furnished with any such appraisals, nor
did Evercore Partners evaluate the solvency or fair value of SpeechWorks or
ScanSoft under any state or federal laws relating to bankruptcy, insolvency or
similar matters. Evercore Partners' opinion is necessarily based on economic,
market and other conditions as in effect on, and the information and merger
agreement made available to Evercore Partners as of, the date of the opinion.
Evercore Partners assumed the merger will qualify as a tax-free reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended. Evercore Partners did not evaluate, nor did ScanSoft request Evercore
Partners to evaluate, alternative transaction structures or other financial
alternatives other than the merger. Evercore Partners' opinion does not address
ScanSoft's underlying business decision to effect the merger nor constitute a
recommendation to any ScanSoft stockholder as to how such stockholder should
vote with respect to the issuance of shares of ScanSoft common stock in
connection with the merger. Furthermore, Evercore Partners expresses no opinion
as to the price or range of prices at which the shares of ScanSoft common stock
will trade at any future time.
For purposes of rendering its opinion, Evercore Partners assumed, in all
respects material to its analysis, that the representations and warranties of
each party contained in the merger agreement are true and correct, that each
party will perform all the covenants and agreements required under the merger
agreement, and that all conditions to the consummation of the merger will be
satisfied without waiver thereof. Evercore Partners also assumed that in the
course of obtaining the necessary regulatory or other approvals (contractual or
otherwise) for the merger, no restrictions, including any divestiture
requirements or amendments and modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the merger.
In connection with a presentation to the ScanSoft board of directors on
April 23, 2003, Evercore Partners advised the ScanSoft board of directors that,
in evaluating the fairness of the exchange ratio, Evercore Partners performed a
variety of financial analyses with respect to ScanSoft and SpeechWorks. The
following is a summary of the material analyses contained in the presentation.
Some of the summaries of the financial analyses include information presented in
tabular format. The tables are not intended to stand alone, and in order to more
fully understand the financial analyses performed by Evercore Partners, the
tables must be read together with the full text of each summary.
Historical Exchange Ratio Analysis. Evercore Partners reviewed the daily
closing prices of ScanSoft common stock and SpeechWorks common stock to
determine the implied exchange ratio based upon the relative prices of these
securities for each considered time period. Evercore Partners analyzed the
implied exchange ratio between ScanSoft common stock and SpeechWorks common
stock for various time periods between January 1, 2001 and April 22, 2003.
Evercore Partners noted that the exchange ratio in the
53
merger of 0.860 was within the range of historical implied exchange ratios in
the periods examined. The historical implied exchange ratios for the periods
examined are shown below:
PERIOD IMPLIED EXCHANGE RATIO
------ ----------------------
April 22, 2003 0.475x
10-Day Average 0.493
1 Month Average 0.519
3 Month Average 0.526
6 Month Average 0.504
One Year Average 0.556
Two Year Average 2.777
One Year High 1.151
Two Year High 13.023
High Since January 1, 2001 57.048
Comparable Public Company Analysis. Evercore Partners compared selected
financial, market and operating information of SpeechWorks with corresponding
data of selected publicly traded companies with operations Evercore Partners
deemed to be similar in some respect to those of SpeechWorks for purposes of
this analysis. In such analysis, Evercore Partners compared the multiples of
enterprise value to certain financial data of SpeechWorks on a stand alone basis
as well as based on the terms of the merger to the corresponding multiples for
the selected comparable companies. The multiples that were analyzed by Evercore
Partners were derived by dividing (i) the enterprise value of each company
(based on closing stock prices on April 22, 2003) by its actual 2002 and
estimated 2003 revenues and earnings before interest and taxes ("EBIT"), and
(ii) the stock price of each company on April 22, 2003 by its actual 2002 and
estimated 2003 earnings per share. Evercore Partners divided the selected
comparable companies into three subgroups as follows:
Speech Recognition Software Companies:
- Nuance Communications, Inc.
- ScanSoft, Inc.
Enterprise-Focused Voice Software Systems and Applications Companies:
- Aspect Communications Corp.
- Avaya Inc.
- Brooktrout Inc.
- Interactive Intelligence Inc.
- Inter-Tel Inc.
- InterVoice Brite Inc.
- S1 Corp.
54
Carrier-Focused Voice Software Systems and Applications Companies:
- Comverse Technology, Inc.
- NMS Communications Corporation
- Sonus Networks, Inc.
For ScanSoft and SpeechWorks, projections were based on ScanSoft
management's estimates for 2003. For the comparable companies, projections were
based on publicly available Wall Street research estimates.
To illustrate, Evercore Partners highlighted the multiples of enterprise
value to actual 2002 revenue and projected 2003 revenue. Evercore Partners then
derived reference ranges of such multiples from this analysis. Evercore Partners
noted that the valuation multiples for SpeechWorks based on the terms of the
merger fall within the range found for the selected companies.
ENTERPRISE VALUE TO:
-------------------------------
2003 ESTIMATED
2002 REVENUE REVENUE
-------------- --------------
SPEECHWORKS TRANSACTION(1)(2)............................... 3.4X 2.9X
SpeechWorks(1)(2)........................................... 1.4x 1.2x
Speech Recognition Software
Nuance...................................................... Not meaningful Not meaningful
ScanSoft(2)................................................. 4.1x 3.1x
Enterprise-focused Voice Software Systems and Applications
Companies
Mean...................................................... 0.5x 0.5x
Median.................................................... 0.5x 0.5x
Carrier-focused Voice Software Systems and Applications
Companies
Mean...................................................... 3.6x 2.9x
Median.................................................... 1.5x 1.6x
For All Three Subgroups
Max....................................................... 9.1x 7.0x
Min....................................................... 0.2x 0.2x
---------------
(1) Excludes non-cash stock compensation expense.
(2) Estimated net debt as of June 30, 2003.
Evercore Partners noted that no company used in the comparable company
analyses summarized above is identical to SpeechWorks. Evercore Partners noted
that because of the differences between the business mix, operations and other
characteristics of SpeechWorks and the comparable public companies, Evercore
Partners believed that an appropriate use of the comparable public company
analysis would also involve qualitative judgments concerning the differences
between SpeechWorks and the comparable companies which would affect the public
trading values of the common stock of the companies. Accordingly, any analysis
of the fairness of the exchange ratio involves complex considerations and
judgments concerning differences in the financial and operating characteristics
of the comparable companies and other factors in relation to the trading values
of the comparable companies.
Precedent Transactions Analysis. Evercore Partners reviewed and analyzed
the implied transaction multiples paid in selected merger and acquisition
transactions in the voice software systems and applications industry that
Evercore Partners deemed to be similar in some respect to the merger and
55
compared these multiples to the multiples implied for SpeechWorks based on the
terms of the merger. The following table sets forth the transactions that were
used for purposes of this analysis:
ACQUIROR TARGET
---------------------------------- -----------------------------------------------------
ADC Telecommunications Centigram Communications
Aspect Telecommunications Voicetek
Cisco Systems Active Voice Corporation
Cisco Systems Summa Four Inc.
Comverse Technology Boston Technology
InterVoice Inc. Brite Voice Systems
Lucent Technologies Octel Communications
Nortel Networks Periphonics Corporation
ScanSoft Lernout & Hauspie Speech Assets
ScanSoft Philips Speech Processing Telephony and Voice Control
To illustrate, Evercore Partners calculated the multiples of enterprise
value to actual revenue for the last twelve months. Evercore Partners noted that
the valuation multiple for SpeechWorks based on the terms of the merger falls
within the range found for the selected companies.
ENTERPRISE VALUE TO
LAST TWELVE
MONTHS' REVENUE
-------------------
SPEECHWORKS TRANSACTION(1).................................. 3.4X
Voice Software Systems and Applications Transactions
Mean...................................................... 2.5x
Median.................................................... 2.6x
Max....................................................... 4.5x
Min....................................................... 1.1x
---------------
(1) Revenue for SpeechWorks excludes non-cash stock compensation expense.
Among other factors, Evercore Partners noted that the merger and
acquisition transaction environment varies over time because of macroeconomic
factors such as interest rate and equity market fluctuations and microeconomic
factors such as industry results and growth expectations. Evercore Partners
noted that no transaction used in the comparable transaction analysis summarized
above is identical to the terms of the proposed merger. Accordingly, the
analysis performed by Evercore Partners involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable transactions and other factors in relation to the acquisition
values of the comparable companies.
Premiums Paid Analysis. Evercore Partners analyzed the premiums paid
relative to public market pre-announcement trading prices for a selected group
of transactions that Evercore Partners deemed to be similar in some respect to
the merger and compared these premiums to the premium implied for SpeechWorks
based on the terms of the merger.
Evercore Partners identified and analyzed seven transactions that occurred
since 1997 in the voice software systems and applications industry involving
companies that Evercore Partners deemed to be similar to SpeechWorks for the
purposes of this analysis. Evercore Partners also identified and analyzed a
group of 20 acquisitions in the broader software industry that were announced
since January 1, 2002. Additionally, Evercore Partners identified and analyzed a
group of 32 acquisitions with enterprise values between $50 million and $175
million in all industries that were announced since January 1, 2001.
Evercore Partners calculated and compared the premiums paid in these
transactions based on the value of the per share consideration received in the
transaction relative to the closing stock price of the
56
target company one day and four weeks prior to the respective date of
announcement of the transaction and relative to the one year average trading
price and one year high trading price prior to announcement. The premium
calculations for SpeechWorks based on the terms of the merger are based upon an
assumed announcement date of April 23, 2003. Evercore Partners noted that the
premiums for SpeechWorks based on the terms of the merger generally fall within
the range found for the selected transactions. This analysis produced the
following results:
PREMIUM BASED ON STOCK PRICE:
---------------------------------------------
4 WEEKS 1 YEAR
1 DAY PRIOR PRIOR AVERAGE 1 YEAR HIGH
----------- ------- ------- -----------
SPEECHWORKS TRANSACTION...................... 81.2% 76.5% 56.5% (38.7%)
Voice Software Systems and Applications
Transactions
Mean....................................... 22.1% 51.9% 67.7% (0.9%)
Median..................................... 15.9% 41.3% 54.8% (0.7%)
Max........................................ 48.6% 111.8% 156.5% 30.8%
Min........................................ (3.7%) 6.7% 32.3% (41.8%)
Software Transactions Since January 1, 2002
Mean....................................... 53.8% 60.7% 52.2% (6.3%)
Median..................................... 40.7% 47.2% 54.2% (3.5%)
Max........................................ 260.0% 296.5% 169.4% 85.5%
Min........................................ (3.4%) (10.8%) (24.8%) (77.4%)
Transactions from $50-$175 MM Since January
1, 2001
Mean....................................... 28.3% 46.8% 48.7% 0.1%
Median..................................... 22.3% 37.9% 38.4% 4.6%
Max........................................ 113.4% 153.3% 183.9% 160.4%
Min........................................ (18.6%) (14.6%) (28.8%) (68.5%)
Among other factors, Evercore Partners noted that the merger and
acquisition transaction environment varies over time because of the
macroeconomic factors such as interest rate and equity market fluctuations and
microeconomic factors such as industry results and growth expectations. Evercore
Partners noted that no transaction used in the premiums paid analysis summarized
above is identical to the merger. Accordingly, the analysis performed by
Evercore Partners involves complex considerations and judgments concerning
differences in financial and operating characteristics of the comparable
transactions and other factors in relation to the acquisition values of the
comparable companies.
Discounted Cash Flow Analysis. Relying on ScanSoft management's estimates
of the projected financial performance of SpeechWorks, Evercore Partners
estimated the present value of the future stand alone, unlevered free cash flows
that could be produced by SpeechWorks. Evercore Partners estimated a range of
theoretical values for SpeechWorks based on the net present value of its implied
annual cash flows and a terminal value in 2007 calculated based upon perpetual
growth rates of free cash flow, and adjusted for SpeechWorks estimated net cash
balance as of June 30, 2003. Evercore Partners used a range of discount rates
from 13.0% to 17.0%, a range of terminal value perpetual growth rates from 3.0%
to 6.0% relative to estimated 2007 free cash flow, and an assumed net cash
balance of $36.5 million. Perpetual growth rates were based on assumed long-term
industry growth rates prevailing in 2007. The discount rates were based on
weighted average cost of capital computations and qualitative assessments of
SpeechWorks' projected results and the risks inherent therein. This analysis
indicated values per share of SpeechWorks common stock ranging from $1.81 to
$3.10.
Relying on ScanSoft management's estimates of the projected financial
performance of SpeechWorks and estimated synergies resulting from the merger,
Evercore Partners estimated the present value of the future, unlevered free cash
flows, including expected operating cost synergies of approximately
57
$27.5 million for a full year that could be produced through a combination with
SpeechWorks, and net of one-time costs to achieve these synergies of
approximately $10.1 million. Evercore Partners estimated a range of theoretical
values for SpeechWorks based on the net present value of its implied annual cash
flows and a terminal value in 2007 calculated based upon perpetual growth rates
of free cash flow, and adjusted for SpeechWorks estimated net cash balance as of
June 30, 2003. Evercore Partners used a range of discount rates of 13.0% to
17.0%, a range of terminal value perpetual growth rates of 3.0% to 6.0% relative
to estimated 2007 free cash flow, and an assumed net cash balance of $45.8
million, which includes $9.3 million in estimated cash proceeds from the
exercise of SpeechWorks' in the money options based on the per share closing
price of SpeechWorks common stock on April 22, 2003. Perpetual growth rates were
based on assumed long-term industry growth rates prevailing in 2007. The
discount rates were based on weighted average cost of capital computations and
qualitative assessments of SpeechWorks' projected results and the synergies and
the risks inherent therein. This analysis indicated values per share of
SpeechWorks common stock ranging from $4.87 to $8.35.
Contribution Analysis. Evercore Partners analyzed the relative
contributions of ScanSoft and SpeechWorks to the pro forma combined company with
respect to a selected group of operating and financial statistics for the
historical year 2002 and the projected years 2003 and 2004. Evercore Partners
also reviewed the pro forma ownership of the combined company, taking into
account ScanSoft's outstanding options and warrants to purchase shares of
ScanSoft common stock treated under the treasury stock method and assuming that
all SpeechWorks in the money options are converted into shares of ScanSoft
common stock. For each of ScanSoft and SpeechWorks, Evercore Partners utilized
ScanSoft management's estimates.
To illustrate, Evercore Partners calculated the relative revenue
contributions of ScanSoft and SpeechWorks to the pro forma combined company.
Evercore Partners also calculated adjusted revenue contribution, which was
defined to incorporate cash balances for both companies by valuing revenue at a
2x multiple (using information derived from the comparable public company
analysis and the precedent transaction analysis described above) and net cash at
face value to adjust for the capital structures of the two companies. Evercore
Partners compared the relative ownership percentages implied by this analysis to
the relative ownership percentages implied for the stockholders of the companies
by the exchange ratio in the merger.
2002 2003 2004
---------------------- ---------------------- ----------------------
SCANSOFT SPEECHWORKS SCANSOFT SPEECHWORKS SCANSOFT SPEECHWORKS
-------- ----------- -------- ----------- -------- -----------
Contribution Percentage(1):
Revenue........................ 73.1% 26.9% 75.8% 24.2% 75.7% 24.3%
Adjusted Revenue(2)............ 61.3% 38.7% 66.3% 33.7% 67.2% 32.8%
Pro Forma Economic Ownership Based on Exchange Ratio:
SCANSOFT SPEECHWORKS SCANSOFT SPEECH\WORKS
-------- ----------- -------- ------------
Assuming Philips Assuming Philips
Convertible Debentures Convertible Debentures
Are Not Converted...... 70.1% 29.9% Are Converted............ 71.3% 28.7%
---------------
(1) SpeechWorks values exclude non-cash stock compensation expense.
(2) Incorporates cash balances for both companies by valuing revenue at a 2x
multiple and net cash at face value. SpeechWorks has estimated net cash as
of June 30, 2003 of $45.8 million and ScanSoft has estimated net debt of
$16.5 million.
Pro Forma Merger Analysis. Relying on ScanSoft management's estimates,
Evercore Partners analyzed the potential pro forma effects of the merger on
ScanSoft's estimated 2003 and 2004 earnings per share before amortization and
nonrecurring restructuring charges and ScanSoft's earnings per share after
amortization but before nonrecurring restructuring charges based on various
assumptions regarding the merger. Evercore Partners performed such analysis due
to the fact that several Wall Street research
58
analysts use earnings per share before amortization and nonrecurring charges,
among other measurements, as a valuation measurement. This analysis, taking into
account certain operating cost synergies estimated by ScanSoft management,
indicated that the merger would be accretive to ScanSoft's projected earnings
per share before amortization and nonrecurring restructuring charges in 2003 and
2004. The merger, taking into account certain operating cost synergies estimated
by ScanSoft management, would be dilutive to ScanSoft's projected earnings per
share after amortization but before nonrecurring restructuring charges in 2003
and accretive in 2004. The actual results achieved by the combined company may
vary from projected results and the variations may be material.
The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, is not necessarily susceptible to partial analysis
or summary description. Selecting portions of the analysis or the summary set
forth above, without considering the analysis as a whole, could create an
incomplete view of the processes underlying the opinion of Evercore Partners. In
arriving at its fairness determination, Evercore Partners considered the results
of all these constituent analyses and did not attribute any particular weight to
any particular factor or analysis considered by it; rather, Evercore Partners
made its determination as to fairness on the basis of its experience and
professional judgment after considering the results of all such analyses.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable than
suggested by such analyses. The foregoing summary does not purport to be a
complete description of the analyses performed by Evercore Partners. As
described above, Evercore Partners' opinion to the ScanSoft board of directors
was among the many factors taken into consideration by the ScanSoft board of
directors in making its determination to approve the merger agreement. The
parties to the merger agreement determined the exchange ratio based on the
result of arms' length negotiations, and Evercore Partners was not asked to, and
did not, propose any alternative exchange ratio to the ScanSoft board of
directors.
Evercore Partners is a nationally recognized investment banking firm that
is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions. ScanSoft retained Evercore Partners
based on these qualifications as well as its familiarity with ScanSoft. Evercore
Partners has previously provided various investment banking and financial
advisory services to ScanSoft, for which Evercore Partners received customary
fees for the rendering of those services.
Pursuant to the terms of an engagement letter with Evercore Partners,
ScanSoft agreed to pay Evercore Partners a fee equal to $175,000 upon delivery
of the fairness opinion and $825,000 upon the closing of the merger.
Additionally, ScanSoft has agreed to issue a warrant to purchase an aggregate of
150,000 shares of ScanSoft common stock to Evercore Partners upon the closing of
the merger. This warrant will have a strike price equal to the average closing
price of ScanSoft common stock on the NASDAQ National Market for five
consecutive trading days, starting two days before and ending two days after
closing, will not be exercisable for three years and will have a term of eight
years. Whether or not the merger is completed, ScanSoft has agreed under the
engagement letter to reimburse Evercore Partners for all its reasonable
out-of-pocket expenses, including the reasonable fees and disbursements of its
counsel, incurred in connection with its engagement by ScanSoft, and to
indemnify Evercore Partners against liabilities, including liabilities under
federal securities law, and expenses in connection with its engagement.
CONSIDERATION OF THE MERGER BY SPEECHWORKS
SPEECHWORKS' REASONS FOR THE MERGER AND RECOMMENDATION OF THE SPEECHWORKS
BOARD OF DIRECTORS
In reaching its decision to approve the merger agreement and the merger,
the SpeechWorks board of directors identified and considered a number of
potential benefits for SpeechWorks and its stockholders
59
that supported the SpeechWorks board of directors' decision to approve the
merger agreement and the merger. These potential benefits include the following:
- the belief that the combination of the product lines, sales channels and
financial resources of ScanSoft and SpeechWorks will result in a combined
company that is a leader in the speech recognition and imaging
technologies market;
- the ability to better serve the customer base of each company with an
expanded portfolio of technologies and applications, and a deeper set of
services and support capabilities;
- the opportunity for each company to introduce its complementary product
lines into the customer base of the other company;
- the greater global presence of the combined company, which will include
representation in more than 70 countries with speech solutions that
support 45 languages, and employ approximately 800 individuals, with
nearly half located internationally;
- the revenue diversification of the combined company, as compared to
SpeechWorks' primary reliance on sub-segments of the speech recognition
technology market;
- the expected synergies and cost-saving opportunities that should result
from office site consolidations and eliminating redundant operations; and
- the belief that the merger would combine two experienced and respected
management teams, resulting in a combined management team that is
stronger than the management teams of each of the individual companies.
In addition to the potential benefits accruing to SpeechWorks and its
stockholders from the merger, the SpeechWorks board of directors also considered
a number of other factors in approving the merger, including the following:
- the number of shares of ScanSoft common stock to be exchanged pursuant to
the merger for each share of SpeechWorks common stock, and the premium
that such exchange ratio represented over the then current market price
of SpeechWorks common stock;
- SpeechWorks management's view of the business and prospects of
SpeechWorks and ScanSoft as stand-alone companies and as a combined
company, including the strategic options which might become available to
SpeechWorks if it were or were not to proceed with the merger and the
effectiveness of the merger in implementing and accelerating SpeechWorks'
long-term growth strategy;
- the belief that a merger with ScanSoft could enhance SpeechWorks' ability
to compete with larger, better-financed competitors by providing
SpeechWorks with access to the financial resources, distribution
channels, client base and industry contacts of ScanSoft;
- historical information concerning SpeechWorks' and ScanSoft's respective
businesses, financial performance and common stock market prices and
trading information;
- the intent that the merger be tax-free to SpeechWorks' U.S. stockholders
who receive shares of ScanSoft common stock in exchange for their
SpeechWorks common stock pursuant to the merger (except to the extent
they receive cash for any fractional shares);
- the financial analyses and presentation of Morgan Stanley & Co.
Incorporated delivered to the SpeechWorks board of directors on April 23,
2003, as well as its opinion of the same date that, as of such date, and
based on and subject to the assumptions, considerations and limitations
set forth in its opinion, the exchange ratio of 0.860 shares of ScanSoft
common stock for each share of SpeechWorks common stock in the merger
agreement was fair from a financial point of view to the holders of
SpeechWorks common stock (a copy of such written opinion is attached as
Annex C to this joint proxy statement/prospectus);
60
- the results of the due diligence investigation of ScanSoft conducted by
SpeechWorks' management, financial advisor, accountants and legal
counsel;
- the SpeechWorks board of directors' own knowledge of SpeechWorks,
ScanSoft and their respective businesses;
- the likelihood of the merger being approved by the appropriate regulatory
authorities;
- the contractual terms of the merger agreement and related transaction
documents; and
- the interest that certain SpeechWorks officers and directors may have in
the merger, in addition to their interest as SpeechWorks stockholders,
(as described in the section entitled "The Merger -- Interests of Certain
Persons in the Merger -- Interests of SpeechWorks Directors and Executive
Officers in the Merger").
In reaching its decision to approve the merger agreement and the merger,
the SpeechWorks board of directors also identified and considered a number of
potentially negative factors that could result from the merger, including the
following:
- the risks that the integration of the businesses, products and personnel
of the two companies will not be successfully implemented and may require
a significant amount of management time and resources;
- the risk that the potential synergies and cost-saving opportunities
identified by ScanSoft and SpeechWorks will not be fully realized or not
fully realized in the time frame anticipated;
- the risk that the merger may not be completed and the effect of the
public announcement of the merger on the retention of SpeechWorks'
customers, business partners and employees;
- the significant cost that will be incurred in seeking to complete the
merger; and
- the other risks described in this joint proxy statement/prospectus in the
section entitled "Risk Factors."
The SpeechWorks board of directors evaluated all of the factors described
above in light of their knowledge of SpeechWorks' business, financial condition
and prospects, ScanSoft's business, financial condition and prospects, and the
market for speech technology solutions. In view of the variety of factors
considered by the SpeechWorks board of directors in its evaluation of the
merger, the SpeechWorks board of directors did not find it practicable to, and
did not, quantify or otherwise assign relative weight to the specific factors
considered in reaching its decision. In addition, individual members of the
SpeechWorks board of directors may have given different weight to different
factors. The list of factors described in this section as having been considered
by the SpeechWorks board of directors is not intended to be the complete list of
all factors considered but is believed to include all of the factors considered
by the SpeechWorks board of directors to be material.
After considering all of the information and factors described in this
section, the SpeechWorks board of directors unanimously approved the merger, the
merger agreement and the other transactions contemplated by the merger
agreement. The SpeechWorks board of directors believes that the merger agreement
and the merger are fair to, advisable and in the best interests of SpeechWorks
and its stockholders. The SpeechWorks board of directors has unanimously
recommended that the SpeechWorks stockholders vote FOR the adoption of the
merger agreement and approval of the merger.
OPINION OF SPEECHWORKS FINANCIAL ADVISOR
Pursuant to a letter dated October 15, 2002, Morgan Stanley & Co.
Incorporated was engaged to provide financial advisory services, including a
financial opinion letter in connection with the merger. Morgan Stanley was
selected by the SpeechWorks board of directors to act as SpeechWorks' financial
advisor based on Morgan Stanley's qualifications, expertise and reputation and
its knowledge of the business and affairs of SpeechWorks and the market in which
it competes.
61
At the April 23, 2003 meeting of the SpeechWorks board of directors, Morgan
Stanley rendered its oral opinion that, as of such date and based upon and
subject to the various considerations set forth in its opinion, the exchange
ratio pursuant to the merger agreement was fair from a financial point of view
to holders of the SpeechWorks common stock. Morgan Stanley confirmed its opinion
in writing by delivery to the SpeechWorks board of directors of a written
opinion dated April 23, 2003.
The full text of the Morgan Stanley opinion, dated April 23, 2003, which
sets forth, among other things, the assumptions made, procedures followed,
matters considered and limitations on the review undertaken, is attached as
Annex C to this joint proxy statement/prospectus. The Morgan Stanley opinion is
directed to the SpeechWorks board of directors and addresses only the fairness
of the exchange ratio from a financial point of view to holders of the
SpeechWorks common stock as of the date of such opinion and does not address any
other aspect of the merger. The summary of the Morgan Stanley opinion set forth
in this joint proxy statement/prospectus is qualified in its entirety by
reference to the full text of the Morgan Stanley opinion attached as Annex C
hereto, which should be read carefully and in its entirety.
In arriving at the Morgan Stanley opinion, Morgan Stanley, among other
things:
- reviewed certain publicly available financial statements and other
information of SpeechWorks and ScanSoft, respectively;
- reviewed certain internal financial statements and other financial and
operating data concerning SpeechWorks and ScanSoft prepared by the
management of SpeechWorks and ScanSoft, respectively;
- reviewed certain financial projections prepared by the managements of
SpeechWorks and ScanSoft, respectively;
- discussed the past and current operations and financial condition and the
prospects of SpeechWorks and ScanSoft, including information relating to
certain strategic, financial, and operational benefits anticipated from
the merger, with senior executives of SpeechWorks and ScanSoft,
respectively;
- reviewed the reported prices and trading activity for the SpeechWorks
common stock and the ScanSoft common stock;
- compared the financial performance of SpeechWorks and ScanSoft and the
prices and trading activity of the common stock with that of certain
other comparable publicly-traded companies and their securities;
- reviewed the pro forma impact of the merger on ScanSoft's earnings per
share;
- reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
- participated in discussions and negotiations among representatives of
SpeechWorks and ScanSoft and their financial and legal advisors;
- reviewed the merger agreement and certain related documents; and
- considered such other factors as Morgan Stanley deemed appropriate.
In arriving at the Morgan Stanley opinion, Morgan Stanley assumed and
relied upon, without independent verification, the accuracy and completeness of
the information reviewed by it for the purposes of its opinion. With respect to
the financial projections, including information relating to certain strategic,
financial, and operational benefits anticipated from the merger, Morgan Stanley
assumed that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the future financial performance
of SpeechWorks and ScanSoft. Morgan Stanley relied upon, without independent
verification, the assessment by the managements of SpeechWorks and ScanSoft of
SpeechWorks' and ScanSoft's technologies, products, and intellectual property,
the timing and risks associated with the integration of SpeechWorks with
ScanSoft and the validity of, and risks associated with SpeechWorks' and
ScanSoft's existing and future technologies, products, and intellectual
property.
62
In addition, Morgan Stanley assumed that the merger would be consummated in
accordance with the terms set forth in the merger agreement, including, among
other things, that the merger would be treated as a tax-free reorganization,
pursuant to the Internal Revenue Code of 1986, as amended. Morgan Stanley did
not make any independent valuation or appraisal of the assets or liabilities of
SpeechWorks, nor was it furnished with any such appraisals. The Morgan Stanley
opinion was necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to it as of, the
date of its opinion.
In arriving at its opinion, Morgan Stanley was not authorized to solicit,
and did not solicit, interest from any party with respect to an acquisition,
business combination or other extraordinary transaction, involving SpeechWorks.
The following is a brief summary of the material analyses performed by
Morgan Stanley in connection with its oral opinion and the opinion letter.
Certain of these summaries of financial analyses include information presented
in tabular format. In order to fully understand the financial analyses used by
Morgan Stanley, the tables must be read together with the text of each summary.
The tables alone do not constitute a complete description of the financial
analyses.
Historical Common Stock Performance. Morgan Stanley's analysis of
SpeechWorks' common stock performance consisted of a review of closing prices
and trading volumes during the period from October 22, 2002 to April 22, 2003.
During that period, based on closing prices as reported on the NASDAQ National
Market, SpeechWorks common stock achieved a high closing price per share of
$3.86 on December 2, 2002 and a low closing price per share of $2.05 on February
5, 2003. Additionally, Morgan Stanley noted that SpeechWorks common stock closed
at a price of $2.61 per share on April 22, 2003.
Morgan Stanley's analysis of ScanSoft's common stock performance consisted
of a review of closing prices and trading volumes during the period from October
22, 2002 to April 22, 2003. During that period, based on closing prices as
reported on the NASDAQ National Market, ScanSoft common stock achieved a high
closing price per share of $7.50 on November 27, 2002 and a low closing price
per share of $3.95 on February 12, 2003. Additionally, Morgan Stanley noted that
ScanSoft common stock closed at a price of $5.50 per share on April 22, 2003.
Based on the closing stock prices of SpeechWorks common stock and ScanSoft
common stock as of April 22, 2003, and the exchange ratio, the implied
consideration for the SpeechWorks common stock was approximately $4.73 per
share.
Comparative Stock Price Performance. Morgan Stanley reviewed the closing
prices of SpeechWorks common stock, ScanSoft common stock, the NASDAQ index and
the common stock of a comparable speech company, Nuance Communications Inc.,
during the period from October 22, 2002 to April 22, 2003. Morgan Stanley
observed that, during the period from October 22, 2002 to April 22, 2003,
SpeechWorks' common stock increased 17.6%, ScanSoft's common stock increased
29.7%, the NASDAQ index increased 12.3%, and Nuance's common stock increased
30.0%.
Comparable Public Company Analysis. As part of its analysis, Morgan
Stanley compared selected publicly available financial information of selected
digital imaging and speech software companies as listed below. Morgan Stanley
also compared composites (the "comparable composites") of selected publicly
available information of selected application software companies ("application
vendors") and selected system management companies ("system management vendors")
with ScanSoft and SpeechWorks, digital imaging and speech software companies.
Morgan Stanley did not include Nuance in any of these groups
63
due to the fact that its aggregate value and EPS estimates were negative at the
time, rendering the multiples not meaningful.
COMPARABLE DIGITAL IMAGING AND SPEECH SOFTWARE COMPANIES
--------------------------------------------------------
- Adobe Systems Inc. - ScanSoft
- Brooktrout Inc. - SpeechWorks
- Documentum Inc. - Verity Inc.
- Interactive Intelligence Inc. - Composite of Application Vendors
- InterVoice Brite Inc. - Composite of System Management Vendors
- Macromedia Inc.
While noting that none of the comparable public companies listed above are
identical to SpeechWorks or ScanSoft, Morgan Stanley compared the publicly
available financial information of those companies to the financial performance
of SpeechWorks and ScanSoft. Such information included the stock trading price
divided by the 2003 and 2004 estimated earnings per share ("EPS") adjusted for a
calendar year end (the "2003 price/estimated earnings multiple" and the "2004
price/estimated earnings multiple") and the aggregate value divided by 2003 and
2004 estimated revenue (the "aggregate value/ 2003 estimated revenue multiple"
and the "aggregate value/2004 estimated revenue multiple"). The estimated EPS
and estimated revenue were derived from I/B/E/S International mean EPS
estimates, with the exception of the 2003 estimated EPS and estimated revenue
for SpeechWorks and ScanSoft (the "Street Case"), which were obtained from
selected publicly available equity research for each company. The SpeechWorks
Street Case was based on C.E. Unterberg Towbin equity research published January
30, 2003. The ScanSoft Street Case was based on Needham equity research
published February 25, 2003. I/B/E/S is a database owned and operated by Thomson
Financial, which contains estimated and actual earnings, cash flows, dividends,
sales, and pre-tax income data for companies in the United States, Europe, Asia
and emerging markets.
The ScanSoft 2003 estimated EPS and 2004 estimated EPS were derived using a
10% and 15% effective tax rate, respectively. These tax rates were derived from
the equity research used in developing the Street Case for ScanSoft and are
primarily the result of the expected effect of ScanSoft's net operating losses
on net income in 2003. Morgan Stanley also compared the ScanSoft 2003
price/estimated earnings multiple and 2004 price/estimated earnings multiple
using EPS estimates derived using a 35% effective tax rate (the "adjusted 2003
price/estimated earnings multiple" and "adjusted 2004 price/estimated earnings
multiple".)
The following table presents, as of April 22, 2003, the 2003 aggregate
value/estimated revenue multiples and the 2003 price/estimated earnings
multiples for the comparable companies and composites:
2003 PRICE/ ESTIMATED
EARNINGS MULTIPLE/
AGGREGATE VALUE/ 2003 ADJUSTED 2003
COMPARABLE DIGITAL IMAGING ESTIMATED REVENUE PRICE/ ESTIMATED EARNINGS
AND SPEECH SOFTWARE COMPANIES MULTIPLE MULTIPLE
----------------------------- --------------------- -------------------------
- Adobe Systems Inc........................... 6.3x 33.3x
- Brooktrout Inc.............................. 0.3x NM
- Documentum Inc.............................. 2.8x 48.2x
- Interactive Intelligence Inc................ 0.8x NM
- InterVoice Brite Inc........................ 0.5x NM
- Macromedia Inc.............................. 1.9x 26.9x
- ScanSoft.................................... 3.2x 16.9x/23.4x
- SpeechWorks................................. 1.1x NM
- Verity Inc.................................. 5.0x 34.5x
Comparable Composites
- Application Vendors (Low/Median/High)....... 1.7x/2.9x/6.2x 27.9x/29.2x/60.8x
- System Management Vendors (Low/Median/
High)....................................... 1.5x/2.9x/6.3x 19.5x/34.1x/56.4x
64
The following table presents, as of April 22, 2003, the 2004 aggregate
value/estimated revenue multiples and the 2004 price/estimated earnings
multiples for the comparable companies and composites:
2004 PRICE/ESTIMATED
EARNINGS MULTIPLE/
AGGREGATE VALUE/2004 ADJUSTED 2004
COMPARABLE DIGITAL IMAGING AND SPEECH ESTIMATED REVENUE PRICE/ESTIMATED EARNINGS
SOFTWARE COMPANIES MULTIPLE MULTIPLE
------------------------------------- -------------------- ------------------------
- Adobe Systems Inc. ......................... 5.8x 29.0x
- Brooktrout Inc. ............................ 0.2x NM
- Documentum Inc. ............................ 2.4x 32.5x
- Interactive Intelligence Inc. .............. 0.7x NM
- InterVoice Brite Inc. ...................... 0.4x 15.2x
- Macromedia Inc. ............................ 1.8x 20.1x
- ScanSoft ................................... 2.9x 14.0x/18.3x
- SpeechWorks ................................ 1.0x NM
- Verity Inc. ................................ 3.9x 28.3x
Comparable Composites
- Application Vendors (Low/Median/High) ...... 1.6x/2.8x/6.1x 25.0/25.5x/36.1x
- System Management Vendors
(Low/Median/High) ........................... 1.3x/2.6x/5.5x 15.7x/23.7x/34.6x
Morgan Stanley noted that the ScanSoft trading multiples and the
SpeechWorks trading multiples implied by the exchange ratio were in line with
trading multiples of comparable public companies within the digital imaging and
speech software sector.
No company utilized in the comparable company comparison analysis is
identical to SpeechWorks or ScanSoft. In evaluating the peer group, Morgan
Stanley made judgments and assumptions with regard to industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of SpeechWorks or ScanSoft. These other
matters include the impact of competition on the business of SpeechWorks or
ScanSoft and the industry generally, industry growth and the absence of any
adverse material change in the financial condition and prospects of SpeechWorks
or ScanSoft or in the industry or financial markets in general. Mathematical
analysis, such as determining the average or median, is not in itself a
meaningful method of using peer group data.
Exchange Ratio Analysis. Morgan Stanley analyzed the ratios of the closing
prices of the SpeechWorks common stock divided by the corresponding prices of
ScanSoft common stock over various periods during the period from October 22,
2002 to April 22, 2003. Morgan Stanley observed the following implied exchange
ratios and implied equity value premiums over various periods ending on April
22, 2003 and as of April 22, 2003:
AVERAGE IMPLIED
PERIOD ENDING APRIL 22, 2003 EXCHANGE RATIO IMPLIED EQUITY PREMIUM
---------------------------- --------------- ----------------------
October 22, 2002 -- April 22, 2003 Average......... 0.50x 71%
October 22, 2002 -- April 22, 2003 High............ 0.64x 35%
October 22, 2002 -- April 22, 2003 Low............. 0.33x 159%
Prior 90 Trading Days.............................. 0.52x 65%
Prior 60 Trading Days.............................. 0.53x 63%
Prior 30 Trading Days.............................. 0.53x 62%
Prior 10 Trading Days.............................. 0.49x 74%
As of April 22, 2003............................... 0.47x 81%
65
Morgan Stanley noted that during the prior six month period for which it
conducted its analysis, the average exchange ratio between SpeechWorks and
ScanSoft was 0.50, which was lower than the 0.860 merger exchange ratio to be
paid by ScanSoft pursuant to the merger agreement.
Pro Forma Contribution Analysis. Morgan Stanley analyzed the pro forma
financial contribution of each of ScanSoft and SpeechWorks to the combined
company based on, among other things, a street case derived from publicly
available equity research. Morgan Stanley did not use contribution from net
income because SpeechWorks' 2003 estimated net income is not positive. The
following table presents the relative pro forma equity ownership implied by
SpeechWorks' and ScanSoft's relative revenue and gross margins contribution,
adjusted for each company's net cash contribution:
SPEECHWORKS SCANSOFT
------------------ -------------------
% PRO FORMA % PRO FORMA
$MM OWNERSHIP $MM OWNERSHIP
---- ----------- ----- -----------
Calendar Year 2003
Estimated Revenue
Street Case.................................. 44.2 31.2% 134.6 68.8%
Calendar Year 2003
Estimated Gross Margin
Street Case.................................. 29.3 26.8% 117.0 73.2%
The implied offer prices in the above table did not take into account any
estimates by the managements of SpeechWorks or ScanSoft of the synergies or cost
savings anticipated from the merger, nor did they take into account any
accounting adjustments or potential changes in capital structure as a result of
the merger. Morgan Stanley noted that the SpeechWorks ownership split of the
combined entity of 29% implied by the 0.860 merger exchange ratio was consistent
with the relative financial contributions of SpeechWorks to the combined entity.
Analysis of Precedent Transactions. Morgan Stanley compared selected
publicly available statistics for up to 55 public software stock-for-stock
transactions valued at less than $1 billion at announcement from January 1, 1998
to April 22, 2003. The following table presents the indicated premiums paid
above the exchange ratio determined by the closing share prices one day before
the announcement of the respective transaction and the premiums to the average
exchange ratio 30 days, 60 days and 90 days before the announcement of the
respective transaction:
EXCHANGE RATIO PREMIUM
--------------------------------------------------------------
1 DAY PRIOR 30 DAY AVERAGE 60 DAY AVERAGE 90 DAY AVERAGE
----------- -------------- -------------- --------------
Sample Size..................... 55 55 54 53
Mean............................ 35.7% 51.0% 55.1% 46.9%
Median.......................... 25.2% 36.0% 41.4% 37.0%
Maximum......................... 188.2% 351.1% 277.3% 240.5%
Minimum......................... (15.6%) (26.6%) (16.3%) (11.1%)
Morgan Stanley noted that the exchange ratio premiums implied for
SpeechWorks of 62% and 63%, for the 30-day and 60-day averages, respectively,
were above the mean and median exchange ratio premium paid for the transactions
represented in the table above. No transaction utilized as a comparison in the
precedent transactions analysis is identical to the merger. In evaluating the
precedent transactions, Morgan Stanley made judgments and assumptions regarding
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of ScanSoft
or SpeechWorks, such as the impact of competition on SpeechWorks or ScanSoft and
the industry generally, industry growth and the absence of any material adverse
change in the financial condition and prospects of ScanSoft or SpeechWorks or
the industry or in the financial markets in general. Mathematical analysis such
as determining the average or median is not in itself a meaningful method of
using comparable transaction data.
66
Discounted Equity Value Analysis. Morgan Stanley analyzed the value per
share of SpeechWorks by calculating the SpeechWorks stock price in 2005 by
estimating its 2006 revenues, applying an aggregate value/revenue ratio, adding
net cash, dividing by the fully-diluted number of shares and discounting that
figure to March 2003. Morgan Stanley also calculated the SpeechWorks stock price
in 2003 by estimating its 2004 revenues, applying an aggregate value/revenue
ratio, adding net cash, dividing by the fully-diluted number of shares and
discounting that figure to March 2003. Morgan Stanley used a revenue growth rate
of 12.5% to 22.5%, a discount rate of 13%, net cash of $32.5 million and an
aggregate value/revenue ratio range of 0.3x to 1.1x.
The following table presents the high and low of the discounted SpeechWorks
stock price based on various revenue growth rates and aggregate value/revenue
ratios:
IMPLIED SPEECHWORKS STOCK
PRICE FOR CALENDAR YEAR
-------------------------
2004 2006
------- -------
Low........................................... $1.24 $1.05
High.......................................... $2.55 $2.66
Morgan Stanley analyzed the value per share of ScanSoft by calculating
ScanSoft's stock price in 2005 by estimating its 2006 earnings per share,
applying a price to earnings ratio and discounting that figure to March 2003.
Morgan Stanley estimated the 2006 EPS by applying a growth rate to 2002 revenues
to derive 2006 revenues, multiplying by an operating margin, subtracting tax
expense, and dividing by the fully-diluted number of shares. Morgan Stanley also
calculated ScanSoft's stock price in 2003 by estimating its 2004 earnings per
share, applying a price to earnings ratio and discounting that figure to March
2003. Morgan Stanley estimated the 2003 EPS by applying a growth rate to 2002
revenues to derive 2004 revenues, multiplying by an operating margin,
subtracting tax expense, and dividing by the fully-diluted number of shares.
ScanSoft 2002 revenues were pro forma for a full year of results from the
businesses acquired from Philips and Lernout & Hauspie. Morgan Stanley used a
discount rate of 13%, a price to earnings ratio of 20x, a tax rate of 35%, an
operating margin range of 17.5% to 25.0% and a revenue growth rate of 10.0% to
20.0%.
The following table presents the high and low of the discounted ScanSoft
stock price based on various revenue growth rates and price to earnings ratios:
IMPLIED SCANSOFT STOCK
PRICE FOR CALENDAR YEAR
------------------------
2004 2006
-------- --------
Low.............................................. $4.18 $3.96
High............................................. $7.10 $8.01
Morgan Stanley analyzed the value per share of ScanSoft pro forma for the
transaction on a SpeechWorks per share basis. Morgan Stanley calculated the
ScanSoft stock price in 2005 by estimating the 2006 earnings per share, applying
a price to earnings ratio and discounting that figure to March 2003. Morgan
Stanley estimated the 2006 EPS by applying a growth rate to 2002 revenues to
derive 2006 revenues, multiplying by an operating margin, subtracting tax
expense, dividing by the fully-diluted number of shares and multiplying by the
exchange ratio of 0.860. Morgan Stanley calculated the ScanSoft stock price in
2003 by estimating the 2004 earnings per share, applying a price to earnings
ratio and discounting that figure to March 2003. Morgan Stanley estimated the
2003 EPS by applying a growth rate to 2002 revenues to derive 2004 revenues,
multiplying by an operating margin, subtracting tax expense, dividing by the
fully-diluted number of shares and multiplying by the exchange ratio of 0.860.
2002 revenues were derived by combining the SpeechWorks 2002 revenues and the
ScanSoft 2002 revenues, pro forma for a full year of results from the businesses
acquired from Philips and Lernout & Hauspie. Morgan Stanley used a discount rate
of 13%, a price to earnings ratio of 20x, a tax rate of 35%, an operating margin
range of 17.5% to 25.0% and a revenue growth rate of 10.5% to 20.5%.
67
The following table presents the high and low of the discounted ScanSoft
stock price pro forma for the transaction, on a per SpeechWorks share basis,
based on various revenue growth rates and price to earnings ratios:
IMPLIED SCANSOFT
PRO FORMA STOCK PRICE
FOR CALENDAR YEAR
----------------------
2004 2006
------- -------
Low.............................................. $3.38 $3.23
High............................................. $5.74 $6.52
Pro Forma Analysis of the Merger. Morgan Stanley analyzed the pro forma
impact of the merger on estimated EPS for ScanSoft for the calendar year 2003.
The pro forma results were calculated as if the merger had closed at the
beginning of ScanSoft's calendar 2003 first quarter and were based on publicly
available equity research and earnings estimates and other information provided
in discussions with management of both companies.
The results of Morgan Stanley's pro forma analyses indicated that the
merger would be dilutive to ScanSoft's 2003 estimated EPS by between $.20 and
$.22. Morgan Stanley estimated that pre-tax synergies on an earnings (excluding
amortization and extraordinary items) basis, of between $24.6 million and $26.7
million would be required in order for the merger not to be dilutive to
ScanSoft's earnings per share in calendar year 2003.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, Morgan Stanley
believes that selecting any portion of Morgan Stanley's analyses, without
considering all its analyses, would create an incomplete view of the process
underlying the Morgan Stanley opinion. In addition, Morgan Stanley may have
deemed various assumptions more or less probable than other assumptions, so that
the ranges of valuations resulting from any particular analysis described above
should not be taken to be Morgan Stanley's view of the actual value of
SpeechWorks or ScanSoft.
In performing its analysis, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of SpeechWorks or ScanSoft.
Any estimates contained in the analyses performed by Morgan Stanley are not
necessarily indicative of actual values, which may be significantly more or less
favorable than those suggested by such analyses. Such analyses were prepared
solely as a part of Morgan Stanley's analysis of the fairness from a financial
point of view of the exchange ratio pursuant to the merger agreement and were
provided to the SpeechWorks board of directors in connection with the delivery
of the Morgan Stanley opinion to SpeechWorks. The analyses do not purport to be
appraisals of value or to reflect the prices at which SpeechWorks or ScanSoft
might actually be sold. In addition, as described above, the Morgan Stanley
opinion was one of the many factors taken into consideration by the SpeechWorks
board of directors in making its determination to approve the merger. The
exchange ratio pursuant to the merger agreement was determined through
arm's-length negotiations between SpeechWorks and ScanSoft and was approved by
the SpeechWorks board of directors. Consequently, the Morgan Stanley analyses as
described above should not be viewed as determinative of the opinion of the
SpeechWorks board of directors with respect to the value of SpeechWorks or of
whether the SpeechWorks board of directors would have been willing to agree to
different consideration.
Morgan Stanley is an internationally recognized investment banking and
advisory firm. Morgan Stanley, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate,
68
estate and other purposes. Morgan Stanley may continue to provide investment
banking services to the combined entity in the future. In the ordinary course of
its trading, brokerage, investment management and financing activities, Morgan
Stanley and its affiliates may, at any time, have a long or short position in,
and buy and sell the debt or equity securities and senior loans of SpeechWorks
or ScanSoft for its account or the account of its customers.
Pursuant to an engagement letter dated as of October 15, 2002, Morgan
Stanley provided financial advisory services and a financial fairness opinion in
connection with the merger, and SpeechWorks agreed to pay Morgan Stanley a fee
based on a percentage of the aggregate consideration to be received by
SpeechWorks stockholders at the closing of the merger, subject to Morgan Stanley
receiving a minimum fee of $2.0 million. Assuming that the merger closed on June
10, 2003, Morgan Stanley would be entitled to a fee of approximately $2.6
million. SpeechWorks also agreed to reimburse Morgan Stanley for expenses
incurred by Morgan Stanley in performing its services. In addition, SpeechWorks
has also agreed to indemnify Morgan Stanley and its affiliates, their respective
directors, officers, agents and employees and each person, if any, controlling
Morgan Stanley or any of its affiliates against certain liabilities and
expenses, including liabilities under the federal securities laws, related to or
arising out of Morgan Stanley's engagement and any related transactions.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When ScanSoft and SpeechWorks stockholders consider the recommendation of
the boards of directors of ScanSoft and SpeechWorks with respect to the merger,
they should be aware that some of the executive officers and directors of
ScanSoft and SpeechWorks have interests in connection with the merger that are
different from, or in addition to, the interests of their respective
stockholders, as summarized below. In making their decision to recommend the
merger, the boards of directors of ScanSoft and SpeechWorks were aware of these
interests and considered them among the other matters described above under the
sections entitled "The Merger -- Consideration of the Merger by
ScanSoft -- ScanSoft's Reasons for the Merger and Recommendation of the ScanSoft
Board of Directors" on page 51 and "The Merger -- Consideration of the Merger by
SpeechWorks -- SpeechWorks' Reasons for the Merger and Recommendation of the
SpeechWorks Board of Directors" on page 59.
INTERESTS OF SCANSOFT DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
Ms. Katharine Martin, one of ScanSoft's directors, and the owner of record
of 1,000 shares of ScanSoft common stock and options to purchase an aggregate of
100,000 shares of ScanSoft common stock, is a member of Wilson Sonsini Goodrich
& Rosati, the law firm representing ScanSoft in connection with the merger.
As a result of this interest, Ms. Martin could be more likely to vote to
approve the issuance of shares of ScanSoft common stock in the merger than if
she did not hold this interest, and may have reasons for doing so that are not
the same as your interests. ScanSoft stockholders should consider whether this
interest may have influenced Ms. Martin to support or recommend the merger.
INTERESTS OF SPEECHWORKS DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
Executive Officer and Directors. Mr. Stuart R. Patterson, Chief Executive
Officer of SpeechWorks, will be appointed as President of the combined company
following the effective time of the merger. In addition, Mr. Patterson, Mr.
Finch and Mr. Freker, will remain on the board of directors of the combined
company.
Employment. In connection with the merger, Mr. Patterson entered into an
employment agreement with ScanSoft, whereby Mr. Patterson has been provided with
certain incentives to serve as President of the combined company following the
merger. In addition, SpeechWorks is party to an employment agreement with Mr.
Richard J. Westelman, Chief Financial Officer of SpeechWorks, dated June 21,
2000. Under that agreement, Mr. Westelman is entitled to certain remuneration
if, among other things, he voluntarily terminates his employment or his
employment is terminated without cause by SpeechWorks,
69
including as the surviving corporation in the merger. See the section entitled
"Agreements Related to the Merger -- Employment Agreements" beginning on page 94
for a description of these agreements.
Acceleration of Stock Options. In order to eliminate the ongoing
compensation expense and limit the number of outstanding options that would
result from SpeechWorks options remaining outstanding as ScanSoft options after
the merger, ScanSoft has required that all SpeechWorks options be accelerated
and, to the extent not exercised, terminated prior to the closing of the merger.
Accordingly, under the terms of the merger agreement, all outstanding options to
purchase shares of SpeechWorks common stock held by SpeechWorks employees,
officers and directors will fully vest prior to the effective time of the
merger. The vesting of all options held by non-officer employees were
accelerated as of the second business day following the initial filing with the
SEC of the registration statement of which this joint proxy statement/prospectus
is a part. The vesting of options held by officers and directors will accelerate
as of the second business day following the effectiveness of the registration
statement of which this joint proxy statement/prospectus is a part. As of May
28, 2003, officers and directors of SpeechWorks owned options to purchase an
aggregate of 1,637,131 shares of SpeechWorks common stock, of which 513,032 were
then unvested, and all other employees (current and former) held options to
purchase an aggregate of 3,451,222 shares of SpeechWorks common stock, of which
1,811,155 were then unvested, all with an exercise price less than $4.95. Any
option not exercised prior to the effective time of the merger will be
cancelled. As of May 28, 2003, the closing price of a share of SpeechWorks
common stock, as reported on the NASDAQ National Market, was $4.95. The
following table sets forth, as of May 28, 2003, the number of unvested and
vested options with exercise prices below and above $4.95 per share, all of
which will accelerate, owned by each SpeechWorks officer and director.
NUMBER OF
NUMBER OF UNVESTED NUMBER OF
UNVESTED OPTIONS WITH NUMBER OF VESTED OPTIONS
OPTIONS WITH EXERCISE PRICE VESTED OPTIONS WITH EXERCISE
EXERCISE PRICE EQUAL TO OR WITH EXERCISE PRICE EQUAL TO
LESS THAN MORE THAN PRICE LESS THAN OR MORE THAN
NAME $4.95 $4.95 $4.95 $4.95
---- -------------- -------------- --------------- --------------
Axel Bichara............................... 16,667 -- 8,333 20,000
Richard Burnes............................. 16,667 -- 8,333 20,000
Steven G. Chambers......................... 65,246 33,960 115,311 56,040
Robert Finch............................... 16,667 -- 33,833 20,000
John C. Freker, Jr......................... 16,667 -- 38,333 20,000
W. Robert Kellegrew, Jr.................... 8,542 -- -- --
Alexandra Lamaster......................... 15,035 19,125 13,962 22,875
William Ledingham.......................... 34,670 12,188 30,272 22,812
William J. O'Farrell....................... 16,667 -- 8,333 20,000
Stuart R. Patterson........................ 82,673 84,375 590,627 115,625
Michael S. Phillips........................ 8,009 -- 45,533 --
Charles Rutledge........................... 55,346 25,522 62,921 44,478
Alan Schwartz.............................. 98,806 47,399 19,336 97,601
Richard J. Westelman....................... 61,370 20,522 148,972 29,478
SpeechWorks cannot determine the number of options that SpeechWorks
employees, officers and directors will exercise and, with respect to the shares
of SpeechWorks common stock issued upon exercise, sell prior to the effective
time of the merger. SpeechWorks expects, however, that all optionholders will
exercise their in-the-money options prior to the closing of the merger and that
many optionholders, including SpeechWorks executive officers and directors, will
elect to sell at least the portion of the shares issued upon exercise as is
necessary to recoup the exercise price and pay any tax liabilities which the
optionholder incurs in connection with the option exercise. In addition,
executive officers and directors and other employees may for personal reasons,
including to diversify their investment holdings, elect to sell some or all of
the remaining shares acquired upon exercise of options prior to the closing of
the merger. In
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order to decrease the number of shares of SpeechWorks common stock that are
expected to be sold in the market in connection with the acceleration of options
and, as described below, shares of restricted common stock, SpeechWorks officers
and directors will be permitted to pay the exercise price of certain of their
options and/or satisfy any withholding taxes resulting from such exercise or
from the vesting of their restricted stock by surrendering to SpeechWorks that
number of shares of SpeechWorks common stock that the respective officer or
director would otherwise be entitled to under his respective option or
restricted stock award grant, as the case may be. Consequently, up to an
aggregate of approximately 352,000 shares of SpeechWorks common stock that may
otherwise have been sold in the market to satisfy such exercise price or tax
withholding obligations may be surrendered to SpeechWorks by officers and
directors.
As discussed below and in the section entitled "Agreements Related to the
Merger - SpeechWorks Voting Agreements," SpeechWorks directors and officers have
entered into voting agreements with ScanSoft. These voting agreements permit the
sale of vested restricted common stock, as well as shares of SpeechWorks common
stock issued after the date of the initial filing date of the registration
statement of which this joint proxy statement/prospectus is a part with the SEC
and pursuant to the exercise of SpeechWorks stock options. Such agreements also
permit the sale of all shares of common stock held by William O'Farrell and up
to 200,000 shares held by Michael Phillips.
Acceleration of Restricted Stock Awards. In March 2003, as part of its
annual equity incentive program, SpeechWorks granted an aggregate of 650,192
shares of restricted common stock to certain SpeechWorks employees, including
the officers named below. These awards vest on March 26, 2007, provided that
they will vest as to 50% of the then unvested shares upon an acquisition. The
merger will constitute an acquisition for these purposes and such shares will
vest as of the second business day following the effectiveness of the
registration statement of which this joint proxy statement/prospectus is a part.
As discussed above, officers and directors will be permitted to satisfy any
withholding taxes due in connection with such acceleration by surrendering to
SpeechWorks shares of SpeechWorks common stock. In addition to the acceleration
in connection with the merger, if, within one year of the effective date of the
closing, the individual's employment is terminated without cause or for good
reason, as defined in the restricted stock agreement evidencing such grants,
100% of any then unvested shares would vest. In addition, the award would fully
vest upon the recipient's death or disability. As of May 28, 2003, no such
shares of restricted common stock had vested. The following table sets forth the
aggregate number of shares of restricted common stock beneficially owned by each
SpeechWorks executive officer.
AGGREGATE NUMBER OF SHARES OF SPEECHWORKS
NAME COMMON STOCK SUBJECT TO RESTRICTED STOCK AWARD
---- ----------------------------------------------
Steven G. Chambers...................... 59,580
W. Robert Kellegrew, Jr................. 59,580
Alexandra Lamaster...................... 22,000
William Ledingham....................... 59,580
Stuart R. Patterson..................... 150,000
Michael S. Phillips..................... 59,580
Charles Rutledge........................ 59,580
Alan Schwartz........................... 59,580
Richard J. Westelman.................... 59,580
Indemnification. ScanSoft and SpeechWorks directors and officers have
customary rights to indemnification against losses incurred as a result of
actions or omissions occurring prior to the effective time of the merger. The
merger agreement provides that, for a period of six years after the completion
of the merger, ScanSoft shall, and will cause SpeechWorks (as a wholly owned
subsidiary) to, fulfill all obligations of SpeechWorks to indemnify SpeechWorks
directors and officers under the certificate of incorporation and by-laws of
SpeechWorks, and the certificate of incorporation and by-laws of the surviving
corporation will contain provisions with respect to exculpation, advancement of
expenses and
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indemnification that are at least as favorable to SpeechWorks directors and
officers as those contained in the certificate of incorporation and by-laws of
SpeechWorks prior to the effective time of the merger. In addition, for a period
of three years after the effective time of the merger, ScanSoft will also cause
SpeechWorks to maintain $10 million of directors' and officers' liability
insurance to cover any such liabilities.
Voting Agreements. SpeechWorks directors and officers have entered into
voting agreements with ScanSoft in connection with the merger. See the section
entitled "Agreements Related to the Merger -- SpeechWorks Voting Agreements"
beginning on page 93 for a description of these agreements.
BOARD OF DIRECTORS AND MANAGEMENT OF SCANSOFT FOLLOWING THE MERGER
ScanSoft currently intends to make changes to the ScanSoft board of
directors following completion of the merger such that the ScanSoft board of
directors will be comprised of eight directors, and shall include three
directors designated by SpeechWorks, who shall initially be Mr. Stuart R.
Patterson, Mr. Robert Finch and Mr. John C. Freker, Jr., currently directors of
SpeechWorks.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following summary discusses the material United States federal income
tax consequences of the merger to stockholders of SpeechWorks. The following
discussion is based on existing provisions of the Internal Revenue Code,
existing Treasury Regulations, and current administrative rulings and court
decisions, all of which are subject to change and to differing interpretations,
possibly with retroactive effect. This discussion assumes that stockholders of
SpeechWorks hold their shares of SpeechWorks common stock as capital assets
within the meaning of Section 1221 of the Internal Revenue Code (generally,
property held as an investment).
We do not discuss all United States federal income tax considerations that
may be relevant to a particular stockholder in light of such stockholder's
particular circumstances, or to stockholders subject to special treatment under
the federal income tax laws, including:
- dealers in securities or foreign currencies;
- stockholders who are subject to the alternative minimum tax provisions of
the Internal Revenue Code;
- tax-exempt organizations;
- non-United States persons or entities;
- financial institutions or insurance companies;
- stockholders who acquired SpeechWorks common stock in connection with
stock option or stock purchase plans or in other compensatory
transactions; or
- stockholders who hold SpeechWorks common stock as part of an integrated
investment, including a "straddle," comprised of shares of SpeechWorks
common stock and one or more other positions.
In addition, we do not discuss the tax consequences of the merger under
foreign, state or local tax law.
ACCORDINGLY, WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO YOU OF THE MERGER, INCLUDING ANY APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.
Based on factual representations contained in letters provided by ScanSoft
and SpeechWorks, and on certain customary factual assumptions, all of which must
continue to be true and accurate as of the closing date of the merger, each of,
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to ScanSoft,
and Hale and Dorr LLP, counsel to SpeechWorks, has delivered its opinion
(attached as exhibits 8.1 and 8.2, respectively, to the registration statement,
of which this joint proxy statement/prospectus is a part) that the merger will
qualify as a "reorganization" for United States federal
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income tax purposes within the meaning of Section 368(a) of the Internal Revenue
Code. The following material United States federal income tax consequences will
result from such qualification:
- a SpeechWorks stockholder will not recognize any gain or loss upon the
receipt of ScanSoft common stock solely in exchange for SpeechWorks
common stock pursuant to the merger, except for cash received instead of
a fractional share of ScanSoft common stock;
- the aggregate tax basis of the ScanSoft common stock received by a
SpeechWorks stockholder in the merger, including any fractional share of
ScanSoft common stock not actually received, will be equal to the
aggregate tax basis of the SpeechWorks common stock surrendered in
exchange for ScanSoft common stock pursuant to the merger;
- the holding period of the ScanSoft common stock received by a SpeechWorks
stockholder in the merger will include the holding period of the
SpeechWorks common stock surrendered in exchange therefor in the merger;
- a cash payment received by a SpeechWorks stockholder instead of a
fractional share of ScanSoft common stock will be treated as if such
fractional share had been issued pursuant to the merger and then redeemed
by ScanSoft, and the SpeechWorks stockholder will recognize capital gain
or loss with respect to such cash payment, measured by the difference, if
any, between the amount of cash received and the tax basis in such
fractional share. Such gain or loss will be long-term capital gain or
loss if the SpeechWorks common stock in respect of which such cash
payment is received has been held for more than one year at the closing
date of the merger; and
- ScanSoft, Spiderman Acquisition Corporation and SpeechWorks will not
recognize gain or loss solely as a result of the merger.
The completion of the merger is conditioned upon the delivery of an opinion
by each of, Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel
to ScanSoft, and Hale and Dorr LLP, counsel to SpeechWorks, that the merger will
constitute a reorganization for United States federal income tax purposes within
the meaning of Section 368(a) of the Internal Revenue Code. These opinions will
be based on updated representation letters to be provided by ScanSoft and
SpeechWorks at the closing date of the merger, and on customary factual
assumptions. Although the merger agreement allows ScanSoft and SpeechWorks to
waive this condition to the completion of the merger, neither ScanSoft nor
SpeechWorks currently anticipates doing so. If either ScanSoft or SpeechWorks
does waive this condition, stockholders of ScanSoft and SpeechWorks will be
informed of this decision and asked to vote in connection with the merger,
taking this waiver into consideration.
Neither ScanSoft nor SpeechWorks will request a ruling from the Internal
Revenue Service regarding the tax consequences of the merger. The tax opinions
do not bind the Internal Revenue Service and do not prevent the Internal Revenue
Service from successfully asserting a contrary position. In addition, if any of
the representations or assumptions upon which the opinions are based is
inconsistent with the actual facts, such opinions by their terms no longer
apply, and the tax consequences of the merger could be adversely affected.
A successful Internal Revenue Service challenge to the reorganization
status of the merger would result in the recognition of taxable gain or loss by
a SpeechWorks stockholder with respect to each share of SpeechWorks common stock
exchanged in the merger equal to the difference between such stockholder's basis
in such share and the sum of the fair market value, as of the closing date of
the merger, of the ScanSoft common stock received in the exchange and any cash
received instead of a fractional share. In such event, the stockholder's
aggregate tax basis in the ScanSoft common stock so received would equal its
fair market value as of the closing date of the merger, and the stockholder's
holding period for such stock would begin the day after the merger.
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ACCOUNTING TREATMENT OF THE MERGER
ScanSoft will account for the merger using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards No.
141, "Business Combinations." As such, the assets acquired and liabilities
assumed of SpeechWorks will be recorded at their fair values as of the date of
the merger. Any excess of the purchase price over the fair value of the net
tangible assets and identifiable intangible assets acquired will be recorded as
goodwill. The results of operations of SpeechWorks will be included in
ScanSoft's results of operations from the date of the closing of the merger.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
the merger may not be consummated unless certain filings have been submitted to
the FTC and the Antitrust Division and certain waiting period requirements have
been satisfied. ScanSoft and SpeechWorks filed the appropriate notification and
report forms with the FTC and with the Antitrust Division and notice of the
early termination of the waiting period was received on June 5, 2003.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions like the merger. At any time before or after
the completion of the merger, the FTC or the Antitrust Division could take any
action under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the completion of the merger or seeking
the divestiture of substantial assets of ScanSoft or SpeechWorks. In addition,
certain private parties, as well as state attorneys general and other antitrust
authorities, may challenge the transaction under antitrust laws under certain
circumstances.
In addition, the merger may be subject to various foreign antitrust laws.
ScanSoft and SpeechWorks believe that the completion of the merger will not
violate any antitrust laws. There can be no assurance, however, that a challenge
to the merger on antitrust grounds will not be made, or, if such a challenge is
made, what the result will be.
LISTING ON THE NASDAQ NATIONAL MARKET OF SCANSOFT SHARES ISSUED PURSUANT TO THE
MERGER
ScanSoft will use all commercially reasonable efforts to cause the shares
of ScanSoft common stock to be issued in connection with the merger to be
authorized for listing on the NASDAQ National Market before the completion of
the merger, subject to official notice of issuance.
DELISTING AND DEREGISTRATION OF SPEECHWORKS COMMON STOCK AFTER THE MERGER
When the merger is completed, SpeechWorks common stock will be delisted
from the NASDAQ National Market and deregistered under the Exchange Act.
RESTRICTIONS ON SALES OF SHARES OF SCANSOFT COMMON STOCK RECEIVED IN THE MERGER
The shares of ScanSoft common stock to be issued in connection with the
merger will be registered under the Securities Act and will be freely
transferable, except for shares of ScanSoft common stock issued to any person
who is deemed to be an "affiliate" of SpeechWorks prior to the merger. Persons
who may be deemed to be "affiliates" of SpeechWorks prior to the merger include
individuals or entities that control, are controlled by, or are under common
control of SpeechWorks prior to the merger, and may include officers and
directors, as well as principal stockholders of SpeechWorks prior to the merger.
Affiliates of SpeechWorks will be notified separately of their affiliate status.
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Persons who may be deemed to be affiliates of SpeechWorks prior to the
merger may not sell any of the shares of ScanSoft common stock received by them
in connection with the merger except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares;
- an exemption under paragraph (d) of Rule 145 under the Securities Act; or
- any other applicable exemption under the Securities Act.
ScanSoft's registration statement on Form S-4, of which this joint proxy
statement/prospectus is a part, does not cover the resale of shares of ScanSoft
common stock to be received in connection with the merger by persons who may be
deemed to be affiliates of SpeechWorks prior to the merger.
APPRAISAL RIGHTS
Neither ScanSoft stockholders nor SpeechWorks stockholders are entitled to
appraisal rights for their shares under the General Corporation Law of the State
of Delaware in connection with the merger.
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AGREEMENTS RELATED TO THE MERGER
THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement. This summary is qualified in its entirety by reference to the merger
agreement, a copy of which is attached as Annex A to this joint proxy
statement/prospectus and is incorporated into this joint proxy
statement/prospectus by reference. You should read the merger agreement in its
entirety, as it is the legal document governing this merger, and the provisions
of the merger agreement are not easily summarized.
STRUCTURE OF THE MERGER
Spiderman Acquisition Corporation, a wholly owned subsidiary of ScanSoft,
will merge with and into SpeechWorks, and, as a result, SpeechWorks will become
a wholly owned subsidiary of ScanSoft.
EFFECTIVE TIME AND TIMING OF CLOSING
The merger will be completed and become effective when the certificate of
merger is filed with the Secretary of State of the State of Delaware, or at such
later time as we may agree and as is specified in the certificate of merger, in
accordance with Delaware law. The closing of the merger will take place no later
than the fifth business day after all conditions to the merger have been
satisfied or waived, or on such other date as we may agree. We currently
anticipate that we will complete the merger four business days after the
ScanSoft and SpeechWorks special meetings, assuming ScanSoft's and SpeechWorks
stockholders give their requisite approvals and all conditions to the merger
have been satisfied or waived.
MERGER CONSIDERATION
Upon completion of the merger, each share of SpeechWorks common stock
outstanding immediately prior to the effective time of the merger will be
canceled and extinguished and automatically converted into the right to receive
0.860 of a share of ScanSoft common stock upon surrender of the certificate
representing such share of SpeechWorks common stock in the manner provided in
the merger agreement. Upon completion of the merger, ScanSoft also will assume
all outstanding warrants to purchase shares of SpeechWorks common stock in
accordance with the terms of each such warrant.
The exchange ratio in the merger will be adjusted to reflect fully the
effect of any stock split, reverse stock split, stock dividend (including any
dividend or distribution of securities convertible into ScanSoft common stock or
SpeechWorks common stock), reorganization, recapitalization, reclassification or
other like change with respect to ScanSoft common stock or SpeechWorks common
stock having a record date on or after the date of the merger agreement and
prior to completion of the merger.
Based on the exchange ratio and the number of shares of SpeechWorks common
stock outstanding as of June 27, 2003, and assuming the exercise of
approximately 2,763,142 outstanding options to purchase shares of SpeechWorks
common stock which were in-the-money as of June 27, 2003, a total of
approximately 32,368,739 shares of ScanSoft common stock will be issued in
connection with the merger to holders of shares of SpeechWorks common stock.
FRACTIONAL SHARES
ScanSoft will not issue any fractional shares of common stock in connection
with the merger. Instead, each holder of SpeechWorks common stock who would
otherwise be entitled to receive a fraction of a share of ScanSoft common stock
(after aggregating all fractional shares of ScanSoft common stock that would
otherwise be received by such SpeechWorks stockholder) will be entitled to
receive cash, without interest, in an amount equal to the fractional shares
multiplied by the average closing price of one share of ScanSoft common stock
for the ten most recent trading days that ScanSoft common stock has traded,
ending on the trading day one day prior to the date the merger is completed, as
reported on the NASDAQ Stock Market, Inc.
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EXCHANGE OF SPEECHWORKS STOCK CERTIFICATES FOR SCANSOFT STOCK CERTIFICATES
Promptly following completion of the merger, U.S. Stock Transfer
Corporation, the exchange agent for the merger, will mail to each record holder
of SpeechWorks common stock a letter of transmittal and instructions for
surrendering the record holder's SpeechWorks stock certificates in exchange for
certificates representing whole shares of ScanSoft common stock, and cash in
lieu of any fractional shares. Only those holders of SpeechWorks common stock
who properly surrender their SpeechWorks stock certificates in accordance with
the exchange agent's instructions will receive:
- certificates representing the number of whole shares of ScanSoft common
stock to which such holder is entitled pursuant to the merger agreement;
- cash in lieu of any fractional share of ScanSoft common stock; and
- dividends or other distributions, if any, to which they are entitled
under the terms of the merger agreement.
The surrendered certificates representing SpeechWorks common stock will be
canceled. After the effective time of the merger, each certificate representing
shares of SpeechWorks common stock that has not been surrendered will represent
only the right to receive each of the items, as the case may be, enumerated
above. Following the completion of the merger, SpeechWorks will not register any
transfers of SpeechWorks common stock on its stock transfer books. Holders of
SpeechWorks common stock should not send in their SpeechWorks stock certificates
until they receive a letter of transmittal from U.S. Stock Transfer Corporation,
the exchange agent for the merger, with instructions for the surrender of
SpeechWorks stock certificates.
DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES
Holders of SpeechWorks common stock are not entitled to receive any
dividends or other distributions on ScanSoft common stock until the merger is
completed. After the merger is completed, holders of SpeechWorks common stock
certificates will be entitled to dividends and other distributions declared or
made after completion of the merger with respect to the number of whole shares
of ScanSoft common stock which they are entitled to receive upon exchange of
their SpeechWorks stock certificates, but they will not be paid any dividends or
other distributions on the ScanSoft common stock until they surrender their
SpeechWorks stock certificates to the exchange agent in accordance with the
exchange agent instructions.
TRANSFERS OF OWNERSHIP AND LOST STOCK CERTIFICATES
ScanSoft will issue only (1) certificates representing the number of whole
shares of ScanSoft common stock to which such holder is entitled pursuant to the
merger agreement, (2) cash in lieu of any fractional share of ScanSoft common
stock, and (3) any dividends or other distributions, if any, to which they are
entitled under the terms of the merger agreement, in a name other than the name
in which a surrendered SpeechWorks stock certificate is registered if the person
requesting such exchange presents to the exchange agent all documents required
to show and effect the unrecorded transfer of ownership and to show that such
person paid any applicable stock transfer taxes. If a SpeechWorks stock
certificate is lost, stolen or destroyed, the holder of such certificate may
need to deliver a bond prior to receiving any ScanSoft common stock certificate.
TREATMENT OF SPEECHWORKS STOCK OPTIONS
In order to eliminate the ongoing compensation expense and limit the number
of outstanding options that would result from SpeechWorks options remaining
outstanding as ScanSoft options after the merger, ScanSoft has required that all
SpeechWorks options be accelerated and, to the extent not exercised, terminated
prior to the closing of the merger. Accordingly, under the terms of the merger
agreement, all outstanding options to purchase shares of SpeechWorks common
stock held by SpeechWorks employees, officers and directors will fully vest, to
the extent that they do not vest sooner in accordance with their
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normal vesting schedules, prior to the effective time of the merger. The vesting
of all options held by non-officer employees will accelerate as of the second
business day following the initial filing with the SEC of the registration
statement of which this joint proxy statement/prospectus is a part. The vesting
of options held by officers and directors will be subsequently accelerated,
prior to the effective time of the merger, on a date to be determined by the
SpeechWorks board of directors. SpeechWorks will take all actions necessary or
appropriate to terminate, effective immediately prior to the effective time of
the merger, each outstanding option to purchase shares of SpeechWorks common
stock.
TREATMENT OF RIGHTS UNDER THE SPEECHWORKS STOCK PURCHASE PLAN
Prior to the effective time of the merger, the SpeechWorks' employee stock
purchase plan shall be terminated. Any offering period then underway under the
SpeechWorks' employee stock purchase plan shall be shortened, if necessary, and
pro rata adjustments to the rights of employees in the SpeechWorks' employee
stock purchase plan will be made to reflect the shortened offering period. Each
offering period will otherwise be treated as a fully effective and completed
offering period for all purposes under the SpeechWorks employee stock purchase
plan.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains generally reciprocal representations and
warranties made by each of ScanSoft and Spiderman Acquisition Corporation, on
the one hand, and SpeechWorks, on the other, regarding aspects of their
respective businesses, financial condition and structure, as well as other facts
pertinent to the merger. These representations and warranties relate to the
following subject matters with respect to each party:
- corporate organization, qualifications to do business, corporate standing
and corporate power;
- absence of any breach of the certificate of incorporation and bylaws and
the certificates of incorporation, bylaws and similar organizational
documents of subsidiaries;
- ownership of subsidiary capital stock and the absence of restrictions or
encumbrances with respect to the capital stock of any significant
subsidiary;
- capitalization;
- corporate authorization to enter into and consummate the transactions
contemplated by the merger agreement and the enforceability of the merger
agreement;
- governmental and regulatory approvals required to complete the merger;
- absence of any conflict or violation of any applicable legal
requirements, corporate charter and bylaws, and the charter, bylaws and
similar organizational documents of subsidiaries as a result of entering
into and consummating the transactions contemplated by the merger
agreement;
- the effect of entering into and consummating the transactions
contemplated by the merger agreement on material contracts;
- filings and reports with the SEC;
- financial statements;
- the absence of undisclosed liabilities;
- absence of any material adverse change in business between the date of
its last audited balance sheet and April 23, 2003, the date of the merger
agreement;
- taxes;
- intellectual property;
- compliance with applicable laws;
78
- possession of and compliance with permits required for the operation of
business;
- litigation;
- payment, if any, required to be made to brokers and agents on account of
the merger;
- affiliates;
- employee benefit plans and labor relations;
- real property and environmental matters;
- absence of breaches of material contracts;
- accuracy of information supplied in this joint proxy statement/prospectus
and the related registration statement filed by ScanSoft with the SEC;
- approvals by the board of directors; and
- the receipt of a fairness opinion.
In addition, SpeechWorks made representations and warranties regarding:
- the inapplicability of certain state takeover statutes to ScanSoft during
the pendency of the merger agreement; and
- non-competition agreements.
In addition, ScanSoft made representations and warranties regarding:
- the absence of any resolution to the effect that ScanSoft common stock
issued pursuant to the merger shall not be entitled to the benefits of
its rights plan.
The representations and warranties contained in the merger agreement will
not survive the merger, but they form the basis of certain conditions to
ScanSoft's and SpeechWorks' obligations to complete the merger.
COVENANTS OF SPEECHWORKS
Except as contemplated by the merger agreement, SpeechWorks has agreed
that, until completion of the merger or termination of the merger agreement, it
will (i) conduct its and its subsidiaries' business in the usual, regular and
ordinary course, in substantially the same manner as previously conducted and in
compliance with all applicable laws and regulations, (ii) pay its debts and
taxes when due, and pay or perform other material obligations when due (subject
to good faith disputes over such debts, taxes or obligations), and (iii) use all
commercially reasonable efforts consistent with past practices and policies to:
- preserve intact its present business organization;
- keep available the services of its present executive officers and
employees; and
- preserve its relationships with customers, suppliers, licensors,
licensees, and others with which it has business dealings.
Under the merger agreement, SpeechWorks also agreed that, until the earlier
of the completion of the merger or termination of the merger agreement, or
unless ScanSoft consents in writing, SpeechWorks and its subsidiaries will
conduct their businesses in compliance with restrictions relating to the
following:
- declaring or paying dividends or making any other distributions;
- purchasing, redeeming or acquiring its capital stock or the capital stock
of its subsidiaries other than repurchases of unvested shares at cost
under stock option or purchase agreements existing as of April 23, 2003
to which an employee is party;
79
- issuing, delivering, selling, authorizing or encumbering its capital
stock, or securities convertible into its capital stock, or entering into
any agreement or obligation to do the same other than:
- issuances of common stock upon the exercise or conversion of employee
stock options or other stock based awards existing prior to April 23,
2003; or
- issuances of options to purchase up to an aggregate of 200,000 shares of
SpeechWorks common stock issuable to new hires;
- modifying or amending its certificate of incorporation and bylaws or the
certificate of incorporation, bylaws or similar organizational documents
of its subsidiaries;
- acquiring or agreeing to acquire by merger or consolidation with, or by
purchasing any equity or voting interest in or a portion of the assets
of, any business of any person or entity, or otherwise acquiring any
assets which are material to SpeechWorks business;
- entering into binding agreements, agreement in principles, letters of
intent, memorandums of understanding or similar agreements with respect
to any joint venture, strategic partnership or alliance, other than in
connection with certain customer arrangements;
- selling, leasing, licensing, encumbering or otherwise disposing of any
property material to its business except in the ordinary course of
business consistent with past practice;
- making any loans, advances or capital contributions to, or investments
in, any other person, other than employee advances for travel, business
and entertainment expenses made in the ordinary course of business
consistent with past practice, provided such employee loans are in
compliance with applicable law;
- making any material change in its methods or principles of accounting
since December 31, 2002, except as required by generally accepted
accounting principles or the SEC;
- making or changing any material tax election or adopting or changing any
accounting method;
- revaluing any of its assets;
- paying, discharging, settling or satisfying any claims (including any tax
claim), liabilities or obligations, or litigation (whether or not
commenced prior to April 23, 2003, the date of the merger agreement)
other than (x) in the ordinary course of business consistent with past
practice, or in accordance with their terms, of claims not in excess of
$100,000 individually or $500,000 in the aggregate, or (y) to the extent
subject to reserves on the SpeechWorks' financials existing as of April
23, 2003, in accordance with generally accepted accounting principles;
- waiving the benefits of, agreeing to modify in any manner, terminating,
releasing any person from or knowingly fail to enforce any
confidentiality or similar agreement to which SpeechWorks or any of its
subsidiaries is a party or a beneficiary;
- except as required by applicable law or existing contract, increasing the
compensation of, or making severance or termination payment to, any
director or officer or other key employee of SpeechWorks; or making any
increase in or commitment to increase any SpeechWorks employee benefit
plan, subject to certain exceptions;
- waiving any stock repurchase rights, accelerating, amending or changing
the period of exercisability of any options to purchase shares of
SpeechWorks common stock, or repricing any options or authorizing cash
payments in exchange for any option to purchase shares of SpeechWorks
common stock;
- entering into any employment, severance, termination or indemnification
agreement with any SpeechWorks employee or entering into any collective
bargaining agreement;
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- making any material oral or written representation or commitment with
respect to any material aspect of any SpeechWorks employee benefit plan
that is not materially in accordance with the existing written terms and
provision of such SpeechWorks employee benefit plan;
- granting any stock appreciation right, phantom stock award, stock-related
award or performance award to any person, or entering into any agreement
with any SpeechWorks employee, the benefits of which are contingent or
the terms of which are materially altered in favor of the SpeechWorks
employee upon the occurrence of a change in control;
- granting any exclusive rights with respect to any intellectual property
of SpeechWorks;
- entering into or renewing any contracts containing any non-competition,
exclusivity or other material restrictions on SpeechWorks or the combined
company following the closing of the merger;
- entering into any agreement or commitment the effect of which would be to
grant to a third party following the merger any actual or potential right
of license to any intellectual property owned by ScanSoft or any of its
subsidiaries;
- engaging in any action that could reasonably be expected to cause the
merger to fail to qualify as a "reorganization" under Section 368(a) of
the Internal Revenue Code;
- hiring or offering to hire employees, subject to certain limited
exceptions;
- incurring any indebtedness for borrowed money or guarantee any such
indebtedness of another person or issuing or selling any debt securities
or any option to acquire any such debt securities;
- making any individual or series of related payments outside of the
ordinary course of business or commit to make capital expenditures beyond
certain specified capital expenditures;
- entering into, modifying or amending in a manner adverse in any material
respect to SpeechWorks, or terminating any lease, sublease or material
contract of SpeechWorks, or waiving, releasing or assigning any material
rights or claims thereunder;
- permitting SpeechWorks employees to exercise their options to purchase
shares of SpeechWorks common stock with a promissory note or through a
net exercise, subject to certain exceptions;
- entering into any contract requiring SpeechWorks or any of its
subsidiaries to pay in excess of an aggregate of $250,000; or
- entering into any oral or written agreement with respect to any of the
foregoing.
COVENANTS OF SCANSOFT
Except as contemplated by the merger agreement, ScanSoft has agreed that,
until completion of the merger or termination of the merger agreement, ScanSoft
will not:
- cause, permit or propose any amendments to its certificate of
incorporation or bylaws or the certificate of incorporation or bylaws of
its subsidiaries that would materially impair or adversely affect the
ability of ScanSoft to consummate the merger;
- declare, set aside or pay any dividends on or make any other
distributions in respect of any ScanSoft capital stock unless the
exchange ratio is appropriately adjusted;
- adopt a plan of liquidation or dissolution;
- purchase, redeem or otherwise acquire, directly or indirectly, shares of
its or its subsidiaries' capital stock for an aggregate repurchase price
in excess of $10,000,000, except repurchases of unvested shares at cost
in connection with the termination of the employment relationship with
any employee pursuant to stock option or purchase agreements in effect on
April 23, 2003, the date of the merger agreement;
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- perform any acquisition that is likely to delay the merger;
- except as required by GAAP or the SEC (and upon consultation with its
independent auditors), revalue any of its assets or make any change in
accounting methods, principles or practices; or
- adopt any resolution that is intended to treat the shares of ScanSoft
common stock issued pursuant to the merger differently under the
ScanSoft's rights agreement than other outstanding shares of ScanSoft
common stock, subject to certain exceptions.
ScanSoft has agreed that, until completion of the merger or termination of
the merger agreement, it will consult with SpeechWorks prior to: (A) granting
any exclusive rights with respect to any intellectual property of ScanSoft, (B)
entering into any settlement agreement obligating ScanSoft to make cash payments
in excess of $100,000 individually or $1,000,000 in the aggregate in settlement
of claims with respect to the intellectual property of ScanSoft or its
subsidiaries, or (C) entering into any agreement or commitment the effect of
which would be to grant to a third party following the merger a right to use any
material intellectual property owned by SpeechWorks.
OTHER COVENANTS
The merger agreement contains a number of other covenants by SpeechWorks
and ScanSoft, including:
- Preparation of Registration Statement and Proxy Statement. SpeechWorks
and ScanSoft agreed to promptly prepare and file the joint proxy
statement/prospectus included as part of the registration statement, and
ScanSoft agreed to promptly prepare and file the registration statement
following the execution of the merger agreement. Both parties also agreed
to use commercially reasonable efforts to have the registration statement
declared effective by the SEC as promptly as practicable, and ScanSoft
agreed to take any action required by applicable state securities laws.
SpeechWorks agreed to furnish information regarding SpeechWorks and its
stockholders as reasonably required.
- Meeting of Stockholders. SpeechWorks agreed to take all actions
necessary to hold the SpeechWorks special meeting to consider and vote
upon the adoption of the merger agreement and the approval of the merger.
ScanSoft agreed to take all actions necessary to hold the ScanSoft
special meeting to consider and vote upon the approval of the issuance of
shares of ScanSoft common stock in connection with the merger.
- Treatment as a Reorganization. ScanSoft, Spiderman Acquisition
Corporation and SpeechWorks have agreed not to, and agreed not to permit
any of their respective subsidiaries to, take any action prior to or
following the closing that would reasonably be expected to cause the
merger to fail to qualify as a reorganization within Section 368(a) of
the Internal Revenue Code.
- Stock Exchange Listing. ScanSoft has agreed to use all commercially
reasonable efforts to authorize for listing on the NASDAQ National Market
the shares of ScanSoft common stock issuable, and those required to be
reserved for issuance, in connection with the merger, subject to official
notice of issuance.
- Access to Information. Each party has agreed to afford the other party's
accountants, counsel and other identified representatives reasonable
access during normal business hours to its properties, books, records and
personnel during the period prior to the effective time of the merger to
obtain all reasonable information concerning its business as may be
reasonably requested, except as prohibited or restricted by applicable
law or the confidentiality agreement between the parties.
- Public Announcements. SpeechWorks and ScanSoft have agreed to consult
with one another before issuing any press release or otherwise making any
public statements about the merger or related transactions, unless
otherwise required by any applicable laws or regulations.
- Notification of Certain Matters. ScanSoft and SpeechWorks each agreed to
give prompt notice to the other of any representation or warranty in the
merger agreement becoming untrue or inaccurate,
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or any failure to comply with or satisfy in any material respect any
covenant or condition to be complied with or satisfied under the merger
agreement, in each case where the respective party could not satisfy the
closing condition with respect to representations or warranties.
- Affiliates. SpeechWorks has agreed to use all commercially reasonable
efforts to obtain a letter agreement from all SpeechWorks stockholders
who may be affiliates of SpeechWorks or ScanSoft pursuant to which those
stockholders would, among other things, agree not to transfer shares of
ScanSoft common stock they receive pursuant to the merger in violation of
the Securities Act and related rules and regulations.
- Third Party Consents. SpeechWorks and ScanSoft each agreed to use all
commercially reasonable efforts to obtain any material consents, waivers
or approvals under any of its respective contracts which are required to
be obtained in connection with the consummation of the merger.
- Termination of 401(k) Plans. SpeechWorks has agreed to adopt resolutions
to terminate its 401(k) plans effective no later than the date
immediately preceding the effective date of the merger, if so requested
by ScanSoft, no later than 5 days prior to the effective date of the
merger.
- Comfort Letter. SpeechWorks has agreed to use all commercially
reasonable efforts to cause its independent public accountants to deliver
a letter dated not more than five days prior to the date on which the
registration statement, of which this joint proxy statement/prospectus is
a part, shall become effective and addressed to SpeechWorks and ScanSoft
and their respective boards of directors which shall be in form and
substance reasonably satisfactory to ScanSoft and customary in scope and
substance with respect to letters delivered by independent public
accountants in connection with similar registration statements.
- Section 16 Matters. Prior to the effective time of the merger, (i)
SpeechWorks has agreed to take all such steps as may be required to cause
any dispositions of SpeechWorks common stock resulting from the
transactions contemplated by the merger agreement by each individual who
is subject to the reporting requirements of Section 16(a) of the Exchange
Act with respect to SpeechWorks to be exempt under Rule 16b-3 promulgated
under the Securities Exchange Act, and (ii) ScanSoft has agreed to take
all such steps as may be required to cause any acquisitions of ScanSoft
common stock resulting from the transactions contemplated by the merger
agreement by each individual who will, as a result of the transactions
contemplated by the merger agreement, be subject to the reporting
requirements of Section 16(a) of the Exchange Act with respect to
ScanSoft to be exempt under Rule 16b-3 promulgated under the Exchange
Act.
INDEMNIFICATION AND INSURANCE
The merger agreement provides that, for a period of six years after the
completion of the merger, ScanSoft shall, and will cause SpeechWorks (as a
wholly owned subsidiary) to, fulfill all obligations of SpeechWorks to indemnify
SpeechWorks directors and officers under the certificate of incorporation and
by-laws of SpeechWorks, and the certificate of incorporation and by-laws of the
surviving corporation will contain provisions with respect to exculpation,
advancement of expenses and indemnification that are at least as favorable to
SpeechWorks directors and officers as those contained in the certificate of
incorporation and by-laws of SpeechWorks prior to the effective time of the
merger. In addition, for a period of three years after the effective time of the
merger, ScanSoft will also cause SpeechWorks to maintain $10 million of
directors' and officers' liability insurance to cover any such liabilities.
EMPLOYEE BENEFITS
As soon as practicable after completion of the merger and in any event
within one year of the completion of the merger, ScanSoft shall use commercially
reasonable efforts to provide the employees of SpeechWorks who are employed by
ScanSoft or one of its subsidiaries after the effective time of the merger with
similar types and levels of employee benefits as those provided to similarly
situated employees of ScanSoft. For purposes of determining eligibility to
participate, vesting and entitlement to benefits
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where length of service is relevant under any benefit plan or arrangement (other
than a defined benefit plan) of ScanSoft and to the extent permitted by
applicable law, ScanSoft shall provide service credit under ScanSoft's benefit
plans or arrangements for their period of service with SpeechWorks prior to the
closing of the merger. ScanSoft may continue one or more of SpeechWorks' benefit
plans, provided the employee benefits provided would, in the aggregate, in the
reasonable judgment of ScanSoft, be no less favorable than those provided under
the SpeechWorks benefit plans.
BOARD OF DIRECTORS AND MANAGEMENT OF SCANSOFT FOLLOWING THE MERGER
The ScanSoft board of directors agreed to take all actions necessary such
that, immediately following completion of the merger, the ScanSoft board of
directors will be comprised of eight directors, and shall include three
directors designated by SpeechWorks, who shall initially be Mr. Stuart R.
Patterson, Mr. Robert Finch and Mr. John C. Freker, Jr., currently directors of
SpeechWorks.
REGULATORY APPROVALS
Each of ScanSoft, Spiderman Acquisition Corporation and SpeechWorks agreed
to coordinate and cooperate with one another and use commercially reasonable
efforts to comply with, and refrain from actions that would impede compliance
with, applicable laws, regulations and any other requirements of any
governmental entity. ScanSoft, Spiderman Acquisition Corporation and SpeechWorks
also agreed, as promptly as practicable, to make all filings and submissions
required by any governmental entity in connection with the merger and the other
transactions contemplated by the merger agreement, including the following:
- those filings or submissions required under the Hart-Scott-Rodino Act, as
well as any other comparable merger notification or control laws of any
applicable jurisdiction, as agreed by the parties; and
- any filings required under the Securities Act, the Exchange Act, any
applicable state or securities or "blue sky" laws and the securities laws
of any foreign country.
Except as prohibited or restricted by applicable law or the confidentiality
agreement among the parties, each of ScanSoft, Spiderman Acquisition Corporation
and SpeechWorks generally agreed to do the following:
- consult with the other with respect to the filings or submissions
described above, coordinate with the other in preparing and exchanging
information with respect to such filing or submissions and provide the
other party an opportunity to review and comment on such filings or
submissions;
- promptly notify the other upon the receipt of any comments or requests
for amendments or supplements to any filings or submissions made pursuant
to, or information provided to comply with, any applicable laws,
regulations and any other requirements of any governmental entity; and
- promptly provide the other copies of any filing or submission made with
any governmental entity.
LIMITATION ON REASONABLE EFFORTS TO OBTAIN REGULATORY APPROVALS
Neither ScanSoft nor SpeechWorks nor any of their respective subsidiaries
or affiliates is required to take any of the following actions:
- make proposals, execute or carry out agreements or submit to any
applicable laws, regulations or any other requirements of any
governmental entity providing for:
- the license, sale or other disposition or holding separate (through
the establishment of a trust or otherwise) of any assets or categories
of assets that are material to ScanSoft, SpeechWorks or any of their
respective subsidiaries;
- the holding separate of SpeechWorks common stock; or
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- the imposition of any limitation on the ability of the respective
company to conduct their respective businesses or own such assets or
to acquire, hold or exercise full rights of ownership of SpeechWorks'
business; or
- otherwise take any step to avoid or eliminate any impediment which may be
asserted under any applicable laws, regulations or any other requirements
of any governmental entity governing competition, monopolies or
restrictive trade practices.
CONDITIONS TO COMPLETION OF THE MERGER
The respective obligations of ScanSoft and Spiderman Acquisition
Corporation, on the one hand, and SpeechWorks, on the other, to complete the
merger and the other transactions contemplated by the merger agreement are
subject to the satisfaction or waiver, by the party entitled to waive such
condition, of each of the following conditions before completion of the merger:
- the merger agreement shall have been adopted and the merger shall have
been duly approved by the stockholders of SpeechWorks and, with respect
to the issuance of shares of ScanSoft common stock, by the stockholders
of ScanSoft, in each case as required under applicable law or marketplace
rules;
- no law, regulation or order has been enacted or issued by a governmental
entity of competent jurisdiction which is in effect and has the effect of
making the merger illegal or otherwise prohibiting completion of the
merger or the issuance of shares of ScanSoft common stock;
- the SEC has declared ScanSoft's registration statement, of which this
joint proxy statement/ prospectus is a part, effective, and no stop order
suspending its effectiveness has been issued and no proceedings for
suspension of the registration statement's effectiveness, or a similar
proceeding in respect of this joint proxy statement/prospectus, has been
initiated or threatened in writing by the SEC;
- all waiting periods (and any extension thereof) under the
Hart-Scott-Rodino Antitrust Improvements Act with respect to the merger
and the other transactions contemplated by the merger agreement have
expired or terminated early and all material foreign antitrust approvals
required to be obtained prior to the merger have been obtained;
- there is no pending or overtly threatened suit, action or proceeding
asserted by any governmental authority (i) challenging or seeking to
restrain or prohibit the completion of the merger or any of the other
transactions contemplated by the merger agreement, the effect of which
would be an order making the merger illegal or otherwise prohibiting
completion of the merger or (ii) seeking to require ScanSoft, SpeechWorks
or any of their respective subsidiaries to effect an action of
divestiture;
- ScanSoft and SpeechWorks have each received from its respective tax
counsel an opinion to the effect that the merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code, and such opinions have not been withdrawn, provided that if
one of their counsels does not render such an opinion, the opinion of the
other counsel shall satisfy this condition; and
- the shares of ScanSoft common stock to be issued pursuant to the merger
have been authorized for listing on the NASDAQ National Market, subject
to official notice of issuance.
In addition, individually, the respective obligations of ScanSoft and
Spiderman Acquisition Corporation on the one hand, and SpeechWorks on the other,
to effect the merger and the other
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transactions contemplated by the merger agreement are subject to the
satisfaction or waiver of the following additional conditions:
- the representations and warranties of the other party were true and
correct on April 23, 2003 and are true and correct as of the date the
merger is to be completed as if made at and as of that time, except:
- to the extent the representations and warranties of the other party
address matters only as of a particular date, then they must be true and
correct as of that date; and
- if any of the representations and warranties are not true and correct
but the effect in each case, or in the aggregate, of such inaccuracy or
breach is not and does not have a material adverse effect, as defined
below, on the other party, then this condition will be deemed satisfied;
- the other party has performed or complied in all material respects with
all of its agreements and covenants required by the merger agreement to
be performed or complied with by it before completion of the merger; and
- no material adverse effect, as defined below, on the other party has
occurred since April 23, 2003 and is continuing.
Finally, obligations of ScanSoft and Spiderman Acquisition Corporation to
effect the merger and the other transactions contemplated by the merger
agreement are subject to the satisfaction or waiver of the following additional
conditions:
- the non-competition agreements entered into by and between SpeechWorks
and certain SpeechWorks employees have not been modified or amended since
April 23, 2003, and all such agreements are enforceable by each of
SpeechWorks and ScanSoft immediately following the merger to the full
extent enforceable by SpeechWorks prior to the merger; and
- the receipt of all required third party consents, permits and approvals.
ALTERNATIVE TRANSACTIONS
SpeechWorks has agreed that neither it, nor any of its subsidiaries, nor
any of the officers or directors of it or its subsidiaries shall and that it
shall use all commercially reasonable efforts to cause its and its subsidiaries
employees, agents and representatives not to, directly or indirectly:
- solicit or initiate, or knowingly encourage, facilitate or induce the
making, submission or announcement of any acquisition proposal, as
defined below;
- participate in any discussions or negotiations regarding, or furnish to
any person any nonpublic information with respect to, or take any other
action to knowingly encourage, facilitate or induce any inquiries or the
making of any proposal that constitutes, or that may reasonably be
expected to lead to any acquisition proposal;
- engage in any discussions with any person with respect to any acquisition
proposal, except as provided below;
- approve, endorse or recommend any acquisition proposal, except as
provided below; or
- enter into any agreement or commitment regarding any acquisition
proposal.
However, if SpeechWorks receives an unsolicited, bona fide written
acquisition proposal from a third party, then SpeechWorks may:
- furnish nonpublic information with respect to SpeechWorks pursuant to a
confidentiality agreement containing customary limitations and with terms
at least as restrictive as the confidentiality agreement in place between
ScanSoft and SpeechWorks, provided that SpeechWorks gives concurrent
written notice to ScanSoft of its intention to furnish this information
and provides ScanSoft with a complete list of the nonpublic information
furnished to the third party; and
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- engage in negotiations with the third party with respect to the
acquisition proposal, provided that it gives ScanSoft concurrent written
notice of its intention to enter into negotiations and keeps ScanSoft
informed regarding all material developments with respect to the status
of the negotiations;
but only if:
- the SpeechWorks board of directors has concluded in good faith, following
consultation with its outside legal counsel, that such action is required
for it to comply with its fiduciary duties under applicable law; and
- the SpeechWorks board of directors has in good faith concluded, following
consultation with its outside legal counsel and its financial advisor,
that such acquisition proposal is, or is reasonably likely to result in,
a superior offer, as defined below.
An "acquisition proposal" means any offer or proposal relating to any
transaction or series of related transactions, other than the merger, involving:
- any purchase or acquisition by any person or group of more than a 15%
interest in the total outstanding voting securities of SpeechWorks or any
of its subsidiaries or any tender offer or exchange offer that, if
consummated, would result in any person or group beneficially owning 15%
or more of the total outstanding voting securities of SpeechWorks or any
of its subsidiaries;
- any merger, consolidation, business combination or similar transaction
involving SpeechWorks or any of its subsidiaries;
- any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of assets of SpeechWorks (including
its subsidiaries taken as a whole) representing more than 15% of the
aggregate fair market value of SpeechWorks' business immediately prior to
such transaction; or
- any liquidation or dissolution (or the adoption of a plan pertaining
thereto) of SpeechWorks or the declaration or payment of an extraordinary
dividend (whether in cash or other property).
A "superior offer" means an unsolicited, bona fide written offer made by a
third party to acquire, directly or indirectly, pursuant to a tender offer,
exchange offer, merger, consolidation or other business combination, all or
substantially all of the assets of SpeechWorks or all of the outstanding voting
securities of SpeechWorks and as a result of which SpeechWorks stockholders
immediately preceding such transaction would hold less than 50% of the equity
interests in the surviving or resulting entity of such transaction or any direct
or indirect parent or subsidiary thereof. The terms of which offer the
SpeechWorks board of directors has in good faith concluded (following
consultation with its outside legal counsel and its financial advisers), taking
into account, among other things, all legal, financial, regulatory and other
aspects of the offer and the person making the offer, to be more favorable to
SpeechWorks stockholders (in their capacities as stockholders) than the terms of
the merger with ScanSoft and is reasonably capable of being consummated.
SpeechWorks also has agreed to notify ScanSoft as promptly as practicable
after if it receives any acquisition proposal (as defined above), request for
nonpublic information or inquiry from a third party regarding the making of an
acquisition proposal or as to the manner in which such third party could proceed
with the making of an acquisition proposal, and to provide ScanSoft with oral
and written notice of the material terms and conditions of the proposal, request
or inquiry, the identity of the person or group making the proposal, request or
inquiry and a copy of such written proposal, request or inquiry. SpeechWorks has
further agreed to provide ScanSoft with oral and written notice as promptly as
practicable setting forth reasonable details of any material amendments or
proposed material amendments to the proposal, request or inquiry and to keep
ScanSoft informed, on a current basis, of all material developments with respect
to the status of any negotiations or related discussions in connection with such
acquisition proposal. In addition, SpeechWorks and its subsidiaries have agreed
to cease immediately all
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existing activities, discussions or negotiations with any third parties with
respect to any acquisition proposal.
SPEECHWORKS BOARD OF DIRECTORS RECOMMENDATIONS
The merger agreement requires the SpeechWorks board of directors:
- to recommend that its stockholders vote in favor of the adoption of the
merger agreement and approval of the merger; and
- not to withdraw, amend or modify, or to propose to withdraw amend or
modify, its recommendation of the merger in a manner adverse to ScanSoft.
However, in response to an acquisition proposal, the SpeechWorks board of
directors may withhold, withdraw, amend or modify its recommendation in favor of
the merger and, in the case of a superior offer that is a tender or exchange
offer made directly to the stockholders of SpeechWorks, recommend that the
stockholders accept the tender or exchange offer, if:
- the SpeechWorks board of directors determines in good faith that the
acquisition proposal constitutes a superior offer and such acquisition
proposal has been made and has not been withdrawn;
- the SpeechWorks' special meeting of stockholders has not occurred;
- SpeechWorks has delivered to ScanSoft a written notice at least three
business days before effecting its change of recommendation, which notice
states that SpeechWorks has received an acquisition proposal which it has
determined is a superior offer, that the SpeechWorks board of directors
intends to change its recommendation and the manner in which it intends
to do so or may intend to do so; and
- the SpeechWorks board of directors has complied with its non-solicitation
obligations, provided the requisite notice of the acquisition proposal to
ScanSoft and has complied with all specified requirements before
furnishing any nonpublic information or engaging in negotiations with a
third party, including concluding that such change in recommendation is
required for it to comply with its fiduciary duties under applicable law.
During the required three business day notice period, the SpeechWorks board
of directors shall provide ScanSoft the opportunity to make adjustments to the
terms and conditions of the merger, and shall give due consideration to these
alternative proposals.
The merger agreement also permits SpeechWorks to comply with Rule 14d-9 and
Rule 14e-2(a) under the Exchange Act in connection with any third party
acquisition proposal. In addition, the merger agreement does not prohibit the
SpeechWorks board of directors from fulfilling its duty of candor or disclosure
to SpeechWorks stockholders.
The merger agreement requires SpeechWorks to submit the adoption of the
merger agreement and approval of the merger to a stockholder vote even if the
SpeechWorks board of directors no longer recommends adoption of the merger
agreement and approval of the merger.
SCANSOFT BOARD OF DIRECTORS RECOMMENDATIONS
The merger agreement requires that the ScanSoft board of directors:
- recommend that its stockholders vote in favor of the issuance of shares
of ScanSoft common stock in connection with the merger; and
- not withdraw, amend or modify, or propose to withdraw amend or modify,
its recommendation that ScanSoft stockholders vote in favor of the stock
issuance.
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However, the merger agreement does not prohibit the board of directors of
ScanSoft from fulfilling its duty of candor or disclosure to ScanSoft
stockholders.
DEFINITION OF MATERIAL ADVERSE EFFECT
Under the terms of the merger agreement, a material adverse effect on
either ScanSoft, Spiderman Acquisition Corporation or SpeechWorks is defined to
mean any change, event, violation, inaccuracy, circumstance or effect,
individually or when taken together, that is or is reasonably likely (i) to be
materially adverse to the business, assets (including intangible assets),
capitalization, financial condition or results of operations of the respective
company taken as a whole with its subsidiaries or (ii) to materially impede the
authority of the respective company to complete the transactions contemplated by
the merger agreement in accordance with its terms and applicable law.
However, under the terms of the merger agreement, for purposes of clause
(i) above, none of the following, individually or in combination, will be deemed
to constitute, and none of the following will be taken into account in
determining, whether there has been or will be, a material adverse effect on
ScanSoft, Spiderman Acquisition Corporation or SpeechWorks, as the case may be:
- any change, event, violation, inaccuracy, circumstance or effect
resulting from compliance with the terms and conditions of the merger
agreement;
- any change, event, violation, inaccuracy, circumstance or effect
resulting from the announcement or pendency of the merger, provided that
this exception does not apply to any breach of a company's respective
representations and warranties with respect to (1) intellectual property
and (2) material contracts, which shall be considered for purposes of
determining whether there has been a material adverse effect, even if
such breaches result from the announcement or pendency of the merger;
- any change in the stock price or trading volume, of ScanSoft or
SpeechWorks, as the case may be;
- any change, event, violation, inaccuracy, circumstance or effect
resulting from changes affecting any of the industries in which the
respective company operates generally or the United States economy
generally (which changes in each case do not disproportionately affect
ScanSoft, Spiderman Acquisition Corporation or SpeechWorks, as the case
may be, in any material respect); or
- any change, event, violation, inaccuracy, circumstance or effect
resulting from changes affecting generally worldwide economic or capital
market conditions (which changes in each case do not disproportionately
affect ScanSoft, Spiderman Acquisition Corporation or SpeechWorks, as the
case may be, in any material respect).
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated in accordance with its terms at any
time, except as set forth below, prior to completion of the merger, whether
before or after adoption of the merger agreement and approval of the merger by
SpeechWorks stockholders or the approval of the issuance of shares of ScanSoft
common stock in connection with the merger by ScanSoft stockholders:
- by mutual written consent of ScanSoft and SpeechWorks;
- by ScanSoft or SpeechWorks if the merger is not completed by October 15,
2003 (which will be extended by one day for each day the merger is
delayed as a result of a pending acquisition of all or substantially all
of the assets or all of the securities of ScanSoft as a result of which
the stockholders of ScanSoft would own less than 50% of the surviving
entity), except that this right to terminate the merger agreement is not
available to any party whose action or failure to act has been a
principal cause of or resulted in the failure of the merger to occur on
or before that date, and the action or failure to act constitutes a
material breach of the merger agreement;
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- by ScanSoft or SpeechWorks, if there is any order of a court or other
action or inaction of any governmental entity having the effect of
permanently restraining, enjoining or prohibiting the completion of the
merger which is final and nonappealable;
- by ScanSoft or SpeechWorks if the proposal for the issuance of shares of
ScanSoft common stock in connection with the merger fails to receive the
requisite affirmative vote by ScanSoft stockholders at the ScanSoft
special meeting or at any adjournment of that meeting, except that the
right to terminate the merger agreement is not available to ScanSoft
where the failure to obtain ScanSoft stockholder approval was caused by
ScanSoft's action or failure to act and the action or failure to act
constitutes a material breach by ScanSoft of the merger agreement;
- by ScanSoft or SpeechWorks if the proposal for the adoption of the merger
agreement and approval of the merger fails to receive the requisite
affirmative vote at the SpeechWorks special meeting or at any adjournment
of that meeting, except that this right to terminate the merger agreement
is not available to SpeechWorks where the failure to obtain SpeechWorks
stockholder approval was caused by SpeechWorks' action or failure to act,
and the action or failure to act constitutes a material breach by
SpeechWorks of the merger agreement;
- by ScanSoft, at any time prior to the adoption of the merger agreement
and the approval of the merger by the required vote of SpeechWorks
stockholders, if any of the following "triggering events" occur with
respect to SpeechWorks:
- the SpeechWorks board of directors withdraws, amends or modifies, in a
manner adverse to ScanSoft, its recommendation described in the section
entitled "Agreements Related to the Merger -- The Merger
Agreement -- SpeechWorks Board of Directors Recommendations" beginning
on page 88 of this joint proxy statement/prospectus;
- it fails to include in this joint proxy statement/prospectus the
recommendation of its board of directors;
- the SpeechWorks board of directors fails to reaffirm (publicly, if
ScanSoft requests) its recommendation that its stockholders vote in
favor of the adoption of the merger agreement and approval of the merger
within 10 business days after being requested in writing by ScanSoft to
reaffirm such recommendation following public announcement of an
acquisition proposal;
- the SpeechWorks board of directors approves or recommends any
acquisition proposal of the type described in the section entitled
"Agreements Related to the Merger -- The Merger Agreement -- Alternative
Transactions" beginning on page 86 of this joint proxy
statement/prospectus; or
- a tender or exchange offer relating to SpeechWorks securities is
initiated by a third party and SpeechWorks does not send to its
securityholders, pursuant to Rule 14e-2 promulgated under the Exchange
Act within 10 business days after the tender or exchange offer is first
published, sent or given, a statement disclosing that its board of
directors recommends rejection of the tender or exchange offer;
- by SpeechWorks upon a breach of any representation, warranty, covenant or
agreement on the part of ScanSoft in the merger agreement or if any
representation or warranty of ScanSoft has become untrue so that the
condition to completion of the merger regarding ScanSoft's
representations and warranties or covenants would not be met. However, if
the breach or inaccuracy is curable by ScanSoft by the termination date
of the merger agreement through the exercise of reasonable efforts, then
SpeechWorks may not terminate the merger agreement for 30 days after
receipt of written notice from SpeechWorks to ScanSoft of the breach, so
long as ScanSoft continues to use all commercially reasonable efforts to
cure the breach during this period. If the breach is cured during those
30 days, or if SpeechWorks is otherwise in material breach of the merger
agreement, SpeechWorks may not exercise this termination right;
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- by ScanSoft upon a breach of any representation, warranty, covenant or
agreement on the part of SpeechWorks in the merger agreement or if any
representation or warranty of SpeechWorks has become untrue so that the
condition to completion of the merger regarding SpeechWorks'
representations and warranties or covenants would not be met. However, if
the breach or inaccuracy is curable by SpeechWorks by the termination
date of the merger agreement through the exercise of reasonable efforts,
then ScanSoft may not terminate the merger agreement for 30 days after
receipt of written notice from ScanSoft to SpeechWorks of the breach, so
long as SpeechWorks continues to use all commercially reasonable efforts
to cure the breach during this period. If the breach is cured during
those 30 days, or if ScanSoft is otherwise in material breach of the
merger agreement, ScanSoft may not exercise this termination right;
- by ScanSoft, if there is a material adverse effect on SpeechWorks since
April 23, 2003; or
- by SpeechWorks, if there is a material adverse effect on ScanSoft since
April 23, 2003.
PAYMENT OF TERMINATION FEE
Under the terms of the merger agreement, ScanSoft must pay a termination
fee of $6.5 million to SpeechWorks if all of the following conditions are met:
- between April 23, 2003 and the date of the ScanSoft special meeting there
has been public disclosure of a bona fide written offer made by a third
party to acquire, directly or indirectly, pursuant to a tender offer,
exchange offer, merger, consolidation or other business combination, all
or substantially all of the assets of ScanSoft or all of the outstanding
voting securities of ScanSoft and as a result of which the stockholders
of ScanSoft immediately preceding the transaction would hold less than
50% of the equity interest in the surviving or resulting entity of such
transaction, or any direct or indirect subsidiary thereof;
- the merger agreement has been terminated because the ScanSoft
stockholders failed to approve the issuance of shares of ScanSoft common
stock in connection with the merger at the ScanSoft special meeting or an
adjournment of that meeting; and
- such acquisition is consummated within 12 months following termination of
the merger agreement.
If all of these conditions are met, ScanSoft must pay the termination fee
to SpeechWorks within two business days following the acquisition of ScanSoft.
Under the terms of the merger agreement, SpeechWorks must pay a termination
fee of $6.5 million to ScanSoft if all of the following conditions are met:
- between April 23, 2003 and the termination of the merger agreement there
has been public disclosure of an acquisition proposal by a third party
with respect to SpeechWorks of the type described in the section entitled
"Agreements Related to the Merger -- The Merger Agreement -- Alternative
Transactions" beginning on page 86 of this joint proxy
statement/prospectus; and
- the merger agreement has been terminated on either of the following
bases:
- the merger has not been completed by October 15, 2003 (or such later
date representing an extension as a result of a pending acquisition of
ScanSoft, as described above); or
- SpeechWorks stockholders failed to adopt the merger agreement and
approve the merger at the SpeechWorks special meeting or an adjournment
of that meeting; and
- either of the following has occurred:
- within 12 months following termination of the merger agreement,
SpeechWorks is the subject of an acquisition of the type described
below; or
- within 12 months following termination of the merger agreement,
SpeechWorks enters into an agreement contemplating an acquisition of it
in the type described below and, within 24 months
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following the termination of the merger agreement, an acquisition of the
type described below is completed.
In this case, the termination fee must be paid to ScanSoft within two
business days following the acquisition of SpeechWorks.
Under the terms of the merger agreement, an acquisition of SpeechWorks for
the purposes of these termination provisions, means any of the following:
- a merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving SpeechWorks
pursuant to which its stockholders immediately preceding such transaction
hold less than 60% of the aggregate equity interests in the surviving or
resulting entity of such transaction, or any direct or indirect parent
thereof;
- a sale or other disposition by SpeechWorks of assets representing in
excess of 40% of the aggregate fair market value of its business,
immediately prior to such sale; or
- the acquisition by any person or group, including by way of a tender
offer or an exchange offer or issuance by SpeechWorks, directly or
indirectly, of beneficial ownership or a right to acquire beneficial
ownership of shares representing in excess of 40% of the voting power of
the then outstanding shares of SpeechWorks capital stock.
In addition, SpeechWorks must pay a termination fee of $6.5 million to
ScanSoft if the merger agreement is terminated by ScanSoft as a result of the
occurrence of any of the conditions described above under the sixth bullet of
the section entitled "Agreements Related to the Merger -- The Merger
Agreement -- Termination of the Merger Agreement" with respect to SpeechWorks.
In this event, the termination fee must be paid to ScanSoft within two business
days following the termination by ScanSoft.
Payment of a termination fee by ScanSoft or SpeechWorks is not in lieu of
damages incurred in the event of breach of the merger agreement. If the party
entitled to payment of the termination fee has to make a claim against the other
party to obtain such payment and such claim results in a judgment against the
other party, the party required to pay the termination fee will also have to pay
the other party's reasonable costs and expenses, including reasonable attorneys'
fees and expenses, in connection with the suit together with interest on the
unpaid termination fee.
COSTS AND EXPENSES
In general, all costs and expenses incurred in connection with the merger
agreement will be paid by the party incurring such expenses whether or not the
merger is consummated, except that those expenses incurred in connection with
filing the registration statement of which this joint proxy statement/prospectus
is a part, including any amendments, printing and filing this joint proxy
statement/prospectus and making required filings under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 or other similar foreign merger notification
laws will be shared equally by ScanSoft and SpeechWorks.
SCANSOFT VOTING AGREEMENTS
The following is a summary of certain material provisions of the ScanSoft
voting agreements. This summary is qualified in its entirety by reference to the
form of voting agreement, a copy of which is attached as Annex D to this joint
proxy statement/prospectus and is incorporated into this joint proxy
statement/prospectus by reference.
AGREEMENT TO VOTE
Each of Wayne Crandall, Robert Frankenberg, Katharine Martin, Jeanne
McCann, Mark Myers, Richard Palmer, Paul Ricci, Robert Teresi, Michael Tivnan,
Robert Weideman and Ben Wittner has entered into a voting agreement with
SpeechWorks. Each of these ScanSoft directors and executive officers has agreed
to vote his or her shares of ScanSoft common stock, and all options, warrants
and other rights to acquire shares of ScanSoft common stock, in favor of the
issuance of shares of ScanSoft common
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stock in connection with the merger, against any proposal in competition with
the merger as contemplated by the merger agreement, against any action that
would delay or prevent the merger, against any proposal that would result in a
breach by ScanSoft of the merger agreement and against an election of a group of
individuals to replace a majority or more of the individuals on the board of
directors of ScanSoft. Each stockholder's obligation to vote in this manner
applies whether or not the ScanSoft board of directors continues to recommend
the merger to ScanSoft stockholders. These stockholders have the right, as of
June 27, 2003, to vote a total of 579,948 shares of ScanSoft common stock, or
approximately 1.0% of the outstanding shares of ScanSoft common stock as of such
date.
Each stockholder has also granted the directors on the board of directors
of SpeechWorks an irrevocable proxy to vote the shares of ScanSoft common stock
owned by such stockholder, including additional shares of ScanSoft common stock
subsequently acquired, as described above.
TRANSFER RESTRICTIONS
The voting agreement, subject to certain exceptions, restricts or limits
the ability of each stockholder that is a party to the agreement to sell,
tender, transfer, pledge, encumber, assign or otherwise dispose of any of his or
her shares of ScanSoft common stock, or to agree to do the foregoing, other than
with SpeechWorks' prior written consent.
Several exceptions to this restriction exist, such as (i) the authorization
for certain officers and directors to sell shares of ScanSoft common stock
pursuant to 10b5-1 plans, and (ii) the authorization for Michael Tivnan to sell
up to 300,000 shares of ScanSoft common stock.
TERMINATION
The irrevocable proxy and voting agreement will terminate upon the earlier
to occur of:
- the completion of the merger;
- the termination of the merger agreement in accordance with its terms; or
- the date as of which the stockholder's employment with ScanSoft has been
terminated by ScanSoft.
SPEECHWORKS VOTING AGREEMENTS
The following is a summary of certain material provisions of the
SpeechWorks voting agreements. This summary is qualified in its entirety by
reference to the form of voting agreement, a copy of which is attached as Annex
E to this joint proxy statement/prospectus and is incorporated into this joint
proxy statement/prospectus by reference.
AGREEMENT TO VOTE
Each of Axel Bichara, Richard Burnes, Steven Chambers, Robert Finch, John
Freker, W. Robert Kellegrew, Stuart Patterson, Michael Phillips and Richard
Westelman has entered into a voting agreement with ScanSoft. Each of these
SpeechWorks directors and executive officers has agreed to vote his or her
shares of SpeechWorks common stock, and any and all options, warrants and other
rights to acquire shares of SpeechWorks common stock, (i) in favor of the merger
and the adoption and approval of the merger agreement, (ii) against any proposal
made in opposition to or in competition with the merger, (iii) against any
action that would delay, interfere or prevent the merger, (iv) against any
proposal that would result in a breach by SpeechWorks of the merger agreement,
and (v) against an election of a group of individuals to replace a majority or
more of the individuals on the SpeechWorks board of directors. Each
stockholder's obligation to vote in this manner applies whether or not the
SpeechWorks board of directors continues to recommend the merger to SpeechWorks
stockholders. These stockholders have the right, as of June 27, 2003, to vote a
total of 3,051,900 shares of SpeechWorks common stock, or approximately 8.8% of
the outstanding shares of SpeechWorks common stock as of such date.
93
Each stockholder has also granted the directors on the board of directors
of ScanSoft an irrevocable proxy to vote the shares of SpeechWorks common stock
owned by such stockholder, including additional shares of SpeechWorks common
stock subsequently acquired, as described above.
TRANSFER RESTRICTIONS
The voting agreement, subject to certain exceptions, restricts or limits
the ability of each stockholder that is a party to the agreement to sell,
transfer, tender pledge, encumber, assign or otherwise dispose of any of his or
her shares of SpeechWorks common stock, or to agree to do the foregoing, other
than with ScanSoft's prior written consent. One exception to this restriction
allows each stockholder to sell shares of SpeechWorks common stock issued after
the initial filing of this joint proxy statement/prospectus upon the exercise of
stock options and to sell shares of restricted common stock that have had
vesting accelerated in connection with the merger. In addition, the voting
agreement entered into by William O'Farrell, a member of the SpeechWorks board
of directors, allows him to sell any or all of his shares of SpeechWorks common
stock and the voting agreement entered into by Michael Phillips, a director and
Chief Technology Officer of Speechworks, allows him to sell up to 200,000 of his
shares of SpeechWorks common stock.
SpeechWorks cannot determine the number of options that SpeechWorks
employees, officers and directors will exercise and, with respect to the shares
of SpeechWorks common stock issued upon exercise, sell prior to the effective
time of the merger. SpeechWorks expects, however, that all optionholders will
exercise their in-the-money options prior to the closing of the merger and that
most optionholders, including SpeechWorks executive officers and directors, will
elect to sell at least the portion of the shares issued upon exercise as is
necessary to recoup the exercise price and pay any tax liabilities which the
optionholder incurs in connection with the option exercise. In addition,
executive officers and directors and other employees may for personal reasons,
including to diversify their investment holdings, elect to sell the remaining
shares acquired upon exercise of options prior to the closing of the merger.
TERMINATION
The irrevocable proxy and voting agreement will terminate upon the earlier
to occur of:
- the completion of the merger;
- the termination of the merger agreement in accordance with its terms; or
- the date as of which the stockholder's employment with SpeechWorks has
been terminated by SpeechWorks.
AFFILIATE AGREEMENTS
Each executive officer and director of SpeechWorks executed affiliate
agreements in his or her capacity as a stockholder. Under the affiliate
agreements, ScanSoft will be entitled to place appropriate legends on the
certificates evidencing any ScanSoft common stock to be received by each of the
persons who have entered into an affiliate agreement and to issue stop transfer
instructions to the transfer agent for ScanSoft common stock.
EMPLOYMENT AGREEMENTS
Stuart R. Patterson. On April 23, 2003, in connection with the execution
of the merger agreement, ScanSoft entered into an employment agreement with Mr.
Stuart R. Patterson, Chief Executive Officer of SpeechWorks, which is effective
upon the closing of the merger. Under the agreement, Mr. Patterson will serve as
President of ScanSoft and a member of its board of directors commencing with the
closing of the merger. Mr. Patterson will receive an annual base salary of
$275,000 through the first year of his employment, $300,000 through the second
year of his employment and $325,000 through the third year of his employment. If
other terms have not been agreed to by Mr. Patterson and ScanSoft, the base
salary will increase by $25,000 each year thereafter. For each fiscal year that
Mr. Patterson serves as President, Mr. Patterson will be eligible to receive a
bonus of up to 50% of his then annual base salary upon the
94
achievement of performance criteria established by the ScanSoft compensation
committee within four months of the commencement date of the applicable bonus
period. In addition, on the first anniversary of the effective date of the
merger, if ScanSoft has achieved certain performance goals related to the
integration of SpeechWorks and ScanSoft, then 50% of any then unvested shares of
SpeechWorks restricted common stock that were assumed in the merger by ScanSoft
will vest. Mr. Patterson's employment agreement may be terminated at any time,
upon 90 days written notice, with or without cause.
On the closing date of the merger, Mr. Patterson will be granted a stock
option to purchase an aggregate of 1,000,000 shares of ScanSoft common stock at
an exercise price equal to the fair market value of ScanSoft common stock on the
date of grant. The stock option will vest as to 1/16 of the original number of
shares subject to the option commencing on the date that is three months from
the closing date of the merger and on each three-month period thereafter. Under
the employment agreement, Mr. Patterson will also be entitled to participate in
the employee benefit plans of ScanSoft in which other ScanSoft senior executive
officers are entitled to participate, including medical, dental and life
insurance plans.
If Mr. Patterson's employment is terminated by Mr. Patterson after the one
year anniversary of the effective date of the merger or, at any time, for a
reason other than (i) cause, (ii) good reason or (iii) death or disablement,
then, subject to Mr. Patterson's compliance with the surviving provisions of a
confidentiality agreement entered into with ScanSoft and his execution of a
general release for the benefit of ScanSoft, Mr. Patterson is entitled to
receive the following benefits:
- payment of his then annual base salary during the applicable severance
period, which ranges from 18 months if termination occurs within six
months of the merger to 12 months if termination occurs after 12 months
of the merger;
- continued participation in the employee benefit plans of ScanSoft; and
- acceleration of any then unvested options to purchase shares of ScanSoft
common stock or restricted common stock of ScanSoft that would have
vested during the applicable severance period, with the right to exercise
any vested stock option until the earlier of one year from the date of
termination or the expiration of the applicable stock option.
In addition to any other benefits Mr. Patterson may be entitled to, if,
within six months following a change of control of ScanSoft, Mr. Patterson's
employment is terminated for a reason other than (i) cause, (ii) good reason or
(iii) death or disablement, then, subject to Mr. Patterson's compliance with the
confidentiality agreement and his execution of a general release, Mr. Patterson
is entitled to full acceleration of any then unvested options to purchase shares
of ScanSoft common stock or restricted common stock of ScanSoft.
Richard J. Westelman. SpeechWorks is a party to an at-will employment
agreement with Mr. Richard J. Westelman, Chief Financial Officer of SpeechWorks,
dated June 21, 2000. Under the agreement, Mr. Westelman currently receives a
base salary of $162,000. If Mr. Westelman is terminated without cause, all
outstanding options previously granted to him will become immediately
exercisable to the extent that they are not already vested, and SpeechWorks,
including as the surviving corporation in the merger, is required to pay Mr.
Westelman his then current base salary for a period of 12 months and his health
insurance premiums for the earlier of 12 months or until he becomes eligible for
another comparable plan. In addition, if Mr. Westelman is terminated without
cause, his employment agreement provides that he is entitled to receive a
one-year recourse loan from SpeechWorks for up to $426,000 at the prime rate to
enable him to exercise his stock options. If Mr. Westelman voluntarily
terminates his employment, 50% of all outstanding options previously granted to
him which are then unvested will become immediately exercisable, and SpeechWorks
is required to pay Mr. Westelman his then current base salary for six months and
his health insurance premiums for the earlier of six months or until he becomes
eligible for another comparable plan.
95
AMENDMENT OF THE SCANSOFT 1995 EMPLOYEE STOCK PURCHASE PLAN
The ScanSoft 1995 Employee Stock Purchase Plan (the "1995 ESPP") provides
ScanSoft employees with an opportunity to purchase ScanSoft common stock through
accumulated payroll deductions. Employees make such purchases by participation
in regular offering periods from which they may withdraw at any time.
The ScanSoft board of directors has approved an amendment to the 1995 ESPP,
subject to stockholder approval, to increase the number of shares authorized for
issuance thereunder from 1,000,000 to 1,500,000. If the amendment is approved,
Section 12 of the 1995 ESPP would read in its entirety as follows:
"The maximum number of shares of Common Stock which shall be made
available for sale under the Plan shall be one million five hundred
thousand (1,500,000) shares, subject to adjustment upon changes in
capitalization of the Company as provided in Section 18." (Change shown
in italics.)
PLAN DESCRIPTION
GENERAL
The 1995 ESPP is intended to qualify under the provisions of Section 423 of
the Code, is not a qualified deferred compensation plan under Section 401(a) of
the Code, and is not subject to the provisions of ERISA. A total of 1,000,000
shares are currently authorized to be issued under the 1995 ESPP. As of December
31, 2002, a total of 688,388 shares had been issued to ScanSoft's employees
under the 1995 ESPP, and 311,612 shares remained available for future issuance.
The average per share issuance price for shares purchased by employees under the
1995 ESPP to date is approximately $2.74. As of December 31, 2002, approximately
264 employees were eligible to participate in the 1995 ESPP.
PURPOSE
The purpose of the 1995 ESPP is to provide employees with an opportunity to
purchase ScanSoft common stock through accumulated payroll deductions. Employees
make such purchases by participation in regular offering periods from which they
may withdraw at any time.
ADMINISTRATION
The 1995 ESPP may be administered by the ScanSoft board of directors or a
committee appointed by the ScanSoft board of directors. Currently the 1995 ESPP
is administered by the ScanSoft board of directors. The ScanSoft board of
directors or its committee has full power to adopt, amend and rescind any rules
deemed desirable and appropriate for the administration of the 1995 ESPP, to
construe and interpret the 1995 ESPP, and to make all other determinations
necessary or advisable for the administration of the 1995 ESPP.
ELIGIBILITY
Any person who, on the first day of an offering period, is customarily
employed by ScanSoft for at least 20 hours per week and more than five months in
any calendar year is eligible to participate in the 1995 ESPP.
OFFERING DATES
In general, the 1995 ESPP is implemented by a series of offering periods of
12 months duration, with new offering periods commencing on or about February 16
and August 16 of each year. Each offering period consists of two consecutive
purchase periods of six months duration, with the last day of such period being
designated a purchase date. The ScanSoft board of directors has the power to
change the duration and frequency of the offering and purchase periods with
respect to future offerings without stockholder approval if such change is
announced at least fifteen days prior to the scheduled beginning of the first
offering or purchase period to be affected.
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PARTICIPATION IN THE PLAN
Eligible employees may participate in the 1995 ESPP by completing an
enrollment form provided by ScanSoft and filing it with ScanSoft prior to the
applicable offering date, unless a later time for filing the enrollment form is
set by the ScanSoft board of directors for all eligible employees with respect
to a given offering. The enrollment form currently authorizes payroll deductions
of not less than 1% and not more than 12% of the participant's eligible
compensation on the date of the purchase.
PURCHASE PRICE
The purchase price per share sold under the 1995 ESPP is a price equal to
the lower of 85% of the fair market value of the common stock at the beginning
of the offering period or the purchase date. The fair market value is the per
share closing price of the common stock on the NASDAQ National Market as of such
date reported by NASDAQ.
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS
The purchase price of the shares is accumulated by payroll deductions
during the offering period. The deductions may be up to 12% of a participant's
eligible compensation received on each payday during the offering period.
Eligible compensation is defined in the 1995 ESPP to include the regular
straight time gross earnings excluding payments for overtime, shift premium,
incentive compensation, bonuses and commissions. A participant may discontinue
his or her participation in the 1995 ESPP at any time during the offering period
prior to a purchase date, and may decrease the rate of his or her payroll
deductions once during the offering period by completing and filing a new
enrollment form. No interest accrues on the payroll deductions of a participant
in the 1995 ESPP.
PURCHASE OF STOCK; EXERCISE OF OPTION
By executing an enrollment form to participate in the 1995 ESPP, the
participant is entitled to have shares placed under option. Unless the
participant's participation is discontinued, each participant's option for the
purchase of shares will be exercised automatically at the end of each purchase
period at the applicable price. Notwithstanding the foregoing, no participant
shall be permitted to subscribe for shares under the 1995 ESPP if immediately
after the grant of the option he or she would own 5% or more of the voting power
or value of all classes of ScanSoft's stock or of any of ScanSoft's subsidiaries
(including stock which may be purchased under the 1995 ESPP or pursuant to any
other options), nor shall any participant be granted an option which would
permit the participant to buy pursuant to all of ScanSoft's employee stock
purchase plans more than $25,000 worth of stock (determined at the fair market
value of the shares at the time the option is granted) in any calendar year.
TERMINATION OF EMPLOYMENT
Upon termination of a participant's continuous status as an employee prior
to the purchase date of an offering period for any reason, including retirement
or death, he or she will be deemed to have elected to withdraw from the Plan and
the contributions credited to his or her account but not yet used to exercise
his or her option under the Plan will be returned to him or her.
NONTRANSFERABILITY
No rights or accumulated payroll deductions of a participant under the 1995
ESPP may be pledged, assigned or transferred for any reason.
AMENDMENT AND TERMINATION OF THE PLAN
The board of directors may at any time amend or terminate the 1995 ESPP,
except that such termination shall not affect options previously granted.
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CERTAIN FEDERAL INCOME TAX INFORMATION
The following brief summary of the effect of federal income taxation upon
the participant and ScanSoft with respect to the shares purchased under the 1995
ESPP does not purport to be complete, and does not discuss the tax consequences
of a participant's death or the income tax laws of any state or foreign country
in which the participant may reside.
The 1995 ESPP, and the right of participants to make purchases thereunder,
is intended to qualify under the provisions of Sections 421 and 423 of the Code.
Under these provisions, no income will be taxable to a participant until the
shares purchased under the ScanSoft ESPP are sold or otherwise disposed of. Upon
sale or other disposition of the shares, the participant will generally be
subject to tax in an amount that depends upon the holding period. If the shares
are sold or otherwise disposed of more than two years from the first day of the
applicable offering period and one year from the applicable date of purchase,
the participant will recognize ordinary income measured as the lesser of (a) the
excess of the fair market value of the shares at the time of such sale or
disposition over the purchase price, or (b) an amount equal to 15% of the fair
market value of the shares as of the first day of the applicable offering
period. Any additional gain will be treated as long-term capital gain. If the
shares are sold or otherwise disposed of before the expiration of these holding
periods, the participant will recognize ordinary income generally measured as
the excess of the fair market value of the shares on the date the shares are
purchased over the purchase price. Any additional gain or loss on such sale or
disposition will be long-term or short-term capital gain or loss, depending on
how long the shares have been held from the date of purchase. ScanSoft generally
is not entitled to a deduction for amounts taxed as ordinary income or capital
gain to a participant except to the extent of ordinary income recognized by
participants upon a sale or disposition of shares prior to the expiration of the
holding periods described above.
VOTE REQUIRED; RECOMMENDATION OF THE SCANSOFT BOARD OF DIRECTORS
The proposal to amend the ScanSoft 1995 ESPP requires the affirmative vote
of a majority of the votes of ScanSoft common stock, voting as a single class,
cast at the ScanSoft special meeting.
THE SCANSOFT BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SCANSOFT
STOCKHOLDERS VOTE FOR THE PROPOSED AMENDMENT OF THE SCANSOFT 1995 EMPLOYEE STOCK
PURCHASE PLAN.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information, as of December 31, 2002
concerning shares of common stock authorized for issuance under all of
ScanSoft's equity compensation plans (shares in thousands).
(C)
NUMBER OF SECURITIES
(A) REMAINING AVAILABLE FOR
NUMBER OF (B) FUTURE ISSUANCE UNDER
SECURITIES TO BE WEIGHTED AVERAGE EQUITY COMPENSATION
ISSUED UPON EXERCISE PRICE OF PLANS (EXCLUDING
EXERCISE OF OUTSTANDING SECURITIES REFLECTED IN
OPTIONS OPTIONS COLUMN (A))
---------------- ----------------- ------------------------
Equity compensation plans approved
by shareholders.................. 7,823,849(1) $2.89 2,542,230(2)
Equity compensation plans not
approved by shareholders......... 7,321,858(3) $3.54 651,779
---------- ----- ---------
Total equity compensation
plans(4)......................... 15,145,707 $3.20 3,194,009
========== ===== =========
---------------
(1) Includes 522,816 stock options that ScanSoft assumed in connection with the
Caere acquisition.
(2) Of these shares, 311,612 shares remain available for purchase under the 1995
ESPP.
(3) Includes a non-plan option granted to Paul Ricci (1,500,000 shares) and a
non-plan option granted to Michael Tivnan (10,000 shares).
(4) See the section entitled "ScanSoft Compensation Plans" for a description of
ScanSoft's equity compensation plans.
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SELECTED FINANCIAL DATA OF SCANSOFT
The following selected consolidated financial data is not necessarily
indicative of the results of future operations and should be read in conjunction
with "ScanSoft's Management's Discussion and Analysis of Financial Condition and
Results of Operations" and ScanSoft's consolidated financial statements and
related notes included elsewhere in this joint proxy statement/prospectus. See
"Where You Can Find More Information" on page 171. This selected consolidated
financial data reflects the adoption of EITF 01-9, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products),
as described in Note 2 to the Notes to the Consolidated Financial Statements
included elsewhere in the joint proxy statement/prospectus.
The statement of operations data for the years ended December 31, 2002,
2001, and 2000 and the balance sheet data as of December 31, 2002 and 2001 have
been derived from ScanSoft's consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, included elsewhere in this
joint proxy statement/prospectus. The statement of operations data for the three
months ended March 31, 2003 and 2002 and the balance sheet data as of March 31,
2003 have been derived from ScanSoft's unaudited consolidated financial
statements included elsewhere in this joint proxy statement/ prospectus, which
in the opinion of ScanSoft's management, reflect all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of the
financial position and results of operations for these periods.
On March 2, 1999, ScanSoft's predecessor acquired ScanSoft, Inc., an
indirect wholly owned subsidiary of Xerox Corporation. On June 30, 1999,
ScanSoft acquired certain assets and liabilities of MetaCreations Corporation.
On March 13, 2000, ScanSoft acquired Caere Corporation. On December 12, 2001,
ScanSoft acquired substantially all of the speech and language technology
operations of Lernout & Hauspie Speech Products N.V. ("L&H"). On January 30,
2003, ScanSoft acquired the Philips Speech Processing Telephony and Voice
Control business units of Royal Philips Electronics ("PSP"). These acquisitions
were each accounted for under the purchase method of accounting. Accordingly,
the results of operations from the ScanSoft, MetaCreations, Caere, L&H and PSP
acquisitions are included in ScanSoft's results of operations from the
applicable acquisition dates.
Through December 1998, ScanSoft developed and sold scanner hardware and
software products. On January 6, 1999, ScanSoft sold its hardware business.
Accordingly, the results of the hardware business are included in ScanSoft's
results of operations through the date of disposal.
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- --------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenue..................... $27,836 $23,765 $106,619 $ 62,717 $ 47,961 $31,629 $79,070
------- ------- -------- -------- -------- ------- -------
Costs and expenses:
Cost of revenue................. 4,302 4,129 16,419 12,849 12,692 7,602 59,370
Cost of revenue from
amortization of intangible
assets........................ 2,057 3,542 9,470 14,192 11,569 1,405 --
Research and development........ 7,177 6,986 27,633 13,968 14,967 6,920 4,408
Selling, general and
administrative................ 13,261 9,711 43,771 25,311 27,111 14,509 19,150
Amortization of goodwill and
other intangible assets(1).... 361 957 1,682 13,328 11,017 516 --
Restructuring and other charges,
net(2)(3)..................... 529 1,041 1,041 -- 4,811 346 --
99
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- --------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Acquired in-process research and
development(4)................ -- -- -- -- 18,291 3,944 --
------- ------- -------- -------- -------- ------- -------
Total costs and expenses........ 27,687 26,366 100,016 79,648 100,458 35,242 82,928
------- ------- -------- -------- -------- ------- -------
Income (loss) from operations..... 149 (2,601) 6,603 (16,931) (52,497) (3,613) (3,858)
Other income (expense), net....... 22 (75) (16) (263) (282) 1,015 53
------- ------- -------- -------- -------- ------- -------
Income (loss) before income
taxes........................... 171 (2,676) 6,587 (17,194) (52,779) (2,598) (3,805)
Provision for (benefit from)
income taxes.................... 95 206 254 (317) 472 150 --
------- ------- -------- -------- -------- ------- -------
Net income (loss)................. $ 76 $(2,882) $ 6,333 $(16,877) $(53,251) $(2,748) $(3,805)
======= ======= ======== ======== ======== ======= =======
Net income (loss) per share: basic
and diluted..................... $ 0.00 $ (0.05) $ 0.09 $ (0.34) $ (1.26) $ (0.11) $ (0.19)
======= ======= ======== ======== ======== ======= =======
Weighted average common shares
outstanding:
Basic........................... 67,689 62,304 67,010 49,693 42,107 25,630 19,728
======= ======= ======== ======== ======== ======= =======
Diluted......................... 77,220 62,304 72,796 49,693 42,107 25,630 19,728
======= ======= ======== ======== ======== ======= =======
AS OF AS OF DECEMBER 31,
MARCH 31, --------------------------------------------------
2003 2002 2001 2000 1999 1998
--------- -------- -------- -------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments......... $ 20,277 $ 18,853 $ 14,324 $ 2,633 $ 5,224 $ 8,123
Working capital (deficit)........ 5,314 16,842 9,318 (6,484) 7,031 6,569
Total assets..................... 197,756 143,690 142,070 109,480 29,982 28,445
Long-term liabilities............ 30,969 725 6,370 2,172 -- 91
Total stockholders' equity....... $125,625 $119,378 $114,534 $ 87,461 $21,924 $ 7,582
---------------
(1) See Notes 4 and 5 to Notes to Consolidated Financial Statements.
(2) See Note 8 to Notes to Consolidated Financial Statements.
(3) See Note 9 to Notes to Unaudited Consolidated Financial Statements.
(4) See Note 18 to Notes to Consolidated Financial Statements.
100
SELECTED QUARTERLY OPERATING RESULTS OF SCANSOFT
The following table sets forth unaudited quarterly consolidated statement
of operations data for the nine quarters ended March 31, 2003 as well as the
percentage of total revenue represented by each item. The information for each
of these quarters has been prepared on substantially the same basis as the
audited financial statements included elsewhere in this joint proxy
statement/prospectus, and, in the opinion of ScanSoft's management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the results of operations for such periods. This quarterly
information reflects the adoption of EITF 01-9, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products),
as described in Note 2 to the Notes to the Consolidated Financial Statements
included elsewhere in the joint proxy statement/prospectus. The financial data
as presented in table should be read in conjunction with such consolidated
financial statements. These quarterly operating results are not necessarily
indicative of the operating results for the full year ending December 31, 2003
or any future period.
QUARTER ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2003 2002 2002 2002 2002 2001 2001 2001 2001
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenue................ $27,836 $28,435 $28,235 $26,184 $23,765 $18,587 $16,765 $14,864 $12,501
Costs and expenses:
Cost of revenue.............. 4,302 3,482 4,199 4,609 4,129 3,634 3,497 2,828 2,890
Cost of revenue from
amortization of intangible
assets..................... 2,057 1,976 1,976 1,976 3,542 3,656 3,512 3,512 3,512
Research and development..... 7,177 6,323 7,257 7,067 6,986 3,952 3,581 3,238 3,197
Selling, general and
administrative............. 13,261 11,720 11,412 10,928 9,711 6,367 6,545 6,113 6,286
Amortization of goodwill and
other intangible
assets(1).................. 361 236 236 253 957 3,364 3,321 3,321 3,322
Restructuring and other
charges, net(2)(3)......... 529 -- -- -- 1,041 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses..... 27,687 23,737 25,080 24,833 26,366 20,973 20,456 19,012 19,207
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................. 149 4,698 3,155 1,351 (2,601) (2,386) (3,691) (4,148) (6,706)
Other income (expense),
net........................ 22 162 (168) 65 (75) (137) 12 (5) (133)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes...................... 171 4,860 2,987 1,416 (2,676) (2,523) (3,679) (4,153) (6,839)
Provision for (benefit from)
income taxes............... 95 420 162 (534) 206 (155) (465) 242 61
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............ $ 76 $ 4,440 $ 2,825 $ 1,950 $(2,882) $(2,368) $(3,214) $(4,395) $(6,900)
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Basic...................... $ 0.00 $ 0.07 $ 0.04 $ 0.03 $ (0.05) $ (0.04) $ (0.06) $ (0.09) $ (0.15)
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted.................... $ 0.00 $ 0.06 $ 0.04 $ 0.03 $ (0.05) $ (0.04) $ (0.06) $ (0.09) $ (0.15)
======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding:
Basic...................... 67,689 66,709 67,865 67,595 62,304 52,858 50,875 48,939 46,100
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted.................... 77,220 73,850 74,787 76,677 62,304 52,858 50,875 48,939 46,100
======= ======= ======= ======= ======= ======= ======= ======= =======
101
QUARTER ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2003 2002 2002 2002 2002 2001 2001 2001 2001
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS A PERCENTAGE OF TOTAL
REVENUE:
Total revenue................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue.............. 15.5 12.3 14.9 17.6 17.4 19.5 20.9 19.1 23.0
Cost of revenue from
amortization of intangible
assets..................... 7.4 7.0 7.0 7.5 14.9 19.5 20.9 23.6 28.0
Research and development..... 25.8 22.2 25.7 27.0 29.3 21.1 21.4 21.9 25.5
Selling, general and
administrative............. 47.6 41.2 40.4 41.7 40.9 34.3 39.0 41.1 50.1
Amortization of goodwill and
other intangible assets.... 1.3 0.8 0.8 1.0 4.0 18.1 19.8 22.3 26.5
Restructuring and other
charges, net............... 1.9 0.0 -- -- 4.4 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses..... 99.5 83.5 88.8 94.8 110.9 112.5 122.0 128.0 153.1
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................. 0.5 16.5 11.2 5.2 (10.9) (12.5) (22.0) (28.0) (53.1)
Other income (expense),
net........................ 0.0 0.6 (0.6) 0.2 (0.3) (0.7) 0.1 0.0 (1.1)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes...................... 0.5 17.1 10.6 5.4 (11.2) (13.2) (21.9) (28.0) (54.2)
Provision for (benefit from)
income taxes............... 0.3 1.5 0.6 (2.0) 0.9 (0.8) (2.7) 1.6 1.0
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............ 0.2% 15.6% 10.0% 7.4% (12.1)% (12.4)% (19.2)% (29.6)% (55.2)%
======= ======= ======= ======= ======= ======= ======= ======= =======
---------------
(1) See Notes 4 and 5 to Notes to Consolidated Financial Statements.
(2) See Note 8 to Notes to Consolidated Financial Statements.
(3) See Note 9 to Notes to Unaudited Consolidated Financial Statements.
102
SELECTED FINANCIAL DATA OF SPEECHWORKS
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of
SpeechWorks and related notes thereto included in SpeechWorks annual reports,
quarterly reports and other information on file with the SEC. See "Where You Can
Find More Information" on page 171.
The statement of operations data for the years ended December 31, 2002,
2001, and 2000 and the balance sheet data as of December 31, 2002 and 2001 have
been derived from SpeechWorks' consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, which have been
incorporated by reference in this joint proxy statement/ prospectus. The
statement of operations data for the years ended December 31, 1999 and 1998 and
the balance sheet data as of December 31, 2000, 1999 and 1998 have been derived
from SpeechWorks' consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, which are not included
elsewhere in this joint proxy statement/ prospectus. The statement of operations
data for the three months ended March 31, 2003 and 2002 and the balance sheet
data as of March 31, 2003 have been derived from SpeechWorks' unaudited
consolidated financial statements, which have been incorporated by reference in
this joint proxy statement/ prospectus, and in the opinion of SpeechWorks'
management, reflect all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations for these periods.
On January 1, 2002, SpeechWorks adopted Statement of Accounting Standards
No. 142, Goodwill and Intangible Assets and ceased amortizing goodwill. During
the year ended December 31, 2001, SpeechWorks' operating results included
$2,677,000 of goodwill amortization expense; there was no goodwill amortization
recorded in years prior to 2001. In addition, certain amounts of SpeechWorks'
financial statements for the years prior to December 31, 2002 have been
reclassified to conform to the presentation in the financial statements for the
year ended December 31, 2002. These reclassifications had no effect on reported
net loss.
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
--------- -------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Product licenses............. $ 4,066 $ 4,595 $ 17,773 $ 25,837 $ 16,356 $ 3,680 $ 1,567
Professional services........ 5,413 5,205 19,663 16,561 11,509 5,944 2,873
Other revenues............... 280 349 1,873 3,051 2,681 4,387 1,410
Non-cash stock
compensation............... (1,028) (676) (3,302) (2,313) (1,208) -- --
------- -------- -------- -------- -------- -------- -------
Total revenue.................. 8,731 9,473 36,007 43,136 29,338 14,011 5,850
------- -------- -------- -------- -------- -------- -------
Costs of revenue:
Cost of product licenses..... 103 36 307 350 214 153 52
Cost of professional
services: non-cash
compensation............... 120 154 554 617 538 139 --
all other expenses......... 3,636 3,178 12,776 13,363 10,796 4,991 1,982
Cost of other revenues....... 301 365 1,991 2,512 1,844 2,987 890
Amortization of purchased
technology................. 374 283 1,284 1,131 -- -- --
------- -------- -------- -------- -------- -------- -------
Total cost of revenue.......... 4,534 4,016 16,912 17,973 13,392 8,270 2,924
------- -------- -------- -------- -------- -------- -------
Gross profit................... 4,197 5,457 19,095 25,163 15,946 5,741 2,926
------- -------- -------- -------- -------- -------- -------
103
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
--------- -------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating expenses:
Selling and marketing:
non-cash stock
compensation............... 345 990 2,859 4,347 2,110 225 --
all other expenses......... 5,774 7,721 29,726 30,846 21,906 9,254 3,867
Research and development:
non-cash stock
compensation............... 106 140 527 559 472 97 --
all other expenses......... 2,800 4,021 14,674 17,076 10,596 5,164 1,881
General and administrative:
non-cash compensation...... 76 106 368 425 398 47 --
all other expenses......... 2,969 3,194 11,467 15,963 11,079 6,693 3,157
Amortization of intangible
assets..................... 958 958 3,832 6,509 1,916 -- --
Restructuring costs.......... 687 -- 8,006 -- -- -- --
------- -------- -------- -------- -------- -------- -------
Total operating expenses....... 13,715 17,130 71,459 75,725 48,477 21,480 8,905
------- -------- -------- -------- -------- -------- -------
Loss from operations........... (9,518) (11,673) (52,364) (50,562) (32,531) (15,739) (5,979)
Interest and other income,
net.......................... 88 172 292 3,758 3,244 276 219
------- -------- -------- -------- -------- -------- -------
Loss before income taxes....... (9,430) (11,501) (52,072) (46,804) (29,287) (15,463) (5,760)
Benefit from (provision for)
income taxes................. (35) 67 (175) 45 309 -- --
------- -------- -------- -------- -------- -------- -------
Net loss....................... (9,395) (11,568) (51,897) (46,849) (29,596) (15,463) (5,760)
======= ======== ======== ======== ======== ======== =======
Accretion and deemed dividends
on redeemable convertible
preferred shareholders....... -- -- -- -- (6,955) (1,904) (789)
------- -------- -------- -------- -------- -------- -------
Net loss attributable to common
stockholders................. $(9,395) $(11,568) $(51,897) $(46,849) $(36,551) $(17,367) $(6,549)
======= ======== ======== ======== ======== ======== =======
Basic and diluted net loss per
common share................. $ (0.28) $ (0.36) $ (1.58) $ (1.46) $ (2.29) $ (3.28) $ (1.44)
======= ======== ======== ======== ======== ======== =======
Shares used in computing basic
and diluted net loss per
common share................. 33,152 32,426 32,750 31,981 15,935 5,298 4,537
======= ======== ======== ======== ======== ======== =======
AS OF AS OF DECEMBER 31,
MARCH 31, ----------------------------------------------------
2003 2002 2001 2000 1999 1998
--------- -------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents..... $42,675 $ 46,901 $ 55,534 $ 99,203 $ 11,474 $ 4,486
Marketable securities......... -- 2,009 24,264 14,370 -- --
Working capital............... 41,579 47,212 79,002 115,920 12,133 5,156
Total assets.................. 79,338 87,829 124,788 144,374 20,566 9,162
Long-term liabilities......... 6,763 6,622 1,201 292 833 161
Redeemable convertible
preferred stock............. -- -- -- -- 43,507 17,749
Total stockholders' equity
(deficit)................... $57,801 $ 65,266 $107,859 $131,439 $(28,248) $(11,457)
104
SELECTED UNAUDITED PRO FORMA COMBINED
FINANCIAL DATA
The following tables show summary unaudited pro forma financial information
as if ScanSoft, SpeechWorks, and the Philips Speech Processing Telephony and
Voice Control business units of Royal Philips Electronics ("PSP") had been
combined as of the beginning of the period for statement of operations purposes
and as if ScanSoft and SpeechWorks had been combined as of March 31, 2003 for
balance sheet purposes. On January 30, 2003, ScanSoft completed the acquisition
of PSP on the terms set forth in the purchase agreement dated October 7, 2002,
as amended. PSP offers speech-enabled services including directory assistance,
interactive voice response and voice portal applications for enterprise
customers, telephony vendors and carriers through its Telephony business unit
and a product portfolio including small footprint speech recognition engines for
embedded applications such as voice-controlled climate, navigation and
entertainment features in automotive vehicles, as well as voice dialing for
mobile phones through its Voice Control business unit. The acquisition of PSP
was accounted for as a purchase of a business. The consolidated balance sheet of
ScanSoft at March 31, 2003 includes the assets acquired and liabilities assumed
of PSP. The results of operations of PSP for the period subsequent to January
30, 2003 are included in the unaudited historical consolidated statement of
operations data of ScanSoft.
The selected unaudited pro forma combined financial data are derived from
the unaudited pro forma combined financial statements, which give effect to
ScanSoft's acquisition of PSP in January 2003 and the proposed merger of
ScanSoft and SpeechWorks using the purchase method of accounting and should be
read in conjunction with the unaudited pro forma combined financial statements
and the notes thereto included in this joint proxy statement/prospectus. The
unaudited pro forma combined financial data are based on estimates and
assumptions, which are preliminary and have been made solely for purposes of
developing such pro forma information. The estimated pro forma adjustments
arising from the acquisitions of PSP and SpeechWorks are derived from the
estimated purchase price and estimated fair values of the assets acquired and
liabilities assumed. The final determination of purchase price, fair value of
the assets acquired and liabilities assumed and resulting goodwill may differ
significantly from that reflected in the pro forma statement of operations and
balance sheet. The pro forma data are presented for illustrative purposes only
and are not necessarily indicative of the operating results or financial
position that would have occurred if each transaction had been consummated as of
January 1, 2002 for the statement of operations or March 31, 2003 for the
balance sheet, respectively, nor are the pro forma data necessarily indicative
of future operating results or financial position.
The selected unaudited pro forma combined financial data should be read in
conjunction with the unaudited pro forma combined financial statements and
related notes thereto, the historical consolidated financial statements of
ScanSoft and PSP, and related notes thereto, and "ScanSoft's Management's
Discussion and Analysis of Financial Condition and Results of Operations",
included in this joint proxy statement/prospectus, and the historical
consolidated financial statements of SpeechWorks, incorporated by reference in
this joint proxy statement/prospectus or as filed by SpeechWorks with the SEC.
See "Where You Can Find More Information" on page 171.
105
YEAR ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, 2003 2002
-------------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
Revenue:
Product licenses..................................... $31,698 $134,550
Professional services................................ 5,300 19,371
Related party........................................ 1,444 6,023
Other revenues....................................... 269 1,787
Non-cash stock compensation.......................... (1,028) (3,302)
------- --------
Total revenue.......................................... 37,683 158,429
------- --------
Costs of revenue:
Cost of product licenses............................. 4,414 19,079
Cost of professional services: non-cash
compensation...................................... 120 554
all other expenses................................ 3,636 12,776
Cost of other revenues............................... 301 1,991
Cost of revenue from amortization of intangible
assets............................................ 2,230 10,485
Research and development: non-cash stock
compensation...................................... 106 527
all other expenses................................ 10,814 52,163
Selling general and administrative: non-cash stock
compensation...................................... 421 3,227
all other expenses................................ 22,878 100,243
Amortization of other intangible assets.............. 835 4,073
Restructuring and other charges...................... 1,216 9,047
------- --------
Total costs and expenses............................... 46,971 214,165
------- --------
Loss from operations................................... (9,288) (55,736)
Other income (expense), net............................ 86 (7)
------- --------
Loss before income taxes............................... (9,202) (55,743)
Provision for income taxes............................. 60 79
------- --------
Net loss............................................... $(9,262) $(55,822)
======= ========
Net loss per common share:
Basic and diluted.................................... $ (0.10) $ (0.60)
Weighted average common shares:
Basic and diluted.................................... 94,902 93,202
AS OF
MARCH 31, 2003
--------------
(IN THOUSANDS)
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 65,470
Working capital............................................. 45,734
Total assets................................................ 390,910
Long-term liabilities....................................... 39,708
Total stockholders' equity.................................. 292,232
106
ADDITIONAL INFORMATION CONCERNING SCANSOFT
SCANSOFT'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On January 3, 2003, ScanSoft paid $3.3 million in full settlement of all
principal and accrued interest on the promissory note issued in connection with
its acquisition of substantially all of the speech and language technology
operations of Lernout & Hauspie Speech Products N.V. ("L&H") on December 12,
2001. Additionally, on December 18, 2002, ScanSoft issued 81,900 and 68,100
shares of its common stock to L&H and L&H Holdings USA, Inc., respectively.
These shares were issued in accordance with the terms and conditions of the
share repurchase agreement entered into with L&H in September 2002.
On January 30, 2003, ScanSoft completed the acquisition of the Speech
Processing Telephony and Voice Control business units of Royal Philips
Electronics N.V. ("Philips"), and related intellectual property, on the terms
set forth in the purchase agreement dated October 7, 2002, as amended. The
Telephony business unit offers speech-enabled services, including directory
assistance, interactive voice response and voice portal applications for
enterprise customers, telephony vendors and carriers. The Voice Control business
unit offers a product portfolio including small footprint speech recognition
engines for embedded applications such as voice-controlled climate, navigation
and entertainment features in automotive vehicles, as well as voice dialing for
mobile phones. As consideration for these business units and intellectual
property, ScanSoft paid 3.1 million euros ($3.4 million) in cash at closing,
subject to adjustment in accordance with the provisions of the purchase
agreement, as amended, and agreed to pay an additional 1.0 million euros in cash
prior to December 31, 2003, issued a 5.0 million euro note due December 31, 2003
and bearing 5.0% interest per annum and issued a $27.5 million three-year, zero-
interest subordinated debenture, convertible at any time at Philips' option into
shares of ScanSoft common stock at $6.00 per share. ScanSoft anticipates that
all related adjustments will be completed no later than December 31, 2003. The
technology acquired includes several speech recognition and voice control
products. In conjunction with the acquisition, the business operations of
ScanSoft were significantly restructured, which has caused disruption in the
employee and customer base of ScanSoft. The Philips operations had consisted of
approximately 250 employees of which ScanSoft hired only 116. Based on its prior
acquisition experience, ScanSoft expects revenue and earnings to be weighted
toward the second half of the year as ScanSoft completes the integration of its
sales team and re-engages Philip customers, partners and channels.
On February 14, 2003, ScanSoft completed an underwritten public offering of
7,184,406 shares of its common stock at $3.80 per share. Of the total shares
sold, 6,184,406 shares were sold on behalf of L&H and L&H Holdings USA, Inc.
ScanSoft sold 1,000,000 common shares and received gross proceeds of $3.8
million. On March 12, 2003, ScanSoft received $4.1 million of gross proceeds
from the exercise of the over allotment option of 1,072,500 shares granted to
the underwriters as part of the underwritten offering. After considering
offering costs, the net proceeds of the underwritten public offering amounted to
approximately $5.5 million.
On April 24, 2003, ScanSoft announced it had entered into a merger
agreement to acquire SpeechWorks. Upon the closing of the merger, ScanSoft
intends to initiate the repurchase of up to $25 million of ScanSoft common
stock, provided that ScanSoft will not repurchase more than 20% of the number of
shares of ScanSoft common stock issued to SpeechWorks stockholders in the
merger. Repurchases of stock will occur from time to time on the open market or
in privately negotiated transactions. The timing and amount of any shares
repurchased will be determined by ScanSoft's management based on its evaluation
of market conditions and other factors. The repurchase program is expected to
extend for a period of twelve months following the closing of the merger and may
be suspended or discontinued at any time. Any repurchased shares will be
available for use in connection with general corporate purposes.
107
RESULTS OF OPERATIONS
The following table presents, as a percentage of total revenue, certain
selected financial data for the three months ended March 31, 2003 and 2002 and
for each of the three years in the period ended December 31:
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31,
------------------ -------------------------
2003 2002 2002 2001 2000
------ ------ ------ ------ -------
Total revenue.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue.......................... 15.5 17.4 15.4 20.5 26.5
Cost of revenue from amortization of
intangible assets..................... 7.4 14.9 8.9 22.6 24.1
Research and development................. 25.8 29.3 25.9 22.3 31.2
Selling, general and administrative...... 47.6 40.9 41.1 40.4 56.5
Amortization of goodwill and other
intangible assets(1)(4)............... 1.3 4.0 1.6 21.3 22.9
Restructuring and other charges,
net(2)(5)............................. 1.9 4.4 0.9 -- 10.0
Acquired in-process research and
development(3)........................ -- -- -- -- 38.1
----- ----- ----- ----- ------
Total costs and expenses................. 99.5 110.9 93.8 127.1 209.3
----- ----- ----- ----- ------
Income (loss) from operations............ 0.5 (10.9) 6.2 (27.1) (109.3)
Other income (expense), net.............. 0.0 (0.3) -- (0.4) (0.6)
----- ----- ----- ----- ------
Income (loss) before income taxes........ 0.5 (11.2) 6.2 (27.5) (109.9)
Provision for (benefit from) income
taxes................................. 0.3 0.9 0.2 (0.5) 1.0
----- ----- ----- ----- ------
Net income (loss)........................ 0.2% (12.1)% 6.0% (27.0)% (110.9)%
===== ===== ===== ===== ======
---------------
(1) See Notes 4 and 5 of Notes to Consolidated Financial Statements.
(2) See Note 8 of Notes to Consolidated Financial Statements.
(3) See Note 18 of Notes to Consolidated Financial Statements.
(4) See Notes 6 and 7 to Unaudited Consolidated Financial Statements.
(5) See Note 9 to Unaudited Consolidated Financial Statements.
GENERAL
ScanSoft derives its revenue from sales of its software products to
customers through distribution partners and value-added resellers, royalty
revenues from OEM partners, license fees from sales of its products to customers
and from services, primarily maintenance associated with software license
transactions.
Sales of its software products through distributors and value-added
resellers provide rights of return for as long as the distributors or resellers
hold the inventory. As a result, ScanSoft recognizes revenues from sales to
distributors and resellers only when products have been sold by the distributors
or resellers to retailers and end-users. Title and risk of loss pass to the
distributor or reseller upon shipment, at which time the transaction is invoiced
and payment is due. Based on reports from distributors and resellers of their
inventory balances at the end of each period, ScanSoft records an allowance
against accounts receivable for the sales price of all inventory subject to
return. If ScanSoft experiences significant returns from distributors or
resellers, its liquidity may be adversely impacted. ScanSoft makes an estimate
of sales returns by retailers or by end users, whether to ScanSoft directly or
through ScanSoft's distributors or
108
resellers based on historical returns experience. The provision for these
estimated returns is recorded as a reduction of revenue at the time that the
related revenue is recorded. Historically, ScanSoft has not experienced
significant returns from retailers or end-users. If actual returns differ
significantly from its estimates, such differences could have a material impact
on the results of operations for the period in which the actual returns become
known.
Royalty revenue derived from sales to OEM customers is recognized when
software copies are deployed based upon reports of actual deployments received
from OEM customers and payment is due.
Cost of revenue consists primarily of material and fulfillment costs,
third-party royalties, salaries for product support personnel, and engineering
costs associated with certain contracts which are accounted for under the
percentage-of-completion method of accounting.
Cost of revenue from amortization of intangible assets includes the
amortization of acquired patents and core and completed technology.
Research and development expense consists primarily of salary and benefits
costs of engineers. ScanSoft believes that the development of new products and
the enhancement of existing products are essential to its success. Accordingly,
ScanSoft plans to continue to invest in research and development activities. To
date, ScanSoft has not capitalized any development costs as the cost incurred
after technological feasibility but before release of product has not been
significant.
Selling expenses include salaries, commissions, advertising, direct mail,
public relations, trade shows, travel and other related sales and marketing
expenses. General and administrative expenses include personnel costs for
administration, finance, human resources, information systems and general
management, in addition to legal and accounting expenses and other professional
services. ScanSoft attempts to control selling, general and administrative
expense; however, if revenue continues to grow, ScanSoft expects selling,
general and administrative expense to increase to support its growing
operations. In addition, ScanSoft may increase selling, general and
administrative expenses in advance of revenue to support expected future revenue
growth in specific product lines or geographic regions.
Amortization of other intangible assets excludes amortization of acquired
patents and core and completed technology which is included in cost of revenue
from amortization of intangible assets.
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. On an ongoing basis, ScanSoft evaluates its estimates and judgments,
including those related to revenue recognition, including estimating valuation
allowances (specifically sales returns and other allowances); the recoverability
of intangible assets, including goodwill; and valuation allowances for deferred
tax assets. Actual amounts could differ significantly from these estimates.
ScanSoft bases its estimates and judgments on historical experience and various
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities and the amounts of revenue and expenses that are not
readily apparent from other sources.
ScanSoft believes the following critical accounting policies most
significantly affect the portrayal of its financial condition and results of
operations and require its most difficult and subjective judgments.
REVENUE RECOGNITION
ScanSoft derives its revenue from sales of its software products to
customers through distribution partners and value-added resellers, royalty
revenues from OEM partners, license fees from sales of its
109
products to customers and from services, primarily maintenance associated with
software license transactions.
Sales of its software products through distributors and value-added
resellers provide rights of return for as long as the distributors or resellers
hold the inventory. As a result, ScanSoft recognizes revenues from sales to
distributors and resellers only when products have been sold by the distributors
or resellers to retailers and end-users. Title and risk of loss pass to the
distributor or reseller upon shipment, at which time the transaction is invoiced
and payment is due. Based on reports from distributors and resellers of their
inventory balances at the end of each period, ScanSoft records an allowance
against accounts receivable for the sales price of all inventory subject to
return. If ScanSoft experiences significant returns from distributors or
resellers, its liquidity may be adversely impacted. ScanSoft makes an estimate
of sales returns by retailers or by end users, whether to ScanSoft directly or
through ScanSoft's distributors or resellers, based on historical returns
experience. The provision for these estimated returns is recorded as a reduction
of revenue at the time that the related revenue is recorded. Historically,
ScanSoft has not experienced significant returns from retailers or end-users. If
actual returns differ significantly from its estimates, such differences could
have a material impact on the results of operations for the period in which the
actual returns become known. ScanSoft's accounts receivable balance, including
accounts receivable from a related party, was $20.7 million, $17.2 million and
$14.3 million at March 31, 2003, December 31, 2002 and December 31, 2001,
respectively. These balances are net of sales returns and other allowances of
$8.6 million, $5.4 million and $5.5 million and allowances for doubtful accounts
of $0.6 million, $0.5 million and $0.8 million as of March 31, 2003, December
31, 2002 and December 31, 2001, respectively.
Royalty revenue derived from sales to OEM customers is recognized when
software copies are deployed, based upon reports of actual deployments received
from OEM customers, and payment is due.
ScanSoft may enter into software license agreements that require
significant modification of its software. ScanSoft recognizes revenue with
respect to these agreements under the percentage-of-completion method. ScanSoft
determines progress toward completion based upon costs incurred to date as
compared with total estimated costs at the contract completion date. If
ScanSoft's total costs significantly differ from its estimates, or ScanSoft
incurs losses on these contracts, its results of operations may be materially
impacted. ScanSoft did not have any significant contracts requiring
customization or modification of its software at March 31, 2003.
In accordance with EITF 01-09, Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products), ScanSoft
accounts for amounts paid to customers as a reduction of revenue, unless the
consideration relates to an identifiable benefit and the benefit's fair value
can be established, in which case ScanSoft records the consideration as an
operating expense. In order to determine the appropriate classification of the
marketing program costs, ScanSoft reviews the nature of the program, the
documentation supporting the fair value of the program, and whether the programs
could be provided independent of the sale of the goods and services. ScanSoft
evaluates its marketing programs quarterly to determine whether costs meet the
criteria for expense classification. Generally, its programs meet the criteria;
therefore, ScanSoft does not report any material costs as a reduction of
revenue. If in the future, the nature of ScanSoft's marketing programs change or
could not be provided independent of the sale of the related goods or services,
it may require reclassification of these programs in its statement of
operations.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL
ScanSoft has significant long-lived tangible and intangible assets and
goodwill, which are susceptible to valuation adjustments as a result of changes
in various factors or conditions. The most significant long-lived tangible and
intangible assets are fixed assets, patents, core technology, and trademarks,
which are amortized using the straight-line method over their estimated useful
lives. The values of intangible assets, with the exception of goodwill, were
initially determined by a risk-adjusted, discounted cash flow approach. ScanSoft
assesses the potential impairment of identifiable intangible assets and fixed
assets whenever
110
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors ScanSoft considers important, which could trigger an
impairment of such assets, include the following:
- significant underperformance relative to historical or projected future
operating results;
- significant changes in the manner of or use of the acquired assets or the
strategy for its overall business;
- significant negative industry or economic trends;
- significant decline in its stock price for a sustained period; and
- a decline in its market capitalization below net book value.
Future adverse changes in these or other unforeseeable factors could result
in an impairment charge that would impact future results of operations and
financial position in the reporting period identified.
Effective January 1, 2002, ScanSoft adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS 142.
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization, the identification of reporting units for purposes of assessing
potential future impairments of goodwill and the assessment of goodwill
impairment at least annually, or more frequently when events and circumstances
occur indicating that the recorded goodwill might be impaired. ScanSoft has
determined that it operates in one reporting unit.
Significant judgments and estimates are involved in determining the useful
lives of ScanSoft's intangible assets, determining what reporting units exist
and assessing when events or circumstances would require an interim impairment
analysis of goodwill or other long-lived assets to be performed. Changes in
events or circumstances, including but not limited to technological advances or
competition that could result in shorter useful lives, additional reporting
units that may require alternative methods of estimating fair value, or economic
or market conditions that may affect previous assumptions and estimates, could
have a significant impact on ScanSoft's results of operations or financial
position through accelerated amortization expense or impairment charges.
ACCOUNTING FOR ACQUISITIONS
ScanSoft has completed five significant business acquisitions, including
the Philips acquisition on January 30, 2003, which have resulted in significant
goodwill and other intangible asset balances. ScanSoft's future business
strategy contemplates that it may continue to pursue additional acquisitions in
the future. ScanSoft's accounting for acquisitions involves significant
judgments and estimates, including primarily, but not limited to: the fair value
of certain forms of consideration, the fair value of acquired intangible assets,
which involve projections of future revenues and cash flows, the fair value of
other acquired assets and assumed liabilities, including potential
contingencies, and the useful lives and, as applicable, the reporting unit, of
the assets. The impact of prior or future acquisitions on ScanSoft's financial
position or results of operations may be materially impacted by the change in or
initial selection of assumptions and estimates. Additionally, under SFAS 142,
ScanSoft determines the fair value of the reporting unit, for purposes of the
first step in its annual goodwill impairment test, based on its stock price. If
prior or future acquisitions are not accretive to ScanSoft's results of
operations as expected, or its stock price declines dramatically, ScanSoft may
be required to complete the second step in its annual goodwill impairment test,
which requires significant judgments and estimates and which may result in
material impairment charges in the period in which they are determined.
INCOME TAXES
At December 31, 2002, ScanSoft has gross deferred tax assets of $45.6
million, which have been offset by a full valuation allowance as a result of
cumulative historical losses. ScanSoft's income tax provision reflects state and
foreign withholding and income taxes. ScanSoft has not incurred any significant
federal income tax provision in the three months ended March 31, 2003 and 2002
or the years ended December 31, 2002, 2001 or 2000 because of the ability to
fully utilize its net operating loss carry-forwards
111
or because ScanSoft did not generate taxable income. A significant portion of
ScanSoft's gross deferred tax assets relates to net operating loss
carry-forwards, the full utilization of which is based on a number of factors,
including future profitability, if any, and potential limitations resulting from
tax laws.
ScanSoft's income tax provisions and its assessment of the realizability of
its deferred tax assets involve significant judgments and estimates. If ScanSoft
continues to generate taxable income through profitable operations in future
years, it will be required to recognize these deferred tax assets through the
reduction of the valuation allowance, which would result in a material benefit
to ScanSoft's results of operations in the period in which the benefit is
determined.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
TOTAL REVENUE
Total revenue for the three months ended March 31, 2003 increased by $4.1
million, or 17% from the comparable period in 2002. This growth in revenue was
the result of revenue generated from ScanSoft's speech and language products.
Revenue from ScanSoft's speech and language products was $15.2 million and $7.4
million for the three months ended March 31, 2003 and 2002, respectively. The
increase of $7.8 million in speech revenue was due to an increase of $2.9
million resulting from greater market acceptance and the launch of Dragon
Naturally Speaking 7.0, increased demand from OEMs for ScanSoft's Real Speak
product (text to speech) of $3.3 million, and $1.9 million in incremental
revenue from products acquired in the Philips acquisition, which occurred on
January 30, 2003. Revenue from ScanSoft's digital capture products was $12.6
million and $16.4 million for the three months ended March 31, 2003 and 2002,
respectively. The net decrease of $3.8 million in revenue from ScanSoft's
digital capture products from 2002 was due primarily to the recognition in the
first quarter 2002 of deferred revenue items associated with completed OEM
services, and the lower sales of ScanSoft's OmniPage product, offset by the
launch of PaperPort 9.0.
Geographic revenue classification is based on the country in which the sale
is invoiced. Revenue for the quarter ended March 31, 2003 was 74% North America
and 26% international, versus 78% North America and 22% international for the
same period 2002.
A number of ScanSoft's OEM partners distribute their products throughout
the world and do not provide ScanSoft with the geographical dispersion of their
products. ScanSoft believes that, if ScanSoft were provided with this
information, ScanSoft's geographical revenue classification would indicate a
higher international percentage. Based on an estimate that factors ScanSoft's
OEM partners' geographical revenue mix into ScanSoft's revenues generated from
these OEM partners, revenue for the period ending March 31, 2003 was
approximately 67% North America and 33% international versus 70% North America
and 30% international for the comparable period in 2002. The increase in
ScanSoft's international revenue percentage for the period ending March 31, 2003
was a direct result of ScanSoft's increased focus on international markets.
The following table presents the breakdown of ScanSoft's total revenue by
distribution channel:
QUARTER
ENDED
MARCH 31,
-----------
2003 2002
---- ----
VAR/Retail.............................................. 36% 40%
Direct.................................................. 28% 22%
OEM..................................................... 36% 38%
--- ---
100% 100%
=== ===
The increase in ScanSoft's direct revenues and the corresponding decrease
in ScanSoft's other sales channels, as a percent of revenue, for the first
quarter 2003 as compared to the same period 2002, was due to the launch of two
of ScanSoft's flagship products, PaperPort 9.0 and Dragon Naturally Speaking
7.0.
112
COST OF REVENUE
Cost of revenue for the three months ended March 31, 2003 was $4.3 million,
or 15.5% of revenue, compared to $4.1 million or 17.4% for the comparable period
in 2002. The increase in cost of revenue in absolute dollars for the three-month
period ended March 31, 2003 was directly attributable to the overall increase in
ScanSoft's direct revenue. The decrease in cost of revenue as a percentage of
total revenue was due to continued productivity gains in ScanSoft's
manufacturing and fulfillment operations and an increase in higher-margin
license revenue.
COST OF REVENUE FROM AMORTIZATION OF INTANGIBLE ASSETS
Cost of revenue from amortization of intangible assets for the three months
ended March 31, 2003 was $2.1 million or 7.4% of revenue, compared to $3.5
million, or 14.9% for the comparable period in 2002. The decrease in cost of
revenue from amortization of intangible assets of $1.4 million was due to $1.6
million of intangible assets that became fully amortized during fiscal year
2002. This reduction was partially offset by $0.1 million of amortization
related to the Philips acquisition completed on January 30, 2003.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense for the three months ended March 31, 2003
was $7.2 million, or 25.8% of revenue, compared to $7.0 million or 29.4% for the
comparable period in 2002. The increase in research and development expense of
$0.2 million was primarily the result of increased headcount associated with the
Philips acquisition. Before consideration of the SpeechWorks acquisition,
research and development expenses are expected to decline as a percentage of
revenue over the remainder of the year as revenue from the Philips products
grows and research and development spending is held flat.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the three months ended
March 31, 2003 was $13.3 million, or 47.6% of revenue, compared to $9.7 million,
or 40.9% for the comparable period in 2002. The increase in selling, general and
administrative expense in absolute dollars was primarily the result of increased
headcount costs resulting from the addition of 19 sales and marketing employees
associated with the Philips acquisition. The remaining increase in general and
administrative expenses is due primarily to increased legal expenses, and
transition expenses associated with the Philips integration. Before
consideration of the SpeechWorks acquisition, as a percentage of revenue,
ScanSoft expects selling, general and administrative expenses for the full year
to approximate 40% of revenue.
AMORTIZATION OF OTHER INTANGIBLE ASSETS
Amortization of other intangible assets for the three months ended March
31, 2003, was $0.4 million or 1.3% of revenue, compared to $1.0 million or 4.0%
for the comparable period in 2002. The decrease in this amortization expense is
due to $0.6 million of intangible assets that became fully amortized during
fiscal year 2002. This reduction was partially offset by $0.1 million of
amortization related to the Philips acquisition.
RESTRUCTURING AND OTHER CHARGES, NET
In connection with the Philips acquisition, ScanSoft eliminated 25 ScanSoft
personnel across all functional areas, resulting in approximately $0.5 million
in severance related restructuring costs in the three month period ended March
31, 2003.
In January 2002, ScanSoft announced, and in March 2002 completed, a
restructuring plan to consolidate facilities, worldwide sales organizations,
research and development teams and other personnel following the L&H acquisition
on December 12, 2001. As a result, ScanSoft exited certain facilities in both
North America and Europe, eliminating 21 employee positions, including 12 in
research and
113
development and 9 in selling, general and administrative functions. In the first
quarter of 2002, ScanSoft recorded a restructuring charge in the amount of $0.6
million for severance payments to these employees and a charge of $0.4 million
for certain termination fees to be incurred as a result of exiting the
facilities, including the write-off of previously recorded assembled workforce
assets of $0.1 million.
INCOME (LOSS) FROM OPERATIONS
As a result of the above factors, income from operations was $0.1 million
for the three months ended March 31, 2003 or 0.5% of revenue, compared with a
loss of ($2.6) million or (11.0)% for the comparable period in 2002.
OTHER INCOME (EXPENSE), NET
Interest income was $41,000 and $54,000 for the three months ended March
31, 2003 and 2002, respectively. Interest expense was $81,000 and $85,000 for
the three months ended March 31, 2003 and 2002, respectively. Other expense for
the three months ended March 31, 2003 consists primarily of foreign exchange
gains of $107,000 and other expenses of $46,000, compared to foreign exchange
losses of $19,000 and other expenses of $25,000 for the three months ended March
31, 2002.
INCOME (LOSS) BEFORE INCOME TAXES
Income before income taxes was $0.2 million for the three months ended
March 31, 2003 or 0.5% of revenue, compared with a loss of ($2.7) million or
(11.3)% for the comparable period in 2002.
INCOME TAXES
The provision for income taxes for the three months ended March 31, 2003
was $0.1 million or 0.3% of revenue, compared to $0.2 million or 0.8% in the
comparable period for 2002. The provision for income taxes consists primarily of
foreign tax provisions for which no net operating loss carryforwards are
available to offset income and foreign withholding and state income taxes.
NET INCOME (LOSS)
As a result of all these factors, net income totaled $0.1 million for the
three months ended March 31, 2003, compared with a loss of ($2.9) million or
(12.1)% for the comparable period in 2002.
DECEMBER 31, 2002 COMPARED TO DECEMBER 31, 2001
TOTAL REVENUE
Total revenue for 2002 increased by $43.9 million or 70% compared to 2001.
The growth in revenue for the year ended December 31, 2002 was primarily the
result of revenue generated from ScanSoft's speech products. Revenue from
ScanSoft's speech products was $44.2 million and $1.8 million for 2002 and 2001,
respectively. The increase in speech revenue was due to the L&H acquisition,
which occurred in December 2001. Revenue from ScanSoft's digital capture
products was $62.4 million and $60.9 million for 2002 and 2001, respectively.
The net increase of $1.5 million in revenue from ScanSoft's digital capture
products from 2001 was due primarily to an increase of $3.6 million in sales of
digital capture products through the channel network, partially offset by a
decrease in revenue of $2.1 million from Xerox, a related party, due to the
cancellation of its retail multi-function product line in late 2001.
Geographic revenue classification is based on the country in which the sale
is invoiced. Revenue for 2002 was 73% North America and 27% international,
versus 79% North America and 21% international for 2001.
A number of ScanSoft's OEM partners distribute their products throughout
the world and do not provide ScanSoft with the geographical dispersion of their
products. ScanSoft believes that, if it were provided with this information, its
geographical revenue classification would indicate a higher international
114
percentage. Based on an estimate that factors ScanSoft's OEM partners'
geographical revenue mix into ScanSoft's revenues generated from these OEM
partners, revenue for 2002 was approximately 67% North America and 33%
international versus 70% North America and 30% international for 2001. The
increase in ScanSoft's international revenue percentage for 2002 was driven
primarily from Europe and Asia and was the result of increased sales and
marketing efforts and additional resellers.
The following table presents the breakdown of ScanSoft's total revenue by
distribution channel:
YEAR ENDED
DECEMBER 31,
-------------
2002 2001
----- -----
VAR/retail.............................................. 43% 45%
Direct.................................................. 23% 24%
OEM..................................................... 34% 31%
--- ---
100% 100%
=== ===
The increase in OEM, and the corresponding decrease in VAR/retail, as a
percent of revenue for 2002 as compared to 2001, was due to the addition of
speech products in 2002. OEMs represent a higher percentage of revenue for
ScanSoft's speech products than for its digital capture products.
Effective January 1, 2002, ScanSoft implemented EITF 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products). The implementation resulted in a $0.3 million reduction to
total revenue and a corresponding reduction of selling, general and
administrative expense for 2002. Additionally, it resulted in the
reclassification of $1.1 million from selling, general and administrative
expense to net revenue for 2001.
COST OF REVENUE
Cost of revenue for 2002 was $16.4 million or 15.4% of revenue, compared to
$12.8 million or 20.5% for 2001. The increase in cost of revenue in absolute
dollars for 2002 was directly attributable to the increase in the volume of
product sales to VAR/retail customers as well as increased embedded text-to-
speech revenue, which bears a higher cost of revenue than ScanSoft's traditional
software products. The decrease in cost of revenue as a percentage of total
revenue for 2002, as compared to 2001, was due to lower supply chain logistics
and fulfillment costs, partially offset by the higher cost of embedded text-to-
speech revenue.
COST OF REVENUE FROM AMORTIZATION OF INTANGIBLE ASSETS
Cost of revenue from amortization of intangible assets for 2002 was $9.5
million compared to $14.2 million for 2001. The decrease in cost of revenue from
amortization of intangible assets of $4.7 million was due to $6.6 million of
intangible assets that became fully amortized in the first quarter of 2002. This
reduction was partially offset by $1.9 million of amortization recorded for the
acquired L&H and Audiomining assets.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs for 2002 were $27.6 million or 25.9% of
total revenue, compared to $14.0 million or 22.3% of total revenue for 2001. The
increase in research and development expenses of $13.6 million for 2002 was
primarily the result of increased headcount of 138 employees associated with the
L&H acquisition. Cost savings from the restructuring actions taken in 2002 for
2002 was approximately $1.3 million. Due to ScanSoft's acquisition of the core
research and development assets of Philips speech business units, ScanSoft
expected 2003 research and development expenses as a percentage of revenue to
increase over 2002 initially, but decline by the end of the year, as revenue
from the Philips products grows and research and development spending is held
flat, ending the year slightly better than 2002 as a percentage of revenue.
115
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for 2002 was $43.8 million or
41.1% of total revenue, compared to $25.3 million or 40.4% for 2001. The
increase in selling, general and administrative expense in absolute dollars for
2002 was primarily the result of increased headcount costs of $9.9 million
resulting from the addition of 74 employees, primarily in sales and marketing,
as well as $3.1 million of increased marketing programs in support of the higher
revenue. These increases were largely attributable to the L&H acquisition and
expanded focus on international sales and marketing. As a percentage of revenue,
ScanSoft expects selling, general and administrative expenses to remain
consistent on an annual basis with 2002 even after consideration of the Philips
acquisition.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill and other intangible assets for 2002 was $1.7
million compared to $13.3 million for 2001. The decrease in amortization expense
is directly attributable to the adoption of SFAS 142, as a result of which
ScanSoft ceased the amortization of goodwill and acquired workforce of
approximately $2.6 million per quarter. Additionally, amortization expense
decreased $1.4 million in 2002, due to intangible assets that became fully
amortized in the first quarter of 2002. This reduction was partially offset by
additional amortization of approximately $0.2 million for 2002 from the L&H and
Audiomining acquisitions.
RESTRUCTURING AND OTHER CHARGES, NET
In January 2002, ScanSoft announced, and in March 2002 completed, a
restructuring plan to consolidate facilities, worldwide sales organizations,
research and development teams and other personnel following the L&H acquisition
on December 12, 2001. As a result, ScanSoft exited certain facilities in both
North America and Europe, eliminating 21 employee positions, including 12 in
research and development and 9 in selling, general and administrative functions.
In the first quarter of 2002, ScanSoft recorded a restructuring charge in the
amount of $0.6 million for severance payments to these employees and a charge of
$0.4 million for certain termination fees to be incurred as a result of exiting
the facilities, including the write-off of previously recorded assembled
workforce assets of $0.1 million.
During 2002, ScanSoft paid a total of $0.8 million in severance payments,
of which $0.6 million related to the March 2002 restructuring and $0.2 million
related to severance paid to the former Caere President and CEO, pursuant to a
2000 restructuring.
At December 31, 2002, the remaining restructuring accrual from the current
and prior restructuring activities amounted to $0.7 million. This balance is
comprised of $0.2 million of lease exit costs resulting from the 2002
restructuring and $0.5 million of severance to the former Caere President and
CEO. The lease exit costs and severance due to the former Caere President and
CEO will be paid through January 2004 and March 2005, respectively.
INCOME (LOSS) FROM OPERATIONS
As a result of the above factors, income from operations was $6.6 million
for 2002 compared with a loss of ($16.9) million for 2001.
OTHER INCOME (EXPENSE), NET
Interest income was $0.4 million and $0.2 million for 2002 and 2001,
respectively. The increase in interest income from 2001 to 2002 was a result of
higher cash and cash equivalent balances, which grew from $14.3 million at
December 31, 2001 to $18.9 million at December 31, 2002. Interest expense
consists primarily of interest related to the $3.5 million note resulting from
the acquisition of L&H. Interest expense was $0.4 million and $0.2 million for
2002 and 2001, respectively. Other expense in 2002 consists primarily of foreign
exchange losses of $2,000, other expenses of $42,000, partially offset by a gain
on the disposal of assets of $41,000. Other expense in 2001 consists primarily
of foreign exchange losses of
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$0.2 million and the write-off of an investment of $0.2 million recorded under
the cost method, which was deemed to be impaired, partially offset by other
income of $0.1 million.
INCOME (LOSS) BEFORE INCOME TAXES
Income before income taxes was $6.6 million for 2002, compared with a loss
of ($17.2) million for 2001.
INCOME TAXES
The provision for income taxes of $0.3 million for 2002 consisted of
foreign and state tax provisions of $1.2 million, offset by a federal tax
benefit of ($0.9) million, related to a refund of taxes paid by Caere
Corporation prior to its acquisition by ScanSoft. The (benefit from) income
taxes of ($0.3) million for 2001 consisted of foreign and state tax provisions
of $0.4 million offset by the state tax benefit of ($0.7) million.
At December 31, 2002, ScanSoft had federal net operating loss carryforwards
of approximately $82 million, of which approximately $9.1 million relate to tax
deductions from stock compensation. The tax benefit related to the stock
compensation, when realized, will be accounted for as additional paid-in capital
rather than as a reduction of the provision for income tax. At December 31, 2002
ScanSoft had federal and state research and development credit carryforwards of
approximately $3.4 million. The net operating loss and credit carryforwards will
expire at various dates through 2021, if not utilized. Utilization of the net
operating losses and credits may be subject to a substantial annual limitation
due to the ownership change limitations provided by the Internal Revenue Code of
1986 and similar state provisions. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
At December 31, 2002, gross deferred tax assets amounted to $45.6 million.
A full valuation allowance has been provided against the deferred tax assets due
to the uncertainty of their realization as a result of ScanSoft's cumulative
historical losses. During 2002, ScanSoft generated income before income taxes of
$6.6 million. If ScanSoft continues to generate taxable income through
profitable operations in future years ScanSoft may be required to recognize
these deferred tax assets through the reduction of the valuation allowance,
which would result in a material benefit to ScanSoft's results of operations in
the period in which the benefit is determined.
NET INCOME (LOSS)
As a result of all these factors, net income totaled $6.3 million for 2002,
compared with a net loss of ($16.9) million for 2001.
DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000
TOTAL REVENUE
Total revenue of $62.7 million for 2001 increased by $14.8 million or 31%
from the comparable period in 2000. The primary factors responsible for this
growth include a $12.0 million revenue increase from ScanSoft's document and PDF
conversion product line driven primarily by its release of OmniPage 11, which
contained significant enhancements over the prior version, and secondarily by an
increased usage of its document conversion tool kits by software vendors,
integrators and in-house developers; $0.9 million revenue increase in ScanSoft's
digital paper management product line, also driven by the release of a
significantly improved new version of its PaperPort product; and a $2.7 million
revenue increase driven by a contract with an OEM customer. ScanSoft also
generated additional revenue in the amount of $1.7 million from its speech
products as a result of the L&H acquisition on December 12, 2001.
North America accounted for 79% and International accounted for 21% of 2001
total revenue, versus 82% and 18%, respectively, for the comparable period in
2000. The release of international versions for two of ScanSoft's digital
capture products and additional sales and marketing resources in Europe expanded
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the market opportunity for ScanSoft's digital capture products, thereby
contributing to the revenue growth in Europe for 2001.
The following table presents the breakdown of ScanSoft's total revenue by
distribution channel:
YEAR ENDED
DECEMBER 31,
-------------
2001 2000
----- -----
VAR/retail.............................................. 45% 50%
Direct.................................................. 24% 21%
OEM..................................................... 31% 29%
--- ---
100% 100%
=== ===
During 2001, ScanSoft's distribution and fulfillment partners, Ingram Micro
and Digital River, accounted for 28% and 15% of ScanSoft's total revenue,
respectively. In addition Xerox, an OEM customer, accounted for 11% of
ScanSoft's total revenue. During 2000, Ingram Micro, Digital River and Xerox
accounted for 7%, 11% and 12% of ScanSoft's total revenue, respectively.
COST OF REVENUE
Cost of revenue in 2001 was $12.8 million, or 21%, of revenue compared to
$12.7 million, or 27%, of revenue in the comparable period of 2000. The decrease
in cost of revenue as a percentage of total revenue from the comparable period
in 2000 is directly attributed to the consolidation of ScanSoft's worldwide
manufacturing fulfillment activities and cost savings initiatives ScanSoft
introduced in the second quarter of 2000. This decrease was partially offset by
an increase of $1.2 million in the cost of revenue in the second half of 2001,
as a result of costs associated with engineering efforts under an OEM contract.
COST OF REVENUE FROM AMORTIZATION OF INTANGIBLE ASSETS
Cost of revenue from amortization of intangible assets for 2001 was $14.2
million compared to $11.6 million for the same period in 2000. The increase in
cost of revenue from amortization of intangible assets of $2.6 million was
primarily attributable to a full year in 2001 of amortization expense for
patents and core and completed technology acquired from Caere late in the first
quarter of 2000.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs were $14.0 million, or 22%, of revenue in
2001 compared to $15.0 million, or 31%, of revenue in 2000. The decrease in
research and development expense as a percentage of total revenue is a result of
$1.2 million of expenses associated with engineering efforts on an OEM contract
being charged to cost of revenues as well as increased revenues of $14.8 million
compared to the prior period. Additionally, during 2000, ScanSoft transferred
certain digital capture development activities from Los Gatos, California to
Budapest, Hungary.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $25.3 million, or 40%, of
total revenue in 2001 compared to $27.1 million, or 57%, of total revenue for
the same period in 2000. The absolute dollar decrease in selling, general and
administrative expense from the same period in 2000 was a result of cost
reduction efforts undertaken during the first and second quarters of 2000.
Additionally, ScanSoft realized a gain of approximately $1.0 million, primarily
due to the favorable settlement of investment banking fees associated with the
Caere acquisition. The decrease in selling, general and administrative expense
as a percentage of revenue from the same period in 2000 is a result of the
decreased expenses as noted above, the realized gain and increased revenues
compared to the prior period.
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AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS AND ACQUIRED IN-PROCESS
RESEARCH AND DEVELOPMENT
Amortization of goodwill and other intangible assets for 2001 was $13.3
million compared to $11.0 million for the same period in 2000. The increase in
amortization of intangible assets of $2.3 million compared to the same period in
2000 resulted from a full 12 months of amortization for the Caere acquisition
being taken during 2001 versus approximately nine months in 2000 due to the
timing of the Caere acquisition which was completed on March 13, 2000. In
connection with the Caere acquisition, $18.3 million was charged to operations
upon consummation of the acquisition, which represented acquired in-process
research and development on development projects that had not yet reached
technological feasibility and had no alternative future use.
RESTRUCTURING AND OTHER CHARGES, NET
There were no restructuring or other charges in 2001, compared with
approximately $4.8 million in 2000. In connection with the acquisition of Caere
in the first quarter of 2000, ScanSoft identified 46 employees of Caere whose
positions were eliminated upon consummation of the acquisition. These positions
included 22 in research and development, 14 in general and administrative
functions, and 10 in sales and marketing. Additionally, the Caere president and
CEO position was eliminated. As a result, ScanSoft established, as part of the
purchase price allocation, a restructuring reserve of $0.5 million for severance
payments to employees, and a restructuring reserve of $1.1 million for severance
to the Caere former president and CEO, the payments of which will continue
through March 2005.
In June 2000, ScanSoft implemented a restructuring plan to strategically
refocus its business and bring operating expenses in line with net revenues. As
a result, ScanSoft eliminated 65 employee positions, including 29 in research
and development, 13 in general and administrative functions and 23 in support
and marketing. ScanSoft recorded a restructuring charge in the amount of $1.1
million for severance payments to these employees and a restructuring charge of
$0.4 million for certain termination fees to be incurred as a result of exiting
the Los Gatos, California facility. Additionally, ScanSoft wrote off $3.5
million of net intangible assets acquired as part of the Caere acquisition,
including the acquired work force of $1.1 million and the favorable building
lease of $2.4 million, which were impaired as a result of the restructuring
action. At the time of the restructuring, management expected these
restructuring actions to reduce operating expenses by approximately $10 million
on an annualized basis. Annualized cost savings realized from these actions
amounted to $13.6 million.
For the years ended December 31, 2001 and 2000, ScanSoft paid $0.8 million
and $1.1 million, respectively in severance payments related to these
restructuring actions. The remaining severance balance of $0.6 million primarily
relates to severance for the former Caere President and CEO and will be paid
through March 2005.
LOSS FROM OPERATIONS
As a result of the above factors, loss from operations totaled
approximately ($16.9) million in 2001 compared to loss from operations of
approximately ($52.5) million in 2000.
OTHER INCOME (EXPENSE)
Interest income was $0.2 million and $0.1 million for 2001 and 2000,
respectively. The increase in interest income from 2000 to 2001 was a result of
significantly higher cash and cash equivalent balances, which grew from $2.6
million at December 31, 2000 to $14.3 million at December 31, 2001 and short-
term investments, which were generated from operations. Interest expense
consists of interest incurred for borrowings under credit facilities and
short-term notes. Interest expense was $0.2 million and $0.6 million for 2001
and 2000, respectively. The decrease in interest expense from 2000 to 2001
resulted from the repayment of all bank borrowings, including accrued interest,
of $3.4 million, under the bank credit facility during May 2001. Other expense
in 2001 consists primarily of foreign exchange losses of $0.2 million and
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the write-off of an investment of $0.2 million recorded under the cost method,
which was deemed to be impaired, partially offset by other income of $0.1
million.
LOSS BEFORE INCOME TAXES
As a result of the above factors, loss before income taxes was
approximately ($17.2) million in 2001 compared to a loss before income taxes of
approximately ($52.8) million in 2000.
INCOME TAXES
The (benefit from) income taxes of ($0.3) million for the year ended
December 31, 2001 reflects a reduction of approximately $0.7 million in amounts
accrued for income taxes upon favorable completion of a state tax audit of Caere
for 1996 and 1997. This benefit was offset by tax provisions of $0.4 million for
foreign and state jurisdictions for which net operating losses were limited or
for which no net operating loss carryforwards were available. This compares to
tax provisions of $0.5 million for the year ended December 31, 2000, which
related to foreign and state income taxes.
NET LOSS
As a result of all these factors, net loss totaled approximately ($16.9)
million in 2001, compared to a net loss of approximately ($53.3) million in
2000.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 2003
As of March 31, 2003, ScanSoft had cash and cash equivalents of $20.3
million and net working capital of $5.3 million as compared to $18.9 million in
cash and cash equivalents and net working capital of $16.8 million at December
31, 2002.
Net cash provided by operating activities for the three months ended March
31, 2003 was $2.9 million compared to $0.2 million for the comparable period in
2002. Cash provided by operations in the 2003 period came primarily from
operating income, net of non-cash adjustments, and an increase in accounts
payable, offset by payments of accrued expenses assumed in the Philips
acquisition. The increase in accounts receivable allowances at March 31, 2003 as
compared to December 31, 2002 is attributable to higher shipments of ScanSoft's
products to distributors at the end of the quarter ended March 31, 2003 in
connection with its release of two new products, Dragon Naturally Speaking 7.0
and PaperPort 9.0. Historically, ScanSoft has not incurred any significant
losses on its accounts receivable balances.
Net cash used in investing activities for the three months ended March 31,
2003 was $4.9 million compared to $1.8 million for the comparable period in
2002. Net cash used in investing activities during the 2003 period consisted of
$0.6 million in capital expenditures, which included costs to build out
facilities in both North America and Europe and $4.3 million of payments
associated with acquisitions. Net cash used in investing activities during 2002
consisted of $0.7 million in capital expenditures to build-out facilities in
both North America and Europe, $0.5 million for the acquisition of the L&H
Audiomining assets and $0.7 million related to the payment of acquisition
related liabilities.
Net cash provided by financing activities for the three months ended March
31, 2003 was $3.6 million compared to $0.1 million for the comparable period in
2002. Net cash provided by financing activities during the three months ended
March 31, 2003 consisted of proceeds of $0.5 million from the issuance of common
stock in connection with employee stock compensation plans and net proceeds of
$6.8 million excluding offering costs of $1.3 million paid in the prior year,
from the public issuance of ScanSoft's common stock. This was offset by a $0.4
million payment to the former Caere President and CEO in connection with the
settlement of the non-competition and consulting agreement, and the payment of
the $3.3 million note payable related to the acquisition of L&H assets during
2001. Net cash provided by financing activities during 2002 consisted of
proceeds of $1.2 million from the exercise of stock options, offset by a $0.1
million payment on ScanSoft's capital lease obligation, a $0.1 million principal
payment on
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a note payable that was issued in connection with the acquisition of the L&H
assets and a $1.0 million payment to the former Caere President and CEO in
connection with the settlement of the non-competition and consulting agreement.
On January 30, 2003, ScanSoft completed the Philips acquisition. As
consideration for the acquisition, ScanSoft paid 3.1 million euros ($3.4
million) in cash at closing, subject to adjustment in accordance with the
provisions of the purchase agreement, as amended, and agreed to pay an
additional 1.0 million euros in cash due no later than December 31, 2003, issued
a 5.0 million euro note due December 31, 2003 and bearing 5.0% interest per
annum and issued a $27.5 million three-year, zero-interest subordinated
debenture, convertible at any time at Philips' option into shares of ScanSoft's
common stock at $6.00 per share.
The following table outlines ScanSoft's contractual payment obligations as
of March 31, 2003:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------------- ------- --------- --------- --------- ---------
(IN THOUSANDS)
Convertible debenture................... $27,524 $ -- $27,524 $ -- --
Deferred payment associated with Philips
acquisition, including imputed
interest.............................. 1,052 1,052 -- -- --
Euro denominated note (5 million)
associated with Philips acquisition... 5,407 5,407 -- -- --
Deferred payments for technology
license............................... 12,328 9,434 2,894 -- --
Operating leases........................ 8,099 2,123 4,310 1,666 --
Caere acquisition related costs......... 2,048 2,048 -- -- --
Imputed interest........................ 652 246 406 -- --
------- ------- ------- ------- -------
Total contractual cash obligations...... $57,110 $20,310 $35,134 $1,666 --
======= ======= ======= ======= =======
Through March 31, 2003, ScanSoft has not entered into any off balance sheet
arrangements or transactions with unconsolidated entities or other persons.
Historically and through December 31, 2001 ScanSoft sustained recurring
losses from operations in each reporting period. ScanSoft reported net income of
approximately $6.3 million for 2002 and $0.1 million for the three months ended
March 31, 2003, and has an accumulated deficit of $146.9 million at March 31,
2003. ScanSoft believes that it has the ability to maintain operating expenses
at levels commensurate with revenues to maintain positive cash flows from
operations. ScanSoft also believes that its existing working capital, cash flows
from future operations and available borrowings under its line of credit
facility will be sufficient to meet its operating, investing and financing
needs, for at least the next twelve months, including the integration of the
Philips acquisition and the pending acquisition of SpeechWorks, and the debt
obligations incurred in connection with the Philips acquisition.
Year Ended December 31, 2002
As of December 31, 2002, ScanSoft had cash and cash equivalents of $18.9
million and net working capital of $16.8 million as compared to $14.3 million in
cash and cash equivalents and net working capital of $9.3 million at December
31, 2001.
Net cash provided by operating activities for the fiscal year ended
December 31, 2002 was $12.3 million compared to $10.4 million for the same
period in 2001. Cash provided by operations in the 2002 period came primarily
from operating income, net of non-cash adjustments, offset primarily by the net
impact of higher balances in accounts receivable, prepaid expenses and other
assets, and accrued expenses and lower deferred revenue due to the recognition
of revenue on a long-term contract that was classified as deferred revenue at
December 31, 2001, for which cash was collected in a prior period. The increase
in accounts receivable of $3.2 million at December 31, 2002, as compared to
December 31, 2001
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was the result of significantly higher revenue, partially offset by improvement
in days sales outstanding. Historically, ScanSoft has not incurred any
significant losses on its accounts receivable balances.
Net cash used in investing activities for 2002 was $6.0 million compared to
$10.7 million for 2001. Net cash used in investing activities during the 2002
period consisted of $2.4 million in capital expenditures, which included costs
to build out facilities in both North America and Europe and $3.6 million of
payments associated with acquisitions. Net cash used in investing activities
during 2001 included capital expenditures of $0.9 million and $10.1 million of
payments associated with acquisitions, offset by $0.3 million in proceeds from
the sale of property and equipment.
Net cash used in financing activities for 2002 was $1.9 million compared to
$12.4 million of net cash provided by financing activities for 2001. Net cash
used in financing activities during 2002 consisted of proceeds of $2.7 million
from the issuance of common stock in connection with employee stock compensation
plans and net proceeds of $5.6 million from a private placement of ScanSoft's
common stock. This was offset by a $0.3 million payment on ScanSoft's capital
lease obligation, a $7.0 million payment to repurchase shares of ScanSoft's
common stock held by L&H, $0.6 million in payments of notes payable related to
prior acquisitions and a $2.2 million payment to the former Caere President and
CEO in connection with the settlement of the non-competition and consulting
agreement. Net cash provided by financing activities during the comparable
period in 2001 included proceeds of $15.7 million from a private placement of
ScanSoft's common stock, proceeds of $1.1 million from the exercise of stock
options partly offset by payments of $3.4 million to repay in full ScanSoft's
prior line of credit and payments of $1.0 million to repurchase shares of
ScanSoft's stock on the open market.
Foreign Operations
ScanSoft develops and sells its products throughout the world. As a result
of the Caere acquisition in March 2000, the L&H acquisition in December 2001 and
its recent acquisition of certain assets of Philips, ScanSoft significantly
increased its presence in Europe and added operations in Asia. With ScanSoft's
increased international presence in a number of geographic locations and with
international revenues projected to increase in 2003, ScanSoft is exposed to
changes in foreign currencies including the euro, Japanese yen and the Hungarian
forint. Changes in the value of the euro or other foreign currencies relative to
the value of the United States dollar could adversely affect future revenues and
operating results. ScanSoft does not generally hedge any of its foreign-currency
denominated transactions or expected cash flows. However, in connection with the
Philips acquisition on January 30, 2003, ScanSoft entered into a forward hedge
in the amount of $5.3 million to meet its obligation to pay the 5.0 million euro
promissory note issued as part of the acquisition.
Recently Issued Accounting Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") issued EITF No.
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF
No. 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
EITF No. 00-21 establishes three principles: revenue should be recognized
separately for separate units of accounting, revenue for a separate unit of
accounting should be recognized only when the arrangement consideration is
reliably measurable and the earnings process is substantially complete, and
consideration should be allocated among the separate units of accounting in an
arrangement based on their fair value. EITF No. 00-21 is effective for all
revenue arrangements entered into in fiscal periods beginning after June 15,
2003, with early adoption permitted. ScanSoft does not expect the adoption of
EITF No. 00-21 to have a material impact on its results of operations or
financial condition.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There have been no changes in and disagreements with accountants on
accounting and financial disclosure during the three months ended March 31, 2003
or the years ended December 31, 2002 and 2001.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ScanSoft faces exposure to adverse movements in foreign currency exchange
rates, as a significant portion of its revenues, expenses, assets, and
liabilities are denominated in currencies other than the U.S. Dollar, primarily
the Euro Dollar. These exposures may change over time as business practices
evolve. ScanSoft evaluates its foreign currency exposures on an ongoing basis
and makes adjustments to its foreign currency risk management program as
circumstances change.
In certain instances, ScanSoft enters into forward exchange contracts to
hedge against foreign currency fluctuations. These contracts are used to reduce
ScanSoft's risk associated with exchange rate movements, as the gains or losses
on these contracts are intended to offset the exchange rate losses or gains on
the underlying exposures. ScanSoft does not engage in foreign currency
speculation. The success of ScanSoft's foreign currency risk management program
depends upon the ability of the forward exchange contracts to offset the foreign
currency risk associated with the hedged transaction. To the extent that the
amount or duration of the forward exchange contract and hedged transaction vary,
ScanSoft could experience unanticipated foreign currency gains or losses that
could have a material impact on ScanSoft's results of operations.
ScanSoft entered into a forward exchange contract to hedge the foreign
currency exposure of its 5 million euro note payable to Philips. A forward
exchange contract to exchange a total of $5.3 million for 5.0 million euros with
a weighted-average settlement price of 1.0636 euro/USD, with an original term of
11 months, was outstanding at March 31, 2003.
SCANSOFT'S BUSINESS
BUSINESS
ScanSoft is a leading provider of software that allows users to convert
documents, images and speech into information used within digital applications.
ScanSoft's products and technologies automate manual processes and help
enterprises, professionals and consumers increase productivity, reduce costs and
save time. ScanSoft's products are built upon digital capture and speech
technologies, and are sold as solutions into the financial, legal, healthcare,
government, telecommunications and automotive industries. ScanSoft's digital
capture technologies transform text and images into digital documents and
information. ScanSoft's speech technologies transform speech into text and text
into speech, and enable the voice control of hardware and software applications.
ScanSoft's software is delivered as independent applications or as
technology included by others into larger integrated systems, such as enabling
document conversion capabilities within networked digital copiers or enabling
voice control within customer service call centers. ScanSoft's digital capture
solutions eliminate the need to manually reproduce documents, automate the
integration of documents into business systems, and enable the use of electronic
documents and forms within XML, Internet, mobile and other business
applications. ScanSoft's speech solutions automatically create documents from
speech, transform text into synthesized speech, and enable seamless interaction
with hardware and software systems simply by speaking. ScanSoft's products and
technologies deliver a measurable return on investment to its customers.
ScanSoft's technologies are based on complex mathematical formulas, which
require large amounts of linguistic and image data, acoustic models and
recognition techniques. A significant investment in capital and time would be
necessary to replicate ScanSoft's current capabilities, and ScanSoft continues
to build upon its leadership position. ScanSoft's digital capture technology is
recognized as the most accurate in the industry, with rates as high as 99.8%,
and supports more than 100 languages. ScanSoft's speech technology has
industry-leading recognition accuracy, provides natural sounding synthesized
speech in 20 languages, and supports a broad range of hardware platforms and
operating systems. ScanSoft's technologies are covered by more than 300 patents
or patent applications.
ScanSoft has established relationships with more than 2,000 resellers,
including leading system vendors, independent software vendors, value-added
resellers and distributors, through which it markets
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and distributes its products and solutions. In digital capture, companies such
as Brother, Canon, Hewlett-Packard, Visioneer and Xerox include ScanSoft's
technology in digital copiers, printers and scanners, as well as multifunction
devices that combine these capabilities. In addition, companies such as Corel,
Kofax, Lockheed Martin, Microsoft and Symantec embed ScanSoft's digital capture
technology into their commercial software applications. In speech, companies
such as Cisco, Dictaphone, Lucent, GSL and Microsoft embed ScanSoft's
technologies into telecommunications systems, as well as automotive, PC or
multimedia applications. Each of these listed companies is one of ScanSoft's
five largest revenue producing OEM customers, in their respective category, for
the year ended December 31, 2002. ScanSoft also maintains an extensive network
of value-added resellers to address the needs of specific markets, such as
financial, legal, healthcare and government. ScanSoft sells its applications to
enterprises, professionals and consumers through major independent distributors
that deliver ScanSoft's products to computer superstores, consumer electronic
stores, mail order houses, office superstores and eCommerce Web sites.
ScanSoft incorporated as Visioneer, Inc. in March 1992 and through December
1998 developed and sold scanner hardware and software products. On January 6,
1999, Visioneer sold the hardware business and the Visioneer brand name to
Primax Electronics, Ltd., and on March 2, 1999, Visioneer acquired ScanSoft,
then a wholly owned subsidiary of Xerox Corporation, in a cash election merger
from Xerox Corporation.
The corporate entity "Visioneer" survived the merger, but changed its name
to "ScanSoft, Inc." In addition, Visioneer changed the ticker symbol for its
common stock that trades on the NASDAQ National Market, to "SSFT." On March 13,
2000, ScanSoft merged with Caere Corporation, a California-based digital imaging
software company. In December 2001, ScanSoft acquired certain assets and
intellectual property relating to the former L&H entities that were in
bankruptcy under the jurisdiction of both the United States Bankruptcy Court for
the District of Delaware and the Belgium Court of Ieper and hired certain
employees from those entities. In January 2003, ScanSoft acquired Royal Philips
Electronics' Speech Processing Telephony and Voice Control business units and
related intellectual property for aggregate consideration of approximately $39.4
million. Since 1997 and through March 2003, ScanSoft made five significant
business acquisitions and acquired several key technologies for aggregate
consideration totaling approximately $273 million.
ScanSoft's focus on providing solutions that enable the capture and
conversion of information requires a broad set of technologies and channel
capabilities. ScanSoft has made and expects to continue to make acquisitions of
other companies, businesses and technologies to complement its internal
investments in these areas. ScanSoft has a small team that focuses on evaluating
market needs and potential acquisitions to fulfill them. In addition, ScanSoft
has a disciplined methodology for integrating acquired companies and businesses
after the transaction is complete.
SCANSOFT'S MARKETS AND PRODUCTS
DIGITAL CAPTURE MARKET
Document and PDF Conversion. Despite the broad use of computing systems in
enterprises, the majority of business information is still maintained in paper
form. The proliferation of PDF as a digital document standard does not resolve
the problem of accessing and utilizing information trapped in a static form. In
addition, manually reproducing static documents in digital form is time
consuming, costly and subject to error, taking valuable resources away from more
productive activities. Enterprises and workgroups seek solutions that integrate
paper and static PDF documents into their business processes, allowing them to
automate the way they store, edit, use and share information.
ScanSoft's solutions help businesses save time and money by automatically
converting paper documents and PDF files into editable and usable business
documents. Based on optical character recognition, ScanSoft's software delivers
highly accurate document and PDF conversion, replacing the need to manually
re-create documents. ScanSoft's software preserves document formatting and
provides editing capabilities that re-create the complex components in a typical
document, including formatted text, columns, graphics, tables and spreadsheets.
ScanSoft's products can be used with existing business
124
applications and enable the distribution and publishing of documents to email,
Internet and mobile applications using standard file formats, including XML,
HTML, PDF and Open eBook.
The proliferation of multifunction devices and digital copiers connected
over a network has increased the number of documents that individuals within an
enterprise are transforming into digital format. ScanSoft's software solutions
create a more efficient method to process static documents in enterprise content
management and database systems, thereby enhancing the value of their
investments in these systems. All of these documents can then be more easily
archived, edited and combined within the enterprise.
ScanSoft's solutions are used in professional office settings, particularly
in the government, legal, finance and education sectors. ScanSoft's software is
available in 11 languages. ScanSoft utilizes a combination of its global
reseller network and direct sales to distribute its document and PDF conversion
products. ScanSoft licenses its software to companies such as Canon,
Hewlett-Packard and Xerox, which bundle its solutions with multifunction
devices, digital copiers, printers and scanners.
ScanSoft also licenses software development toolkits to independent
software vendors, integrators and in-house developers to add document and PDF
conversion capabilities to their applications. ScanSoft's independent software
vendor customers include vendors, such as Microsoft and Symantec. ScanSoft's
technology is also used within high-end enterprise systems from vendors such as
Kofax and Lockheed Martin.
Digital Paper Management. As the volume and complexity of corporate data
continues to multiply, organizations are increasingly challenged in their
efforts to manage all of their paper and digital documents. The wide dispersion
of documents makes finding complete and specific information even more
difficult, time-consuming and costly. As a result, businesses need solutions
that allow individuals, workgroups or the entire organization to more
efficiently organize, find and share business documents.
ScanSoft's solutions convert paper into digital documents that can be
easily archived, retrieved and shared. ScanSoft's software can be used in
conjunction with network scanning devices to preserve an image of a document
exactly as it appears on paper. ScanSoft's software automatically indexes the
scanned image, so that it can be stored together with other digital documents on
a desktop, over a network or within an enterprise content management system. In
a single search, users can quickly find scanned documents and existing digital
files that match the search criteria.
Within enterprises, workgroups and distributed teams, ScanSoft's products
also facilitate the movement of scanned paper and digital documents into email,
print and other business applications. This streamlines the flow of documents
between workers, decreasing the time and costs associated with managing and
using paper documents. ScanSoft's solution integrates with established file
systems, such as Oracle 9i Collaboration Suite, to simplify the transfer of
documents between desktop and enterprise content management systems.
ScanSoft's solutions are used in enterprises and workgroups, especially
those within the legal, healthcare, financial, government, real estate and
education industries. ScanSoft's software is available in eight languages.
ScanSoft utilizes a combination of its global reseller network and direct sales
to distribute its digital paper management products. It also licenses its
software to companies such as Brother, Hewlett-Packard, and Xerox, which bundle
ScanSoft's solutions with multifunction devices, digital copiers, printers and
scanners.
Electronic Forms. Paper forms are expensive to print, store and
distribute. They must be physically circulated for approval and, when completed,
paper forms must be collected, verified and archived. Processing paper forms
adds to this expense by requiring the manual transfer of data on completed forms
into business applications. As a result, organizations seek solutions that
implement online alternatives to the use of paper forms in order to reduce costs
and increase operational efficiency.
ScanSoft's products automatically convert paper forms into fillable
electronic forms that can be easily used by enterprises and other organizations.
ScanSoft's products also convert static PDF and Microsoft
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Word forms into fillable electronic forms using XML, HTML and PDF standards.
ScanSoft's solutions simplify the design and creation of new forms that can be
delivered electronically with the same appearance as paper. ScanSoft's products
enable the access and distribution of forms through the Web and email, and can
be electronically routed, approved and digitally signed. ScanSoft's solution
validates form information and automates data collection by connecting
electronic forms with standard database and back office applications.
ScanSoft's solutions are used in enterprises and workgroups, especially
those within the government, financial, public safety, education, legal,
healthcare and real estate industries. ScanSoft's software is available in
English, French and German. ScanSoft utilizes a combination of its global
reseller network and direct sales to distribute its electronic forms products.
Companies such as Hewlett-Packard bundle ScanSoft's solutions with multifunction
devices, digital copiers, printers and scanners, and organizations such as the
U.S. Internal Revenue Service and the Law School Admission Council license
ScanSoft's solutions.
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The following table summarizes ScanSoft's digital capture products:
PRODUCT HIGHLIGHTS
------- ----------
DOCUMENT AND PDF - Converts paper and PDF into documents that can be edited,
CONVERSION archived and shared
OmniPage - Most widely used optical character recognition product
- Accuracy of up to 99.8%, the highest in the industry
- Converts into XML, HTML, Open eBook, Microsoft Word, Excel
and PowerPoint
- Retains precise document layout and formatting
- Integrates with enterprise content management systems
- Recognizes 114 languages
- Recent Editors' Choice Awards from PC Magazine and CNET
- Localized in 11 languages
- Available on Microsoft Windows 98/NT/2000/XP and Apple
Macintosh operating systems
Capture Development - Toolkit of sophisticated imaging, PDF and capture
System capabilities
- Optical character recognition, handprint, checkbox and
barcode recognition
- Supports PDF, JPEG, TIFF and other image formats
- Exports Microsoft Word and Excel, RTF, ASCII, HTML, PDF
and other document formats
- Recognizes more than 100 languages
- Supports over 200 scanning devices
- Available on Microsoft Windows NT/2000/XP operating
systems
DIGITAL PAPER MANAGEMENT - Simplifies scanning, organizing and sharing paper
PaperPort documents
- Index, search and retrieve scanned paper and digital
documents
- Adds document management and collaboration capabilities to
Microsoft Windows
- Thumbnail based visual file management
- Adds scanning and creation of searchable PDF files to
Oracle 9i
- Integrates with network file systems and content
management applications
- Speeds document set assembly and connectivity to workgroup
- Localized in eight languages
- Available on Microsoft Windows 98/NT/2000/XP operating
systems
ELECTRONIC FORMS - Converts paper, static PDF and Microsoft Word forms into
OmniForm fillable electronic forms
- Supports online filling, routing, electronic signing,
validation and collection of forms
- Connectivity with Microsoft Access, Excel, SQL Server,
Oracle and other database applications
- Supports XML, HTML and PDF standards
- Localized in English, French and German
- Available on Microsoft Windows 98/NT/2000/XP operating
systems
SPEECH MARKET
Speech Recognition and Dictation. Organizations demand solutions that
increase productivity by automating repetitive business processes, including the
creation of documents, data entry and completing forms. They also look for ways
to maximize the productivity of their existing workers, including those with
disabilities, and to comply with government requirements relating to workplace
safety and accessibility. Organizations also seek solutions that can reduce the
cost associated with manual transcription of
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professional documents. Since most people can talk more quickly than they can
type, speech is a natural way to interact with computers to address these
problems.
ScanSoft's speech recognition and dictation solutions increase productivity
in the workplace by using speech to create documents, streamline repetitive and
complex tasks, input data, complete forms and automate manual transcription
processes. ScanSoft's solutions allow users to automatically convert speech into
text at up to 160 words-per-minute, much faster than most people can type.
ScanSoft's software supports a vocabulary of more than 250,000 words that can be
expanded by users to include specialized words and phrases. ScanSoft's software
is designed to adapt to individual voice patterns and accents and is highly
accurate, able to achieve accuracy rates of approximately 95%, with the ability
to achieve still greater accuracy with frequent use. ScanSoft's software
supports multiple languages, including Dutch, French, German, Italian, Japanese,
Spanish, Swedish, and U.S./U.K. English.
ScanSoft's solutions are valuable within enterprises and workgroups for a
number of reasons. ScanSoft's software can operate within a distributed network
environment, where speaker profiles can be stored on a server and accessed from
any networked computer. ScanSoft's solutions also speech enable existing
business systems and applications, including electronic records management
systems and customer service and billing applications. ScanSoft's software
allows a user to interact with a computer without a keyboard or mouse,
increasing the productivity of disabled workers and those suffering from
repetitive stress injury. ScanSoft's solutions also help government agencies
address accessibility mandates, such as those described in Section 508 of the
U.S. Government Rehabilitation Act. ScanSoft also delivers versions of its
products that are specialized for the medical, legal and public safety vertical
markets.
ScanSoft offers a range of implementations, each with features that match a
specific customer target. ScanSoft's solutions are also used in enterprises and
workgroups, particularly in the medical, legal, government, finance and
education sectors. ScanSoft's software is available in eight languages. ScanSoft
utilizes a combination of its global reseller network and direct sales to
distribute its speech recognition and dictation products. ScanSoft believes that
it gains a competitive advantage through its established value-added reseller
community, who provide local sales, integration, training and support services
to ScanSoft's professional end-user community. ScanSoft also licenses its
software to companies such as Corel and Panasonic, which bundle ScanSoft's
solutions with some of their products.
Telephony Solutions. Organizations look for ways to reduce the costs
associated with serving their customers without sacrificing the quality of
service that they deliver. They also seek solutions that more effectively
connect their mobile workforce with real-time enterprise information, including
customer data, email and schedules, while at the same time reducing operating
costs. Speech-based telephony technologies are used to implement systems and
applications to achieve these goals.
ScanSoft's telephony solutions allow enterprise customers, telephony
vendors and carriers to speech-enable a range of services, including call center
automation, directory assistance, interactive voice response and voice portal
applications. ScanSoft's solutions are highly scalable, able to handle large
call volumes, and are available on many hardware platforms and operating
systems. These solutions are based on text-to-speech and speech recognition
technologies.
ScanSoft's text-to-speech solutions deliver natural sounding results by
using segments of real human speech, thereby increasing listener satisfaction
especially in the delivery of multiple phrases and sentences. ScanSoft's
solutions provide a single, standardized interface that supports the creation of
speech-enabled applications in 20 languages, more than any other vendor.
ScanSoft's products also support the rapid and cost-effective implementation of
customized voices for specific customers.
ScanSoft's telephony speech recognition solutions are speaker-independent
technology that adds voice control capabilities to applications. This technology
identifies specific words and phrases at any moment in time, converting spoken
words into instructions that control functions within applications. ScanSoft
technology supports 45 languages and can process a vocabulary of more than one
million words.
The technology is also used in ScanSoft's corporate voice dialing and
automated directory assistance applications.
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ScanSoft's solutions are used within a wide range of applications,
including accessing emails through unified messaging systems, automating call
centers and customer service operations, and adding voice capabilities to
telecommunications services such as directory assistance and name directories.
These solutions are intended to help organizations improve customer service,
lower administrative costs, and provide new productivity and communications
services.
ScanSoft licenses products to systems integrators, technology providers and
telecommunications companies that in turn sell an integrated solution to
businesses and end-users. This indirect, or channel-based, method of selling
allows ScanSoft to focus on technology advancement instead of custom
deployments. ScanSoft licenses its solutions to developers of telephony
applications, including Cisco and Lucent, which integrate ScanSoft's solutions
into hardware and software platforms.
Voice Control. Automobile and mobile communications manufacturers and
their suppliers are accelerating the development of products that require
enhanced voice control capabilities. In addition, a growing number of
independent software and hardware vendors are incorporating voice control into
multimedia applications.
ScanSoft's voice control solutions are based upon automatic speech
recognition technologies that allow users to interact with devices simply by
speaking. ScanSoft's solutions for automotive and mobile applications support
large, dynamic vocabularies and have sophisticated noise management capabilities
that ensure accuracy, even at high vehicle speeds. ScanSoft's products scale to
meet the size and accuracy requirements for automotive and navigation systems
and offer rapid application development tools, extensive compatibility with
hardware and operating systems, and support for up to 16 languages. By scale,
ScanSoft means that it offers a variety of voice control solutions that are
designed to meet the individual vocabulary, operating system and memory
requirements of different applications and devices. ScanSoft includes toolkits
with its engines that help developers add ScanSoft's technologies to
applications such as navigation systems, hands-free cell phone devices and
voice-activated controls in an automobile.
ScanSoft's voice control solutions are embedded by tier-one, automobile,
cell phone and aftermarket system manufacturers, including Citroen, Daimler
Chrysler, Delphi, General Motors, Microsoft and Pioneer. By embedded, ScanSoft
means its technologies are included as part of a larger system, application or
solution that is designed, manufactured and sold by its partners. These partners
include tier-one suppliers, companies whose size and importance qualifies them
to be direct suppliers to the major automotive manufacturers, and in-dash radio,
navigation system and other electronic device manufacturers, also known as
aftermarket systems providers. In addition, Microsoft ships ScanSoft's product
as the reference speech software development toolkit for Windows CE for
Automotive, and independent software developers embed ScanSoft's speech
recognition technologies into multimedia applications.
AudioMining. ScanSoft's AudioMining products are based on its speech
recognition and dictation solutions and are used to automatically create index
information for words spoken in audio and video content. ScanSoft's products
allow users to search for specific audio and video content using standard text
queries. ScanSoft's solutions not only present matched audio and video files,
but also provide random access to precise match locations within each audio and
video file. ScanSoft's solutions can also be used to time-align existing
transcripts with video clips, automating the creation of captions. ScanSoft's
AudioMining solutions provide efficient access to the information currently
hidden within media files and reduce the cost associated with creating captioned
video. AudioMining is used within call center and security applications to
facilitate the retrieval of specific recorded conversations based on the
identification of key words and phrases. AudioMining is also used by content
providers to enable text queries for specific Web-based media content, such as
news, financial analyst reports, sports and talk radio.
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The following table summarizes ScanSoft's speech-related products:
PRODUCT HIGHLIGHTS
------- ----------
SPEECH RECOGNITION AND - Highly accurate automatic speech recognition
DICTATION - Converts speech into text at up to 160 words per minute
Dragon - Recognizes more than 250,000 words
NaturallySpeaking - Speech-enables Microsoft Windows applications
- Adds voice control to Microsoft Windows operating system
- Available in eight languages
- Vertical implementations for medical, legal and public
safety markets
- Performs complex tasks simply by speaking
- Complements accessibility efforts for disabled workers
- Supports Microsoft Windows 98/NT/2000/XP
AudioMining Development - Automatically converts speech within audio and video into
System XML search index data
- Allows text-based search for content in audio and video
content
- Time-aligns captions for video content
- Supports word-spotting for call center and security
applications
TELEPHONY SOLUTIONS - Industry-leading synthesized human speech solution
RealSpeak - Converts text into speech in 20 languages
- Scalable, high-density capabilities
- Supports Microsoft Windows 98/NT/2000/XP, Windows CE,
Windows CE for Automotive; Sun Solaris; and Linux operating
systems
- Available on Hitachi, Intel, MIPS and NEC hardware systems
SpeechPearl - Provides accurate speech recognition and natural speech
understanding to automate telephony applications
- Recognizes a vocabulary of more than 1 million words
- Provides developer modules to simplify application
integration
- Supports 45 languages
- Supports Microsoft Windows 98/NT/2000/XP
VOICE CONTROL - Highly accurate speaker-independent embedded voice
recognition solution in 13 languages
- Adds sophisticated command and control applications into
automotive, mobile, PC and multimedia applications
- Rapid application development tools
- Accurate speech recognition engine in noisy environments,
even at high vehicle speeds
- Supports Microsoft Windows 98/NT/2000/XP, Windows CE,
Windows CE for Automotive; QNX; and Linux operating systems
- Available on Hitachi, Intel, MIPS and NEC hardware systems
SCANSOFT'S COMPETITIVE STRENGTHS
Core Technology Assets. In recent years, ScanSoft has developed and
acquired extensive technology assets, intellectual property and industry
expertise in digital capture and speech. ScanSoft's technologies are based on
complex mathematical formulas, which require extensive linguistic and image
data, acoustic models and recognition techniques. A significant investment in
capital and time would be necessary to replicate ScanSoft's current
capabilities. ScanSoft continues to invest in the advancement of its
technologies to maintain its market leading position and to develop new
applications. As of December 31, 2002 ScanSoft had 250 full-time employees in
research and development, and its technologies are covered by more than 300
patents or patent applications. Additionally, in connection with the Philips
acquisition
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ScanSoft hired approximately 116 employees and acquired 132 patents and 189
pending patent applications in speech. ScanSoft also received licenses to
additional speech patents retained by Philips.
Broad Distribution Channels. ScanSoft has established relationships with
more than 2,000 resellers, including leading system vendors, independent
software vendors and distributors. ScanSoft maintains an extensive network of
value-added resellers to address the needs of specific markets, such as
financial, legal, healthcare and government. In addition, ScanSoft's channel
network enables it to introduce new products quickly and effectively into the
global marketplace.
Leading Market Share. ScanSoft has a strong market position in each of its
product categories and is the market leader in document and PDF conversion,
speech recognition and dictation, and text-to-speech. Approximately 79% of its
revenue for the year ended December 31, 2002 was derived from markets where it
is the established leader. As the established brand in its markets, ScanSoft
believes it can target and win more partnership arrangements and new customers
than its competition.
International Focus. The broad language coverage within ScanSoft's
products increases the likelihood that it will be a selected technology provider
to vendors selling globally. With nearly one half of its staff located outside
of North America, ScanSoft is able to efficiently compete on a global basis.
Multiple End Markets. ScanSoft sells to a range of end markets and
maintain a tiered distribution model that provides a diversified revenue stream
and broad market exposure. ScanSoft is not dependent on any single market
segment or set of end customers and earn revenue from both established and
emerging markets.
SCANSOFT'S STRATEGY
Expand Digital Capture Solutions. ScanSoft intends to enhance the value of
its digital capture solutions for enterprises to address the expanded use of
content management systems, the proliferation of PDF and the widespread adoption
of networked multifunction and digital scanning devices. ScanSoft expects to
introduce new products or new versions of existing products to take advantage of
these growth opportunities. ScanSoft also plans to enhance its software
development toolkits so its technologies can be integrated with more third-party
solutions. ScanSoft expects to maintain product development and delivery cycles
that range from 12 to 18 months for each of its digital capture products and
applications.
Pursue High Growth Markets In Speech. ScanSoft intends to leverage its
technologies and market leadership in speech to expand its opportunities in the
automotive, healthcare, telecommunications, telematic and mobile markets.
ScanSoft also intends to pursue emerging opportunities to use its speech
technology within consumer devices, games and other embedded applications. To
expand its position, ScanSoft has introduced new versions of its products that
are designed for specific markets; completed new license agreements with
customers and partners that will resell its technologies; and completed the
acquisition of Philips Speech Processing Telephony and Voice Control business
units that ScanSoft believes complement its existing solutions and resources in
the telecommunications, automotive and electronics markets.
Grow Market Share. ScanSoft intends to increase its market share in each
of its product categories. In particular, ScanSoft intends to expand and add
features and functions to its products to make its solutions more useful to and
useable by a larger customer base. In addition, ScanSoft intends to aggressively
pursue sales and partnership opportunities to build on its leading positions in
text-to-speech and speech recognition, and to capture additional market share
and increase the penetration of its products.
Expand Worldwide Channels. ScanSoft intends to expand its global channel
network and build upon its existing distribution channels, especially in Europe,
Asia and Latin America. In particular, ScanSoft intends to replicate its
successful North American value-added reseller channel in Europe. Along these
lines, ScanSoft has added sales employees in different geographic regions and
launched programs and events to help recruit new partners for its channel
network.
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Capitalize on Government Initiatives. ScanSoft intends to market its
products aggressively in North America and abroad to capitalize on legislative
mandates and government initiatives to put government processes online, to
enhance opportunities for workers with disabilities and to promote public
safety.
Pursue Strategic Acquisitions. ScanSoft has selectively pursued strategic
acquisitions. For example, during the last year ScanSoft completed the L&H
acquisition and completed the Philips acquisition. ScanSoft intends to continue
to pursue strategic acquisitions as a part of its growth strategy.
SALES, DISTRIBUTION AND FULFILLMENT
ScanSoft has established relationships with more than 2,000 channel
partners, including leading system vendors, independent software vendors,
value-added resellers and distributors, through which it markets and distributes
its products and solutions. In digital capture, companies such as Brother,
Canon, Hewlett-Packard, Visioneer and Xerox include ScanSoft's technology in
digital copiers, printers and scanners, as well as multifunction devices that
combine these capabilities. In addition, companies such as Corel, Kofax,
Lockheed Martin, Microsoft and Symantec embed ScanSoft's digital capture
technology into their commercial software applications. In speech, companies
such as Cisco, Dictaphone, Lucent, Matsushita and Microsoft embed ScanSoft's
technologies into telecommunications systems, as well as automotive, PC or
multimedia applications.
ScanSoft also maintains an extensive network of value-added resellers to
address the needs of specific markets, such as financial, legal, healthcare and
government. ScanSoft sells its applications to enterprises, professionals and
consumers through distribution and fulfillment partners, including 1450, Ingram
Micro, Tech Data and Digital River. These distribution and fulfillment partners
provide ScanSoft's products to computer superstores, consumer electronic stores,
eCommerce Web sites, mail order houses and office superstores, such as
Amazon.com, Best Buy, CDW, MicroWarehouse, Circuit City, CompUSA, Fry's
Electronics, Office Depot, PC Connection and Staples. ScanSoft also maintains an
extensive network of value added resellers to address the needs of specific
markets such as medical, legal and public safety. ScanSoft also sells products
through its Web site at www.ScanSoft.com.
Until recently, most of ScanSoft's software products were manufactured,
packaged and shipped by GlobalWare Solutions on a worldwide basis. In June 2003,
ScanSoft transitioned its manufacturing and fulfillment activity to
Hewlett-Packard Corporation. This agreement strengthens the strategic
relationship between Hewlett-Packard and ScanSoft.
As of May 31, 2003, ScanSoft employed 147 full-time sales and marketing
employees in offices worldwide.
PROPRIETARY TECHNOLOGY
ScanSoft exploits its proprietary technology, trade secrets, know-how,
continuing technological innovations and licensing opportunities to maintain its
competitive position. ScanSoft relies on patent law, copyright law, trade secret
laws, secrecy, technical measures, licensee agreements and non-disclosure
agreements to protect its technology, trade secrets and other proprietary
rights. ScanSoft's policy is to file patent applications to protect technology,
inventions and improvements that are important to the development of its
business, to maintain a technological advantage over its competitors and to
generate licensing revenue. In this regard, ScanSoft has obtained patents that
directly relate to its products. Furthermore, ScanSoft obtained in the L&H
acquisition 131 patents and 165 pending patent applications in speech.
ScanSoft's digital capture and speech technologies are covered by more than 300
patents or patent applications. These patents expire on various dates between
2005 and 2016.
In connection with the Philips acquisition ScanSoft acquired 132 patents
and 189 pending patent applications in speech. ScanSoft also received licenses
to additional speech patents retained by Philips.
In order to protect its ownership rights in its software products, ScanSoft
licenses its products to OEMs and resellers on a non-exclusive basis with
contractual restrictions on reproduction, distribution and
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transferability. In addition, ScanSoft generally licenses its software in object
code form only. ScanSoft licenses certain of its software products to end-users
by use of a "shrink-wrap" or "click wrap" customer license that restricts the
end-user to personal use of the product.
ScanSoft requires its employees to execute confidentiality and invention
assignment agreements in order to protect its proprietary technology and other
proprietary rights. ScanSoft also relies on trade secrets and proprietary
know-how.
RESEARCH AND DEVELOPMENT
The market for ScanSoft's products and services is characterized by rapid
technological change, frequent new product introductions and enhancements,
evolving industry standards, and rapidly changing client requirements. As a
result, ScanSoft believes that its future growth is highly dependent on the
timely and efficient introduction of new and updated products and technology. As
of May 31, 2003, ScanSoft employed 326 people in research and development, over
half of whom are located in international locations. ScanSoft employees based in
overseas facilities extend its global focus while often lowering its overall
cost of research and development. To promote efficiency in its research and
development efforts, ScanSoft has organized the effective use of global
development teams and a comprehensively integrated development process. In
addition, ScanSoft has developed and refined its time-to-market process, which
contributes to cost-effective resource management while promoting technology
sharing across programs.
ScanSoft's future success will depend in part on its ability to anticipate
changes, enhance its current products, develop and introduce new products that
keep pace with technological advancements and address the increasingly
sophisticated needs of its clients. ScanSoft's research and development expenses
for the years ending December 31, 2002, 2001 and 2000 were $27.6 million, $14.0
million and $15.0 million, respectively. ScanSoft expects that it will continue
to commit significant resources to research and development in the future and
that research and development expenses will continue to increase, particularly
in 2003 as a result of the Philips acquisition. All research and development
expenses have been expensed as incurred.
INTERNATIONAL OPERATIONS
ScanSoft currently has offices in a number of international locations
including: Australia, Belgium, Denmark, England, France, Germany, Hong Kong,
Hungary, Italy, Japan, the Netherlands, Poland, and Taiwan. The scope of its
international operations includes research and development, customer support and
sales and marketing. ScanSoft's international research and development is
conducted in Budapest, Hungary; Merelbeke, Belgium and Aachen, Germany.
Additionally sales and support offices are located throughout the world to
support ScanSoft's current international customers and to expand its
international revenue opportunities.
Geographic revenue classification is based on the country in which the sale
is invoiced. Revenue for the year ended December 31, 2002 was 73% North America
and 27% international, versus 79% North America and 21% international for the
comparable period in 2001.
A number of ScanSoft's OEM partners distribute their products throughout
the world and do not provide ScanSoft with the geographical dispersion of their
products. ScanSoft believes that if provided with this information, its
geographical revenue classification would indicate a higher international
percentage. Based on an estimate that factors its OEM partners' geographical
revenue mix into its revenues generated from these OEM partners, revenue for the
year ended December 31, 2002, is approximately 67% North America and 33%
international, compared to 70% North America and 30% international for the
comparable period in 2001.
COMPETITION
There are a number of companies that develop or may develop products that
compete in ScanSoft's targeted markets; however, there is no one company that
competes with ScanSoft in all of its product
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areas. The individual markets in which ScanSoft competes are highly competitive,
and are rapidly changing. Within digital capture, ScanSoft competes directly
with ABBYY, I.R.I.S. and NewSoft. Within speech, ScanSoft competes with AT&T,
IBM, Nuance Communications and SpeechWorks International, among others. Vendors
such as Adobe and Microsoft offer solutions that can be considered alternatives
to some of ScanSoft's solutions. In addition, a number of smaller companies
produce technologies or products that are in some markets competitive with
ScanSoft's solutions. Current and potential competitors have established, or may
establish, cooperative relationships among themselves or with third parties to
increase the ability of their technologies to address the needs of ScanSoft's
prospective customers.
Some of ScanSoft's competitors or potential competitors in its markets have
significantly greater financial, technical and marketing resources than ScanSoft
does. These competitors may be able to respond more rapidly than ScanSoft can to
new or emerging technologies or changes in customer requirements. They may also
devote greater resources to the development, promotion and sale of their
products than ScanSoft does.
EMPLOYEES
As of May 31, 2003 ScanSoft employed 618 people on a full-time basis, 297
in the United States and 321 internationally. Of the total, 326 were in product
research and development, 147 in sales and marketing, 95 in operations and
support, and 50 in finance and administration. Of these employees, 116 were
hired in connection with the Philips acquisition completed on January 30, 2003.
Of the total employees hired, 88 were in product research and development, 24 in
sales and marketing and 4 in operations and support. None of ScanSoft's
employees are subject to collective bargaining agreements. ScanSoft has
experienced no work stoppages and believes that its employee relations are good.
ScanSoft has utilized the services of consultants, third-party developers, and
other vendors in its sales, development, and manufacturing activities.
PROPERTIES
ScanSoft's principal administrative, sales, marketing and support functions
along with its North American imaging research and development functions occupy
45,860 square feet of space that ScanSoft leases in Peabody, Massachusetts.
ScanSoft also leases 26,568 square feet of space in Waltham, Massachusetts where
its North American speech and language research and development is performed.
These leases expire in July 2006 and September 2006, respectively. Additionally,
ScanSoft leases approximately 21,180 square feet of research and development
space located in Budapest, Hungary and 20,085 square feet in Merelbeke, Belgium,
which houses ScanSoft's research and development and international headquarters
space. These leases expire in December 2006 and April 2008, respectively. In
connection with the Philips acquisition, ScanSoft assumed a lease for
approximately 39,000 square feet of research and development space located in
Aachen, Germany. This lease expires in March 2006. ScanSoft also leases a number
of small sales and marketing offices in Asia and Europe, including offices
located in Amsterdam, the Netherlands; Hong Kong, China; Taipei, Taiwan; Milan,
Italy; Munich, Germany; Goteborg, Sweden; Paris, France; Reading, England;
Budapest, Hungary; and Tokyo, Japan.
ScanSoft believes that its existing facilities are adequate for its needs
for at least the next twelve months.
LEGAL PROCEEDINGS
Like many companies in the software industry, ScanSoft has from time to
time been notified of claims that it may be infringing the intellectual property
rights of others. These claims have been referred to legal counsel, and they are
in various stages of evaluation and negotiation. In addition, the following
claims are in litigation:
On November 27, 2002, AllVoice Computing plc filed an action against
ScanSoft in the United States District Court for the Southern District of Texas
claiming patent infringement. In the lawsuit, AllVoice alleges that ScanSoft is
infringing United States Patent No. 5,799,273 entitled "Automated
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Proofreading Using Interface Linking Recognized Words to Their Audio Data While
Text Is Being Changed" (the "'273 Patent"). The '273 Patent generally discloses
techniques for manipulating audio data associated with text generated by a
speech recognition engine. Although ScanSoft has several products in the speech
recognition technology field, ScanSoft believes that its products do not
infringe the '273 Patent because they do not use the claimed techniques. Damages
are sought in an unspecified amount. ScanSoft filed an Answer on December 23,
2002. For the reasons described here, ScanSoft believes this claim has no merit,
and it intends to defend the action vigorously.
In December 2001, the Massachusetts Institute of Technology and Electronics
For Imaging, Inc. sued ScanSoft in the United States District Court for the
Eastern District of Texas for patent infringement. The patent infringement claim
was filed against more than 200 defendants. In their lawsuit, MIT and EFI allege
that ScanSoft infringes United States Patent No. 4,500,919 entitled "Color
Reproduction System" (the "'919 Patent"). MIT and EFI allege that the '919
Patent discloses a system for adjusting the colors of a scanned image on a
television screen and outputting the modified image to a device. ScanSoft has
several products that permit a user to adjust the color of an image on a
computer monitor. ScanSoft has asserted that its products do not infringe the
'919 Patent because its products do not contain all elements of the structure
required by the claimed invention and because its products do not perform all of
the steps required by the claimed method. Further, ScanSoft believes there may
be prior art that would render the '919 Patent invalid. The '919 Patent expired
on May 6, 2002. Damages are sought in an unspecified amount. ScanSoft filed an
Answer and Counterclaim on June 28, 2002. For the reasons described here,
ScanSoft believes this claim has no merit, and it intends to defend the action
vigorously.
On August 16, 2001, Horst Froessl sued ScanSoft in the United States
District Court for the Northern District of California for patent infringement.
In his lawsuit, Froessl alleges that ScanSoft infringes United States Patent No.
4,553,261 entitled "Document and Data Handling and Retrieval System" (the "'261
Patent"). Froessl alleges that the '261 Patent discloses a system for receiving
and optically scanning documents, converting selected segments of the
digitalized scan data into machine code, and storing and retrieving the
documents and the digitalized and converted segments. Although ScanSoft has
several products in the scanning technology field, ScanSoft has asserted that
its products do not infringe the '261 Patent because its products do not contain
all elements of the structure required by the claimed invention and because its
products do not perform all of the steps required by the claimed method.
Further, ScanSoft believes there may be prior art that would render the '261
Patent invalid. Damages are sought in an unspecified amount. ScanSoft filed an
Answer and Counterclaim on September 19, 2001. For the reasons described here,
ScanSoft believes this claim has no merit, and it intends to defend the action
vigorously.
ScanSoft believes that the final outcome of these matters will not have a
significant adverse effect on its financial position and results of operations,
and it believes it will not be required to expend a significant amount of
resources defending such claims. However, should ScanSoft not prevail in any
such litigation, its operating results and financial position could be adversely
impacted.
From time to time, ScanSoft receives information concerning possible
infringement by third parties of its intellectual property rights, whether
developed, purchased or licensed by ScanSoft. In response to any such
circumstance, ScanSoft has its counsel investigate the matter thoroughly and it
takes all appropriate action to defend its rights in these matters.
135
MANAGEMENT OF SCANSOFT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to
ScanSoft's executive officers and directors as of June 30, 2003.
NAME AGE POSITION
---- --- --------
Paul A. Ricci........................ 46 Chief Executive Officer and Chairman of the
Board
Wayne S. Crandall.................... 44 Senior Vice President of Worldwide Sales and
Business Development
Jeanne McCann........................ 52 Senior Vice President of Speech Research and
Development
Richard S. Palmer.................... 52 Senior Vice President and Chief Financial
Officer
Robert J. Weideman................... 45 Senior Vice President and Chief Marketing
Officer
Ben S. Wittner....................... 45 Senior Vice President Imaging Research and
Development
Robert J. Frankenberg(1)(2).......... 56 Director
Katharine A. Martin.................. 40 Director and Corporate Secretary
Mark B. Myers(1)..................... 64 Director
Robert G. Teresi(1)(2)............... 61 Director
---------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Paul A. Ricci has served as ScanSoft's Chairman since March 2, 1999 and
ScanSoft's Chief Executive Officer since August 21, 2000. From January 1998 to
August 2000, Mr. Ricci was the Vice President, Corporate Business Development of
Xerox. Prior to 1998, Mr. Ricci held several positions within Xerox, including
serving as President, Software Solutions Division and as President of the
Desktop Document Systems Division. Between June 1997 and March 1999, Mr. Ricci
served as Chairman of the Board of Directors of ScanSoft, Inc., which was then
operating as an indirect wholly owned subsidiary of Xerox.
Wayne S. Crandall has served as ScanSoft's Senior Vice President Sales and
Business Development since January of 2002. Mr. Crandall served as Senior Vice
President Sales and Marketing from November 2000 until December of 2001. From
March 2000 to November 2000, Mr. Crandall was Senior Vice President Sales, and
from March 1995 to March 2000, he was Vice President Sales and Channel
Marketing. From January of 1993 until March 1995, Mr. Crandall was ScanSoft's
Managing Director of International Sales, Marketing and Operations based in the
United Kingdom. From December 1989 until January of 1993, Mr. Crandall was Vice
President of North American Sales for Xerox Imaging Systems, a wholly owned
subsidiary of Xerox. From January of 1984 until December of 1989, Mr. Crandall
was the Director of North American Sales for Kurzweil Computer Products. From
1978 until January of 1984, Mr. Crandall held several sales and marketing
positions with Philips N.V., Lexitron, a Division of Raytheon and Savin
Corporation.
Jeanne McCann has served as ScanSoft's Senior Vice President of Speech
Research and Development since December 2001. From June 2000 to December 2001,
Ms. McCann served as Senior Vice President, Development - SLS Division of
Lernout & Hauspie. From July 1998 to June 2000, Ms. McCann served as Vice
President, Development for Dragon Systems, Inc., and from March 1997 to July
1998, as Vice President, Development for Eastman Software, Inc.
Richard S. Palmer has served as ScanSoft's Senior Vice President and Chief
Financial Officer since May 2000. From July 1994 to April 2000, Mr. Palmer was
the Director of Corporate Development at Xerox Corporation. Prior to that, Mr.
Palmer worked in a number of financial management positions at
136
Xerox, including Vice President of Business Analysis for Xerox Financial
Services, Inc., Corporate Assistant Treasurer, and Manager of Planning and
Pricing for Xerox's Latin American Operations.
Robert J. Weideman became the Chief Marketing Officer and Senior Vice
President of ScanSoft in August 2002. Mr. Weideman has served as Vice President,
Marketing since November 2001. From February 1999 until November 2001, Mr.
Weideman was Vice President of Marketing for Cardiff Software, Inc. From August
1994 to January 1999, Mr. Weideman was Vice President of Marketing for TGS N.V.
(TGS Inc., Europe).
Ben S. Wittner has served as ScanSoft's Senior Vice President Imaging
Research and Development since August 2000. From March 2000 to August 2000, Dr.
Wittner served as Vice President Technology Research and Development. From
February 1995 until March 2000, Dr. Wittner was Director of OCR Research and
Development of ScanSoft, Inc., which was operating as an indirect wholly owned
subsidiary of Xerox until March 1999. Dr. Wittner joined ScanSoft in 1992 as
manager of text recognition for OCR development. Previously, Dr. Wittner was an
individual contributor and then supervisor for the handwriting recognition
project at NYNEX. Prior to that, he held a post-doctoral position at AT&T Bell
Laboratories, researching fundamentals and applications of neural networks. Dr.
Wittner earned a Ph.D. in mathematics from Cornell University.
Robert J. Frankenberg has served as a director since March 13, 2000. Since
December 1999, Mr. Frankenberg has served as Chairman of Kinzan, Inc., an
Internet Services software platform provider. From May 1997 to July 2000, Mr.
Frankenberg served as the Chairman, President and Chief Executive Officer of
Encanto Networks, Inc., a developer of hardware and software designed to enable
creation of businesses on the Internet. Since July 2000, Mr. Frankenberg has
continued as Chairman, and since January 2001, has served as Acting President
and CEO of Encanto. From April 1994 to August 1996, Mr. Frankenberg was
Chairman, President and Chief Executive Officer of Novell, Inc., a producer of
network software. Mr. Frankenberg is a director of Electroglas, Inc., National
Semiconductor, Daw Technologies, Inc. and Secure Computing Corporation.
Katharine A. Martin has served as a director since December 17, 1999. Since
March 2, 1999, Ms. Martin has served as ScanSoft's Corporate Secretary. Since
September 1999, Ms. Martin has served as a Member of Wilson Sonsini Goodrich &
Rosati, Professional Corporation. Wilson Sonsini Goodrich & Rosati serves as
ScanSoft's primary outside corporate and securities counsel. Prior thereto, Ms.
Martin was a Partner of Pillsbury Madison & Sutro LLP.
Mark B. Myers has served as a director since March 2, 1999. Dr. Myers
served as Senior Vice President, Xerox Research and Technology, responsible for
worldwide research and technology from February 1992 until April 2000. Dr. Myers
is presently on the faculty of the Wharton Business School, The University of
Pennsylvania.
Robert G. Teresi has served as a director since March 13, 2000. Mr. Teresi
served as the Chairman of the Board, Chief Executive Officer and President of
Caere Corporation from May 1985 until March 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
ScanSoft's compensation committee consists of Messrs. Frankenberg and
Teresi. Ms. Martin was a member of the compensation committee until she resigned
from the committee in October 2002. The compensation committee reviews and
recommends to the Board of Directors the compensation and benefits of ScanSoft's
employees.
During 2002, no member of the compensation committee was an officer or
employee of ScanSoft. During 2002, no member of the compensation committee or
executive officer of ScanSoft served as a member of the board of directors or
compensation committee of any entity that has an executive officer serving as a
member of the ScanSoft board of directors or compensation committee.
137
COMPENSATION OF NON-EMPLOYEE DIRECTORS
Non-employee directors are entitled to participate in the 1995 Directors'
Stock Option Plan. Options granted under this plan constitute the sole
compensation for board service. The plan, as amended in June 2001, provides that
each non-employee director will receive an initial option grant to purchase
50,000 shares of common stock at an exercise price equal to the fair market
value of the stock on the respective effective date of the grant. Each option is
exercisable in installments, 25% each year beginning on the first anniversary of
the grant so that the options are 100% exercisable four years after the
effective date of the grant. The plan also provides for the automatic annual
grant of stock options to purchase 15,000 shares of common stock, which was
5,000 prior to the June 2001 amendment, to each non-employee director on January
1 of each year, provided that, on such date, he or she shall have served on the
board for at least six months. These annual grants become fully vested and
exercisable on the first anniversary of the date of grant. Pursuant to the
automatic grant provisions, on January 2, 2001, each non-employee director was
granted an option to purchase 5,000 shares of common stock at an exercise price
of $.6563, the market price on that date, which amounted to 25,000 shares in the
aggregate. Also pursuant to these automatic grant provision as stated in the
plan, on January 2, 2002, each non-employee director was granted an option to
purchase 15,000 shares of common stock at an exercise price of $4.45, the market
price on that date, which amounted to 75,000 shares in the aggregate. The June
2001 amendment also allowed for the non-automatic grant of an option to purchase
40,000 shares of common stock to all non-employee directors who were outside
directors on January 23, 2001 ("Eligible Directors"). Accordingly, each Eligible
Director received a grant of an option to purchase 40,000 shares on June 27,
2001 at an exercise price of $1.18, the market price on that date, which
amounted to 160,000 shares in the aggregate. These June 27, 2001 options became
fully vested and exercisable on June 27, 2002, the first anniversary of the date
of grant. Effective July 1, 2003, non-employee directors will receive an annual
stipend of $25,000.
SCANSOFT EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years 2002, 2001 and 2000 concerning compensation earned by ScanSoft's Chief
Executive Officer and by ScanSoft's four other most highly compensated named
executive officers whose compensation exceeded $100,000 in 2002 (the "Named
Executive Officers").
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ------------------------
---------------------------------- RESTRICTED SECURITIES ALL OTHER
NAME AND OTHER ANNUAL STOCK UNDERLYING ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION AWARD(S)($) OPTIONS(#) COMPENSATION(2)
------------------ ---- -------- -------- ------------ ----------- ---------- ---------------
Paul A. Ricci......... 2002 $299,000 $25,000(3) $107,000(4) $ -- 1,011,554 $ --
Chief Executive 2001 300,000 39,700 52,746(4)(5) -- -- --
Officer 2000(6) 110,385 12,248 -- -- 2,505,000 --
Michael K. Tivnan..... 2002 $274,516 $25,000(3) $ -- $ -- 122,918 $8,000
President and Chief 2001 275,016 99,250 5,289(5) -- -- 7,062
Operating Officer 2000(7) 269,180 36,378 5,289(5) -- 330,000 8,250
Wayne S. Crandall..... 2002 $224,500 $ -- $ -- $ -- 263,125 $7,125
Senior Vice
President, 2001 225,000 67,382 4,327(5) -- -- 9,154
Sales and Business 2000 180,673 58,102 577(5) -- 200,000 6,773
Development
Richard S. Palmer..... 2002 $219,500 $ -- $ -- $ -- 14,667 $6,967
Senior Vice
President 2001 220,000 69,872 4,231(5) 90,750(8) 100,000 7,017
and Chief Financial 2000(9) 155,833 25,868 4,231(5) 550,000 --
Officer
Robert J. Weideman.... 2002(10) $209,500 $42,000 $ 19,943(12) $200,002(11) 10,500 $6,650
Chief Marketing
Officer, Senior Vice
President
138
---------------
(1) Unless specified otherwise, bonuses were paid pursuant to Bonus Incentive
Plans.
(2) Represents Company contributions to ScanSoft's 401(k) plan.
(3) Represents a bonus paid for successful completion of the Lernout & Hauspie
acquisition.
(4) Includes allowance paid for remote living expenses.
(5) Includes payment of one week of accrued vacation.
(6) Mr. Ricci began serving in this capacity in August 2000.
(7) Mr. Tivnan served as President and Chief Executive Officer from March 1999
to August 2000, and thereafter as President and Chief Operating Officer.
Mr. Tivnan tendered his resignation as an executive officer and director of
ScanSoft effective April 30, 2003.
(8) Mr. Palmer received a Restricted Stock Award for 75,000 shares. This
Restricted Stock Award has a 2 1/2 year cliff vesting, which vests 100% on
April 17, 2004. The value of the Restricted Stock Award as of December 31,
2002 was $390,000.
(9) Mr. Palmer joined ScanSoft in May 2000.
(10) Mr. Weideman began serving in this capacity in August 2002.
(11) Mr. Weideman received a Restricted Stock Award in November 2001 for 58,824
shares. This Restricted Stock Award vests in equal installments of 1/3 on
each anniversary date. On November 27, 2002, 19,608 shares vested at a
value of $147,060. The value of the unvested Restricted Stock holdings as
of December 31, 2002 was $203,923.
(12) Represents reimbursement of relocation expenses.
CHANGE IN CONTROL AND EMPLOYMENT AGREEMENTS
The ScanSoft board of directors approved the acceleration of vesting of
options for certain officers and the directors in the event of a change in
control. A change in control includes a merger or consolidation of ScanSoft not
approved by the ScanSoft board of directors, certain changes in the composition
of the Board, and certain changes in the ownership of ScanSoft.
Mr. Ricci serves as ScanSoft's Chief Executive Officer and Chairman of the
Board. Under the terms of his August 21, 2000 employment agreement, his annual
base compensation is $300,000 and he is eligible to receive a target bonus of
$50,000 per year. The agreement also provided for a grant of 2,500,000 options
at $1.3438 per share, subject to 1/8 vesting per quarter over a two-year period.
Mr. Ricci's severance (in the event of involuntary termination other than for
cause, death or disability) under the employment agreement would entitle him to,
among other things, a lump-sum payment equal to 8.5% of his base salary and
target bonus, and acceleration of vesting of all options held by him that were
unvested immediately prior to termination. Additionally, upon a change in
control, Mr. Ricci would be entitled to vesting of all of his unvested options.
Mr. Ricci's employment agreement was amended in July 2001 to provide him with a
living expenses allowance, not to exceed $107,000 annually, in connection with
his relocation to the Massachusetts area, where ScanSoft's corporate
headquarters are located.
Mr. Tivnan served as ScanSoft's President, Chief Operating Officer from
August 2000 to April 2003. Mr. Tivnan tendered his resignation as an executive
officer and director of ScanSoft effective April 30, 2003. As a result of Mr.
Tivnan's resignation, per an amended agreement, Mr. Tivnan will receive one-year
salary of $250,000, which will be paid over a one-year period. In addition, he
will receive six years of ScanSoft medical benefits.
Mr. Crandall serves as ScanSoft's Senior Vice President Sales and Business
Development. Under the terms of a vesting agreement that he entered into in
April 1999, all of Mr. Crandall's unvested stock options will immediately vest
upon his involuntarily or constructive termination prior to, but in
contemplation of, or within twelve months after, a change in control.
Ms. McCann serves as Senior Vice President of Speech and Language Research
and Development. Under the terms of a Company letter addressed to Ms. McCann on
February 17, 2003, in the event there
139
is a change in control of ScanSoft and Ms. McCann's employment is terminated
within six months of the change in control, all of her stock options will become
fully vested as of the effective date of the termination of her employment.
Mr. Weideman serves as ScanSoft's Chief Marketing Officer. Under the terms
of a Company letter addressed to Mr. Weideman on September 26, 2002, in the
event there is a change in control of ScanSoft and Mr. Weideman's employment is
terminated within six months of the change in control, all of his stock options
will become fully vested as of the effective date of the termination of his
employment.
Mr. Wittner serves as ScanSoft's Senior Vice President of Imaging Research
and Development. Under the terms of a Company letter addressed to Mr. Wittner in
July 2000, in the event there is a change in control of ScanSoft and Mr.
Wittner's employment is terminated within twelve months of the change in
control, all of his stock options will become fully vested as of the effective
date of the termination of his employment. Additionally, in the event that Mr.
Wittner's position with ScanSoft is eliminated for any reason other than for
cause, Mr. Wittner would be entitled to 52 weeks of severance pay, based on his
base salary at the time of termination.
RECENT OPTION GRANTS
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2002 to the Named Executive
Officers.
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE AT
OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM($)(2)
OPTIONS IN FISCAL BASE PRICE EXPIRATION -----------------------------
NAME GRANTED(#) YEAR(%)(1) ($/SHARE) DATE 5% 10%
---- ---------- ---------- ----------- ---------- ------------- -------------
Paul Ricci............ 11,554(3) .2362 5.3600 04/29/12 38,947.09 98,699.58
550,000(4) 11.2453 5.3600 04/29/12 1,853,981.36 4,698,352.77
450,000(4) 9.2007 6.9700 06/14/12 1,972,528.00 4,998,773.23
Michael Tivnan........ 22,918(3)(6) .4686 5.3600 04/29/12 77,253.72 195,776.09
100,000(5)(6) 2.0446 5.3600 04/29/12 337,087.52 854,245.96
Wayne Crandall........ 50,000(7) 1.0223 4.7000 02/11/12 147,790.24 374,529.48
13,125(3) .2684 5.3600 04/29/12 44,242.74 112,119.78
100,000(8) 2.0446 5.3600 04/29/12 337,087.52 854,245.96
100,000(8) 2.0446 6.9700 06/14/12 438,339.55 1,110,838.49
Richard S. Palmer..... 14,667(3) .2999 5.3600 04/29/12 49,440.63 125,292.25
Robert J. Weideman.... 10,500(3) .2147 5.3600 04/29/12 35,394.19 89,695.83
---------------
(1) Based on options to purchase an aggregate of 4,890,913 shares of common
stock granted to employees during fiscal 2002.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of five percent (5%) and
ten percent (10%) compounded annually from the date the respective options
were granted to their expiration date and are not presented to forecast
possible future appreciation, if any, in the price of ScanSoft's common
stock. The gains shown are net of the option exercise price, but do not
include deductions for taxes or other expenses associated with the exercise
of the options or the sale of the underlying shares of common stock. The
actual gains, if any, on the stock option exercises will depend on the
future performance of ScanSoft's common stock, the optionee's continued
employment through applicable vesting periods and the date on which the
options are exercised.
(3) Options granted to Mr. Ricci, Mr. Tivnan, Mr. Crandall, Mr. Palmer and Mr.
Weideman have a ten year term, and are exercisable 50% on 8/31/02 and 50% on
2/28/03.
140
(4) Options granted to Mr. Ricci have a ten year term, and are exercisable over
a two year period commencing one month after grant date.
(5) Options granted to Mr. Tivnan have a ten year term, and are 100% exercisable
on the grant anniversary date.
(6) Mr. Tivnan tendered his resignation as an executive officer and director of
ScanSoft effective April 30, 2003. As a result of Mr. Tivnan's resignation,
per an amended agreement with Mr. Tivnan approved by ScanSoft's compensation
committee, Mr. Tivnan will be able to exercise all vested stock options with
an exercise price equal to or greater than $1.3438 for a period of one (1)
year following his effective termination date of April 30, 2004, and any
vested stock options with an exercise price less than $1.3438 for a period
of eighty (80) days following his effective termination date.
(7) Options granted to Mr. Crandall have a ten year term, and are exercisable
over a two year period commencing three months after grant date and monthly
thereafter.
(8) Options granted to Mr. Crandall have a ten year term, and are exercisable
over a four year period commencing one year after grant date and monthly
thereafter.
The following table shows the number of shares of common stock represented
by outstanding stock options held by each of the Named Executive Officers as of
December 31, 2002. No stock appreciation rights were granted by ScanSoft in 2002
and none were outstanding at December 31, 2002.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES(1)
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
ACQUIRED OPTIONS AT 12/31/02 AT 12/31/02
ON VALUE --------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------
Paul A. Ricci.............. -- -- 2,821,609 714,945 $9,695,400 $ 17,550
Michael K. Tivnan.......... -- -- 988,395 216,459 3,640,686 232,050
Wayne Crandall............. -- -- 502,781 315,126 1,779,034 198,281
Richard S. Palmer.......... -- -- 494,834 169,833 1,463,055 401,750
Robert J. Weideman......... -- -- 140,666 369,834 243,749 656,251
---------------
(1) Based on a per share price of $5.20, the closing price of ScanSoft's common
stock as reported by the NASDAQ National Market on December 31, 2002, the
last trading day of the fiscal year, less the exercise price. The actual
value of unexercised options fluctuates with stock market activity.
SCANSOFT COMPENSATION PLANS
1993 INCENTIVE STOCK OPTION PLAN
ScanSoft's 1993 Incentive Stock Option Plan (the "1993 Plan") was adopted
by the ScanSoft board of directors and approved by ScanSoft stockholders in
February 1993. The 1993 Plan was last amended by the ScanSoft board of directors
in June 2000.
General. The 1993 Plan provides for the granting of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), and for the granting of nonstatutory stock options. As
of December 31, 2002, 1,363,904 shares had been issued upon exercise of options
granted under the 1993 Plan, options to purchase 2,506,085 shares were
outstanding, and 11 shares remained available for future grant. As of December
31, 2002, the fair market value of all shares of common stock subject to
outstanding options was $13,031,642, based on the closing sale price of $5.20
for ScanSoft's common stock as reported on the NASDAQ National Market on
December 31, 2002. As of December 31, 2002, (i) options to purchase 1,883,713
shares of common stock were outstanding under the 1993 Plan and held by all
current executive officers as a group, (ii) no options were outstanding and held
by current directors who are not executive officers and (iii) options to
purchase 622,372 shares of common stock were outstanding and held by employees,
including current officers who are not executive officers, and consultants.
141
The 1993 Plan is not a qualified deferred compensation plan under Section
401(a) of the Code, and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended. The maximum aggregate number
of shares which may be optioned and sold under the Plan is 3,870,000.
Purpose. The 1993 Plan seeks to attract and retain the best available
personnel for ScanSoft, give ScanSoft's employees, officers, directors and
consultants a greater personal stake in the success of ScanSoft's business, and
provide these individuals with added incentive to continue and advance in their
employment or services to ScanSoft.
Administration. The 1993 Plan may be administered by the ScanSoft board of
directors or by a committee designated by the ScanSoft board of directors; it is
currently administered by the ScanSoft board of directors and the compensation
committee of the board. Members of the board receive no additional compensation
for their services in connection with the administration of the 1993 Plan. All
questions of interpretation of the 1993 Plan are determined by the
administrator, and decisions of the administrator are final and binding upon all
participants.
Eligibility. The 1993 Plan provides that options may be granted to
ScanSoft's employees (including officers and directors who are also employees)
and consultants. Incentive stock options may be granted only to employees. The
administrator selects the optionees and determines the number of shares and the
exercise price to be associated with each option. In making such determination,
there are taken into account the duties and responsibilities of the optionee,
the value of the optionee's services, the optionee's present and potential
contribution to ScanSoft's success, and other relevant factors. As of December
31, 2002, there were approximately 489 employees eligible to participate in the
1993 Plan. The 1993 Plan provides that the maximum number of shares of common
stock which may be granted under options to any one employee during any fiscal
year is 500,000, subject to certain adjustments. There is also a limit on the
aggregate market value of shares subject to all incentive stock options that may
be granted to an optionee during any calendar year.
Terms of Options. The terms of options granted under the 1993 Plan are
determined by the administrator. Each option is evidenced by a stock option
agreement between ScanSoft and the optionee and is subject to, among other
things, the following terms and conditions:
(a) Exercise of the Option. The optionee must earn the right to
exercise the option by continuing to work for us. The administrator
determines when options are exercisable. An option is exercised by giving
written notice of exercise to ScanSoft specifying the number of full shares
of common stock to be purchased, and by tendering payment of the purchase
price to ScanSoft. The method of payment of the exercise price of the
shares purchased upon exercise of an option is determined by the
administrator.
(b) Exercise Price. The exercise price of options granted under the
1993 Plan is determined by the administrator, and must be at least equal to
the fair market value of the shares on the date of the first grant, in the
case of incentive stock options, and must not be less than 100% of the fair
market value per share on the date of grant, in the case of nonstatutory
incentive stock options, based upon the closing price on the NASDAQ
National Market on the date of grant. Incentive stock options granted to
stockholders owning more than 10% of ScanSoft's outstanding stock are
subject to the additional restriction that the exercise price on such
options must be at least 110% of the fair market value on the date of the
grant. Nonstatutory stock options granted to a covered employee under
Section 162(m) of the Code are subject to the additional restriction that
the exercise price on such options must be at least 100% of the fair market
value on the date of grant.
(c) Termination of Employment. If the optionee's employment or
consulting relationship with ScanSoft is terminated for any reason other
than death or total and permanent disability, options under the 1993 Plan
may be exercised not later than three months (or such other period of time
not exceeding 3 months and no less than 30 days as determined by the
administrator) after the date of such termination to the extent the option
was exercisable on the date of such termination. In no event may an option
be exercised by any person after the expiration of its term.
142
(d) Termination of Options. Incentive stock options granted under the
1993 Plan expire 10 years from the date of grant unless a shorter period is
provided in the option agreement. Incentive stock options and nonstatutory
stock options granted to stockholders owning more than 10% of ScanSoft's
outstanding stock may not have a term of more than five years and five
years and one day, respectively.
(e) Nontransferability of Options. Options are nontransferable by the
optionee, other than by will or the laws of descent and distribution, and
are exercisable only by the optionee during his or her lifetime.
(f) Acceleration of Option. In the event of a sale of all or
substantially all of ScanSoft's assets, or the merger of ScanSoft with
another corporation, an option granted under the 1993 Plan will be assumed
or an equivalent option will be substituted by such successor corporation
or a parent or subsidiary of such successor corporation. The administrator
may, in its discretion, make provisions for the acceleration of the
optionee's right to exercise his or her outstanding options in full.
Amendment and Termination. The board of directors may amend the 1993 Plan
at any time or from time to time or may terminate it without approval of the
stockholders, with certain exceptions. The 1993 Plan will terminate in February
2003, but any options then outstanding under the 1993 Plan will remain
outstanding until they expire by their terms.
1995 EMPLOYEE STOCK PURCHASE PLAN
ScanSoft's 1995 Employee Stock Purchase Plan (the "1995 ESPP") was adopted
by the ScanSoft board of directors and approved by ScanSoft stockholders in
November 1995. It was last amended and restated as of April 27, 2000.
General. The 1995 ESPP is intended to qualify under the provisions of
Section 423 of the Code, is not a qualified deferred compensation plan under
Section 401(a) of the Code, and is not subject to the provisions of ERISA. A
total of 1,000,000 shares are currently authorized to be issued under the 1995
ESPP. The ScanSoft board of directors has approved an amendment to the 1995
ESPP, subject to stockholder approval, to increase the number of shares
authorized for issuance thereunder from 1,000,000 to 1,500,000. See the section
entitled "Amendment of the ScanSoft 1995 Employee Stock Purchase Plan" beginning
on page 96 of this joint proxy statement/prospectus. As of December 31, 2002, a
total of 688,388 shares had been issued to ScanSoft's employees under the 1995
ESPP, and 311,612 shares remained available for future issuance. The average per
share issuance price for shares purchased by employees under the 1995 ESPP to
date is approximately $2.7414. As of December 31, 2002, approximately 264
employees were eligible to participate in the 1995 ESPP.
Purpose. The purpose of the 1995 ESPP is to provide employees with an
opportunity to purchase ScanSoft common stock through accumulated payroll
deductions. Employees make such purchases by participation in regular offering
periods from which they may withdraw at any time.
Administration. The 1995 ESPP may be administered by the ScanSoft board of
directors or a committee appointed by the ScanSoft board of directors. Currently
the 1995 ESPP is administered by the ScanSoft board of directors. The ScanSoft
board of directors or its committee has full power to adopt, amend and rescind
any rules deemed desirable and appropriate for the administration of the 1995
ESPP, to construe and interpret the 1995 ESPP, and to make all other
determinations necessary or advisable for the administration of the 1995 ESPP.
Eligibility. Any person who, on the first day of an offering period, is
customarily employed by ScanSoft for at least 20 hours per week and more than
five months in any calendar year is eligible to participate in the 1995 ESPP.
Offering Dates. In general, the 1995 ESPP is implemented by a series of
offering periods of 12 months duration, with new offering periods commencing on
or about February 16 and August 16 of each year. Each offering period consists
of two consecutive purchase periods of six months duration, with
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the last day of such period being designated a purchase date. The ScanSoft board
of directors has the power to change the duration and frequency of the offering
and purchase periods with respect to future offerings without stockholder
approval if such change is announced at least fifteen days prior to the
scheduled beginning of the first offering or purchase period to be affected.
Participation in the 1995 ESPP. Eligible employees may participate in the
1995 ESPP by completing an enrollment form provided by ScanSoft and filing it
with ScanSoft prior to the applicable offering date, unless a later time for
filing the enrollment form is set by the ScanSoft board of directors for all
eligible employees with respect to a given offering. The enrollment form
currently authorizes payroll deductions of not less than 1% and not more than
12% of the participant's eligible compensation on the date of the purchase.
Purchase Price. The purchase price per share sold under the 1995 ESPP is a
price equal to the lower of 85% of the fair market value of the common stock at
the beginning of the offering period or the purchase date. The fair market value
is the per share closing price of the common stock on the NASDAQ National Market
as of such date reported by NASDAQ.
Payment of Purchase Price; Payroll Deductions. The purchase price of the
shares is accumulated by payroll deductions during the offering period. The
deductions may be up to 12% of a participant's eligible compensation received on
each payday during the offering period. Eligible compensation is defined in the
1995 ESPP to include the regular straight time gross earnings excluding payments
for overtime, shift premium, incentive compensation, bonuses and commissions. A
participant may discontinue his or her participation in the 1995 ESPP at any
time during the offering period prior to a purchase date, and may decrease the
rate of his or her payroll deductions once during the offering period by
completing and filing a new enrollment form. No interest accrues on the payroll
deductions of a participant in the 1995 ESPP.
Purchase of Stock; Exercise of Option. By executing an enrollment form to
participate in the 1995 ESPP, the participant is entitled to have shares placed
under option. Unless the participant's participation is discontinued, each
participant's option for the purchase of shares will be exercised automatically
at the end of each purchase period at the applicable price. Notwithstanding the
foregoing, no participant shall be permitted to subscribe for shares under the
1995 ESPP if immediately after the grant of the option he or she would own 5% or
more of the voting power or value of all classes of ScanSoft's stock or of any
of ScanSoft's subsidiaries (including stock which may be purchased under the
1995 ESPP or pursuant to any other options), nor shall any participant be
granted an option which would permit the participant to buy pursuant to all of
ScanSoft's employee stock purchase plans more than $25,000 worth of stock
(determined at the fair market value of the shares at the time the option is
granted) in any calendar year.
Termination of Employment. Upon termination of a participant's continuous
status as an employee prior to the purchase date of an offering period for any
reason, including retirement or death, he or she will be deemed to have elected
to withdraw from the 1995 ESPP and the contributions credited to his or her
account but not yet used to exercise his or her option under the 1995 ESPP will
be returned to him or her.
Nontransferability. No rights or accumulated payroll deductions of a
participant under the 1995 ESPP may be pledged, assigned or transferred for any
reason.
Amendment and Termination of the 1995 ESPP. The board of directors may at
any time amend or terminate the 1995 ESPP, except that such termination shall
not affect options previously granted.
1995 DIRECTORS' STOCK OPTION PLAN
ScanSoft's 1995 Directors' Stock Option Plan (the "1995 Directors' Plan")
was adopted by the ScanSoft board of directors and approved by ScanSoft
stockholders in October, 1995, and was last amended by the ScanSoft board of
directors on April 5, 2002 and by ScanSoft stockholders on June 14, 2002. As of
December 31, 2002, there were options to purchase 355,000 shares of common stock
outstanding under the 1995 Directors' Plan, with exercise prices ranging from
$0.6563 to $5.9375 per
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share. Additionally, as of the same date, 450,000 shares remained available for
future grant under the 1995 Directors' Plan.
General. The 1995 Directors' Plan currently provides for the
non-discretionary grant of non-statutory stock options. Non-statutory stock
options granted under the 1995 Directors' Plan are intended not to qualify as
incentive stock options within the meaning of Section 422 of the Code.
Purpose. ScanSoft, by means of the 1995 Directors' Plan, seeks to attract
and retain the best available personnel for service as directors of ScanSoft, to
provide additional incentive for such persons to exert maximum efforts to
promote the success of ScanSoft, and to encourage their continued service on the
ScanSoft board of directors.
Administration. The ScanSoft board of directors administers the 1995
Directors' Plan. The board has the power to construe and interpret the 1995
Directors' Plan and options granted under it, to establish, amend, and revoke
rules and regulations for its administration, to amend the 1995 Directors' Plan,
and generally to exercise such powers and to perform such acts as the board
deems necessary or expedient to promote ScanSoft's best interests.
Eligibility. Options may be granted under the 1995 Directors' Plan only to
ScanSoft's non-employee directors. A "non-employee director" is a director who
is not an employee of ScanSoft or of any "parent" or "subsidiary" of ScanSoft,
as those terms are defined in the Code. The payment of a director's fee by
ScanSoft is not sufficient in and of itself to constitute "employment" by
ScanSoft. Four of ScanSoft's five current directors (all except Mr. Ricci) are
eligible to participate in the 1995 Directors' Plan.
Stock Subject to the 1995 Directors' Plan. If options granted under the
1995 Directors' Plan expire or otherwise terminate without being exercised, the
common stock not purchased pursuant to such options again becomes available for
issuance under the 1995 Directors' Plan. The number of shares authorized for
issuance under the 1995 Directors' Plan is 820,000.
Terms and Conditions of Options. Each option under the 1995 Directors'
Plan is subject to the following terms and conditions:
(a) Non-Discretionary Grants. Option grants are non-discretionary.
Each non-employee director is automatically granted an option to purchase
shares of common stock as follows:
- an initial grant of 50,000 on the date the person first becomes a
non-employee director; and
- an annual, subsequent grant of 15,000 on January 1 of each year,
provided that, on such date, the non-employee director has served on
the ScanSoft board of directors for at least six months.
At the June 2001 meeting, the stockholders approved a non-automatic
grant to any director who was an eligible director on January 23, 2001 of
an additional 40,000 shares. The 40,000 shares consist of (i) 30,000 shares
to raise their initial grant from 20,000 to 50,000 and (ii) 10,000 shares
to raise their subsequent grant from 5,000 to 15,000 (before the June 2001
amendment, the initial grant comprised 20,000 shares and the subsequent
grant comprised 5,000 shares). Each eligible director was granted 40,000
options on June 27, 2001.
(b) Exercise Price; Payment. The exercise price of each option
granted under the 1995 Directors' Plan is equal to 100% of the fair market
value of the common stock subject to such option on the date such option is
granted.
ScanSoft may not: reduce the exercise price of any stock option,
including stock appreciation right, outstanding or to be granted in the
future under the 1995 Directors' Plan; cancel and re-grant options at a
lower exercise price (including entering into any "6 month and 1 day"
cancellation and re-grant scheme), whether or not the cancelled options are
put back into the available pool for grant; replace underwater options with
restricted stock in an exchange, buy-back or other scheme; or replace any
options with new options having a lower exercise price or accelerated
vesting schedule in an exchange, buy-back or other scheme.
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(c) Option Vesting. Options granted pursuant to the 1995 Directors'
Plan may be exercised while the non-employee director is a director of
ScanSoft and for a period of 90 days after ceasing to be a director. The
exercise price per share of the option is 100% of the fair market value per
share on the grant date. The initial grant vests over four years in 25%
installments on the anniversary of the grant date. The subsequent grant is
exercisable as to 100% of the shares subject to the subsequent grant on the
first anniversary of the date of grant of the subsequent grant.
(d) Termination of Options. Currently no option granted under the
1995 Directors' Plan is exercisable after the expiration of ten years from
the date the option was granted.
(e) Non-transferability of Options. Options granted under the 1995
Directors' Plan are not transferable except by will or by the laws of
descent and distribution, and are exercisable during the lifetime of the
person to whom the option is granted only by such person or by his or her
guardian or legal representative.
Adjustment Provisions. If there is any change in the stock subject to the
1995 Directors' Plan or subject to any option granted under the 1995 Directors'
Plan (through merger, consolidation, reorganization, re-capitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure, or otherwise), the 1995 Directors' Plan and options outstanding
thereunder will be appropriately adjusted as to the class and maximum number of
shares subject to the 1995 Directors' Plan and the class, number of shares, and
price per share of stock subject to such outstanding options.
Effect of Certain Corporate Events. In the event of (i) a dissolution or
liquidation of ScanSoft, (ii) a sale of all or substantially all of ScanSoft's
assets, (iii) a merger or consolidation in which ScanSoft is not the surviving
corporation, or (iv) any other capital reorganization in which more than 50% of
the shares of ScanSoft entitled to vote are exchanged, ScanSoft shall give to
directors, at the time of adoption of the 1995 Directors' Plan for liquidation,
dissolution, sale, merger, consolidation or reorganization, either a reasonable
time thereafter within which to exercise the option, including shares as to
which the option would not be otherwise exercisable, prior to the effectiveness
of such liquidation, dissolution, sale, merger, consolidation or reorganization,
at the end of which time the option shall terminate, or the right to exercise
the option, including shares as to which the option would not be otherwise
exercisable (or receive a substitute option with comparable terms), as to an
equivalent number of shares of stock of the corporation succeeding ScanSoft or
acquiring ScanSoft's business by reason of such liquidation, dissolution, sale,
merger, consolidation or reorganization.
Duration, Amendment, and Termination. The board may suspend or terminate
the 1995 Directors' Plan at any time. Unless sooner terminated, the 1995
Directors' Plan terminates in October 2005. The board also may amend or
terminate the 1995 Directors' Plan from time to time in such respects as the
board may deem advisable.
1997 EMPLOYEE STOCK OPTION PLAN
ScanSoft's 1997 Employee Stock Option Plan (the "1997 Plan") became
effective on January 1, 1997 and was last amended by the ScanSoft board of
directors effective June, 2000.
General. The 1997 Plan provides for the granting of nonstatutory stock
options within the meaning of Section 422 of the Code. As of December 31, 2002,
312,476 shares had been issued upon exercise of options granted under the 1997
Plan, options to purchase 908,030 shares were outstanding, and 79,494 shares
remained available for future grant. As of December 31, 2002, the fair market
value of all shares of common stock subject to outstanding options was
$4,721,756, based on the closing sale price of $5.20 for ScanSoft's common stock
as reported on the NASDAQ National Market on December 31, 2002. As of December
31, 2002, (i) options to purchase 164,667 shares of common stock were
outstanding under the 1997 Plan and held by all current executive officers as a
group (3 persons), (ii) options to purchase 20,000 shares were outstanding under
the 1997 Plan and held by current directors (one person) who are
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not executive officers and (iii) options to purchase 723,363 shares of common
stock were outstanding and held by employees, including current officers who are
not executive officers, and consultants.
Purpose. The purposes of the 1997 Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to ScanSoft's employees and consultants and to promote the
success of ScanSoft's business.
Administration. The 1997 Plan may be administered by the ScanSoft board of
directors or by a committee designated by the ScanSoft board of directors; it is
currently administered by the ScanSoft board of directors and the compensation
committee of the board. Members of the board receive no additional compensation
for their services in connection with the administration of the 1997 Plan. All
questions of interpretation of the 1997 Plan are determined by the
administrator, and decisions of the administrator are final and binding upon all
participants.
Eligibility. The 1997 Plan provides that options may be granted to
ScanSoft's employees and consultants. For the purposes of the 1997 Plan,
officers, named executive officers and directors are not considered employees
and are not eligible to receive grants under the 1997 Plan unless they fall
under a special exception. The exception is that officers who are not previously
employed by ScanSoft and for whom an option grant is an essential inducement for
the officer to join ScanSoft may be treated as an employee for purposes of
receiving a grant under the 1997 Plan. As of December 31, 2002, ScanSoft had
approximately 489 employees, seven directors (including two employee directors),
and 24 consultants. The administrator, in its discretion, selects the employees
and consultants to whom options may be granted, the time or times at which such
options are granted, and the exercise price (within the limits described below)
and number of shares subject to each such grant.
Terms of Options. The terms of options granted under the 1997 Plan are
determined by the administrator. Each option is evidenced by a stock option
agreement between ScanSoft and the optionee and is subject to, among other
things, the following terms and conditions:
(a) Exercise of the Option. The optionee must earn the right to
exercise the option by continuing to work for us. The administrator
determines when options are exercisable. An option is exercised by giving
written notice of exercise to ScanSoft specifying the number of full shares
of common stock to be purchased, and by tendering payment of the purchase
price to ScanSoft. The method of payment of the exercise price of the
shares purchased upon exercise of an option is determined by the
administrator.
(b) Exercise Price. The administrator determines the exercise price
of options at the time the options are granted. The exercise price of a
stock option may not be less than 100% of the fair market value of the
common stock on the date such option is granted. The fair market value of
the common stock is generally determined with reference to the closing
sales price for the common stock (or the closing bid if no sales were
reported) on the date the option is granted.
ScanSoft may not: reduce the exercise price of any stock option
outstanding or to be granted in the future under the 1997 Plan; cancel and
re-grant options at a lower exercise price (including entering into any "6
month and 1 day" cancellation and re-grant scheme), whether or not the
cancelled options are put back into the available pool for grant; replace
underwater options with restricted stock in an exchange, buy-back or other
scheme; or replace any options with new options having a lower exercise
price or accelerated vesting schedule in an exchange, buy-back or other
scheme.
(c) Termination of Employment. If the optionee's employment or
consulting relationship with ScanSoft is terminated for any reason other
than death or total and permanent disability, options under the 1997 Plan
may be exercised not later than thirty days (or such other period of time
not exceeding the expiration of the term of the option, as determined by
the administrator) after the date of such termination to the extent the
option was exercisable on the date of such termination. In no event may an
option be exercised by any person after the expiration of its term.
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(d) Termination of Options. Nonstatutory options granted under the
1997 Plan expire ten years from the date of grant unless a shorter period
is provided in the option agreement.
(e) Nontransferability of Options. Generally, options under the 1997
Plan are nontransferable by the optionee, other than by will or the laws of
descent and distribution, and are exercisable only by the optionee during
his or her lifetime. However, the administrator may, in its discretion,
grant transferable nonstatutory stock options pursuant to option agreements
specifying (i) the manner in which the nonstatutory options are
transferable and (ii) that any such transfer be subject to applicable law.
(f) Effect of Corporate Transactions. In the event of ScanSoft's
proposed dissolution or liquidation, the options under the 1997 Plan will
terminate immediately prior to the consummation of the proposed action,
unless otherwise provided by the administrator. The administrator may, in
the exercise of its sole discretion in such instances, declare that any
option be terminated as of a date fixed by the administrator and give each
optionee the right to exercise the optionee's option as to all or any part
of the option, including shares as to which the option would not otherwise
be exercisable. In the event of a sale of all or substantially all of
ScanSoft's assets, or ScanSoft's merger with another corporation, an option
granted under the 1997 Plan will be assumed or an equivalent option will be
substituted by the successor corporation or a parent or subsidiary of the
successor corporation. If the successor corporation does not assume or
provide substitute options, the administrator will make provisions for the
acceleration of the optionee's right to exercise his or her outstanding
options in full. If the administrator makes an option fully exercisable in
lieu of assumption or substitution in the event of a merger or sale of
assets, the administrator will notify the optionee that the option will be
fully exercisable for a period of 15 days from the date of the notice, and
the option will terminate upon the expiration of such period.
Amendment and Termination. The ScanSoft board of directors may terminate
the 1997 Plan, or may amend the 1997 Plan from time to time in any respect, as
it feels advisable. The 1997 Plan will terminate in January, 2007, but any
options then outstanding under the 1997 Plan will remain outstanding until they
expire by their terms.
1998 STOCK OPTION PLAN
ScanSoft's 1998 Stock Option Plan (the "1998 Plan") was assumed by ScanSoft
upon the consummation of the merger between Visioneer, Inc. and ScanSoft, Inc.
on March 12, 1999. As of December 31, 2002, there were outstanding options to
purchase 919,081 shares of common stock under the 1998 Plan, with exercise
prices ranging from $0.6100 to $1.3438 per share. As of December 31, 2002, there
were no shares available for future grants.
General. The purpose of the 1998 Plan is to obtain and retain the services
of the types of employees, consultants, officers and directors who will
contribute to ScanSoft's long range success and to provide incentives which are
linked directly to increases in share value which will benefit all of ScanSoft
stockholders. Options granted under the 1998 Plan may be either "incentive stock
options" or nonstatutory stock options. However, only officers and employees are
eligible to be granted incentive stock options.
Administration. The 1998 Plan may be administered by the ScanSoft board of
directors or a committee appointed by the ScanSoft board of directors. The
administrator may make any determinations deemed necessary or advisable for the
1998 Plan.
Eligibility. Directors, officers, employees and consultants who, as
determined by the administrator, are responsible for or contribute to the
management, growth or profitability of ScanSoft's business may be granted stock
options under the 1998 Plan. However, only officers and employees may be granted
incentive stock options. As of December 31, 2002, ScanSoft had approximately 489
employees, six directors (including two employee directors), and 24 consultants.
The administrator, in its discretion, selects the directors, officers, employees
and consultants to whom options may be granted, the time or times at which
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such options are granted, and the exercise price (within the limits described
below) and number of shares subject to each such grant.
Limitations. The 1998 Plan provides that no one may be granted, during any
one year period, options to purchase more than 1,000,000 shares of ScanSoft's
common stock.
Terms and Conditions of Options. Each option is evidenced by a stock
option agreement between ScanSoft and the optionee, and is subject to the
following terms and conditions:
(a) Exercise Price. The administrator determines the exercise price
of options at the time the options are granted. The exercise price for
incentive stock options may not be less than 100% of the fair market value
of the shares of stock on the grant date. In the case of nonstatutory
options, the exercise price may be determined in the sole discretion of the
administrator, provided, that the exercise price may not be less than 85%
of the fair market value of the shares of stock on the grant date of the
nonstatutory option. In the case of either an incentive stock option or a
nonstatutory option granted to a 10% stockholder, the exercise price may
not be less than 110% of the fair market value. The fair market value of
ScanSoft's common stock is generally determined with reference to the
closing sale price for the common stock on the last market trading day
prior to the date the option is granted.
(b) Exercise of Option; Form of Consideration. The administrator
determines when options become exercisable, and may in its discretion,
accelerate the vesting of any outstanding option. The 1998 Plan provides
that options granted under the 1998 Plan must vest at a rate of at least
20% per year over a period of five years from the grant date, unless a
lower vesting rate or longer vesting period is permitted by applicable law
or regulation. In the case of an incentive stock option granted to a 10%
stockholder, the vesting or exercise period may not exceed five years from
the grant date. The 1998 Plan provides that the exercise price must be paid
in full at the time of exercise in cash.
(c) Term of Option. The term of an incentive stock option may be no
more than ten years from the grant date; provided, however, that in the
case of an incentive stock option granted to a 10% stockholder, the term of
the option may be no more than five years from the date of grant. No option
may be exercised after the expiration of its term.
(d) Termination of Service. If an optionee's service relationship
terminates for any reason, then the optionee generally may exercise the
option within 80 days of such termination, to the extent that the option is
vested on the date of termination (but in no event later than the
expiration of the term of such option as set forth in the option
agreement).
(e) Nontransferability of Options. Unless otherwise determined by the
administrator, options granted under the 1998 Plan are not transferable
other than by will or the laws of descent and distribution, and may be
exercised during the optionee's lifetime only by the optionee or by the
optionee's guardian or legal representative.
(f) Other Provisions. The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the 1998 Plan as may
be determined by the administrator.
Adjustments Upon Changes in Capitalization. In the event that ScanSoft's
stock changes by reason of any stock split, reverse stock split, stock dividend,
recapitalization, combination or reclassification in ScanSoft's capital
structure, appropriate adjustments shall be made in the number and class of
shares of stock subject to the 1998 Plan, the number and class of shares of
stock subject to any option outstanding under the 1998 Plan, and the exercise
price of any such outstanding option or stock purchase right.
In the event of a liquidation or dissolution, the administrator may provide
that the holder of any option then exercisable have the right to exercise that
option subsequent to the liquidation or dissolution, and for the balance of its
term, solely for the kind and amount of shares of stock and other securities,
cash or other property receivable upon such liquidation or dissolution by a
holder of the number of shares of stock for which the option might have been
exercised immediately prior to the liquidation or dissolution. The administrator
may also provide, in the alternative, that each option granted under the 1998
Plan
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terminate as of a date to be fixed by the Board provided that written notice is
given to each optionee at least 30 days prior to the termination date. Each
option holder then has the right, during the 30 days preceding the option
termination, to exercise the option as to all or any part of the shares of stock
covered by the option, to the extent that the option is then exercisable.
In the case of any capital reorganization, any reclassification of the
common stock (other than a change in par value or recapitalization), or the
consolidation of ScanSoft with, or a sale of substantially all of ScanSoft's
assets (which sale is followed by ScanSoft's liquidation or dissolution), or
merger of ScanSoft with another person (a "Reorganization Event"), the
administrator is to determine whether the Reorganization Event constitutes a
liquidation or dissolution and to deliver to optionees at least 15 days prior to
the Reorganization Event a notice which (i) indicates whether the Reorganization
Event is a liquidation or dissolution, and (ii) advises the optionee of his or
her rights pursuant to the stock option agreement.
If the Reorganization Event is determined to be a liquidation or
dissolution, in its sole and absolute discretion, the surviving corporation may,
but is not be obligated to, (i) tender stock options to the optionee with
respect to the surviving corporation which contains terms and provisions that
substantially preserve the rights and benefits of the optionee, and (ii) in the
event that no stock options have been tendered by the surviving corporation, the
optionee has the right exercisable during a 10-day period ending on the fifth
day prior to the Reorganization Event to exercise his or her options, to the
extent that such options are then exercisable.
If the Reorganization Event is not determined to be a liquidation or
dissolution, the optionee is entitled upon exercise of the option to purchase
the kind and number of shares of stock or other securities, cash or other
property of the surviving corporation receivable upon such event by a holder of
the number of shares of the common stock which the option entitles the optionee
to purchase from ScanSoft immediately prior to such event. In the case of any
Reorganization Event that is a reorganization, merger or consolidation in which
ScanSoft is not the surviving corporation, the administrator may, in its sole
and absolute discretion, accelerate the vesting period of the options.
Amendment and Termination of the 1998 Plan. The Board may amend, alter, or
discontinue the 1998 Plan. However, ScanSoft must obtain stockholder approval
for any amendment to the 1998 Plan which would: (i) increase the total number of
shares of stock reserved for the purposes of the 1998 Plan; (ii) materially
increase the benefits accruing to eligible persons under the 1998 Plan; or (iii)
materially modify the requirements for eligibility under the 1998 Plan. No such
action by the Board or stockholders may alter or impair any option previously
granted under the 1998 Plan without the written consent of the optionee. No
options may be granted under the 1998 Plan on or after December 31, 2002.
2000 STOCK PLAN
ScanSoft's 2000 Stock Plan (the "2000 Plan") was adopted by the ScanSoft
board of directors and approved by ScanSoft stockholders in May, 2000, and was
last amended by the board on April 5, 2002 and by the stockholders on June 14,
2002. As of December 31, 2002, there were options to purchase 2,612,837 shares
of common stock under the 2000 Plan, with exercise prices ranging from $1.2813
to $6.97 per share. In addition, as of the same date, there were available for
future grant options to purchase 1,701,113 shares of common stock.
General. The purpose of the 2000 Plan is to attract and retain the best
available personnel for positions of substantial responsibility with ScanSoft,
to provide additional incentive to ScanSoft's employees and consultants and to
promote the success of ScanSoft's business. Options granted under the 2000 Plan
may be either incentive stock options or nonstatutory stock options. Stock
purchase rights may also be granted under the 2000 Plan.
Administration. The 2000 Plan generally may be administered by the board
or a committee appointed by the board. The administrator may make any
determinations deemed necessary or advisable for the 2000 Plan.
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Eligibility. Nonstatutory stock options and stock purchase rights may be
granted under the 2000 Plan to ScanSoft's employees, directors and consultants.
As of December 31, 2002, ScanSoft had approximately 489 employees, seven
directors (including two employee directors), and 24 consultants. Incentive
stock options may be granted only to employees. The administrator, in its
discretion, selects the employees, directors and consultants to whom options and
stock purchase rights may be granted, the time or times at which such options
and stock purchase rights shall be granted, and the exercise price and number of
shares subject to each such grant; provided, however, the exercise price of a
stock option may not be less than 100% of the fair market value of the common
stock on the date such option is granted.
Limitations. Section 162(m) of the Code places limits on the deductibility
for federal income tax purposes of compensation paid to certain of ScanSoft's
executive officers. In order to preserve ScanSoft's ability to deduct the
compensation income associated with options granted to such persons, the 2000
Plan provides that no employee may be granted, in any fiscal year, options or
stock purchase rights to purchase more than 750,000 shares of common stock.
Notwithstanding this limit, however, in connection with such individual's
initial employment with us, he or she may be granted options or stock purchase
rights to purchase up to an additional 750,000 shares of common stock.
Terms and Conditions of Options. Each option is evidenced by a stock
option agreement between ScanSoft and the optionee, and is subject to the
following terms and conditions:
(a) Exercise Price. The administrator determines the exercise price
of options at the time the options are granted. The exercise price of a
stock option may not be less than 100% of the fair market value of the
common stock on the date such option is granted; provided, however, that
the exercise price of an incentive stock option granted to a 10%
stockholder may not be less than 110% of the fair market value on the date
such option is granted. The fair market value of the common stock is
generally determined with reference to the closing sale price for the
common stock (or the closing bid if no sales were reported) on the last
market trading day prior to the date the option is granted.
ScanSoft may not: reduce the exercise price of any stock option,
including stock appreciation right, outstanding or to be granted in the
future under the 2000 Plan; cancel and re-grant options at a lower exercise
price (including entering into any "6 month and 1 day" cancellation and
re-grant scheme), whether or not the cancelled options are put back into
the available pool for grant; replace underwater options with restricted
stock in an exchange, buy-back or other scheme; or replace any options with
new options having a lower exercise price or accelerated vesting schedule
in an exchange, buy-back or other scheme.
(b) Exercise of Option; Form of Consideration. The administrator
determines when options become exercisable, and may in its discretion,
accelerate the vesting of any outstanding option. The means of payment for
shares issued upon exercise of an option is specified in each option
agreement. The 2000 Plan permits payment to be made by cash, check,
promissory note, other shares of ScanSoft's common stock (with some
restrictions), cashless exercises, any other form of consideration
permitted by applicable law, or any combination thereof.
(c) Term of Option. The term of an incentive stock option may be no
more than ten years from the date of grant; provided, however, that in the
case of an incentive stock option granted to a 10% stockholder, the term of
the option may be no more than five years from the date of grant. No option
may be exercised after the expiration of its term.
(d) Termination of Service. If an optionee's service relationship
terminates for any reason (excluding death or disability), then the
optionee generally may exercise the option within 90 days of such
termination or within such time period as specified in the option
agreement, to the extent that the option is vested on the date of
termination, (but in no event later than the expiration of the term of such
option as set forth in the option agreement). If an optionee's service
relationship terminates due to the optionee's disability, the optionee
generally may exercise the option, to the extent the option was vested on
the date of termination, within 12 months, or as specified in the option
agreement, from the date of such termination. If an optionee's service
relationship terminates due to
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the optionee's death, the optionee's estate or the person who acquires the
right to exercise the option by bequest or inheritance generally may
exercise the option, as to the vested shares subject to the option (not
including unvested shares), within 12 months from the date of such
termination or as defined in the option agreement.
(e) Nontransferability of Options. Unless otherwise determined by the
administrator, options granted under the 2000 Plan are not transferable
other than by will or the laws of descent and distribution, and may be
exercised during the optionee's lifetime only by the optionee.
(f) Other Provisions. The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the 2000 Plan as may
be determined by the administrator.
Stock Purchase Rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant ScanSoft a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with ScanSoft for any
reason (including death or disability). The purchase price for shares
repurchased pursuant to the restricted stock purchase agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The repurchase option shall lapse at a rate
determined by the administrator.
Adjustments Upon Certain Corporate Transactions. In connection with any
merger of ScanSoft with or into another corporation or the sale of all or
substantially all of ScanSoft's assets, each outstanding option and stock
purchase right shall be assumed or an equivalent option or right substituted by
the successor corporation. If the successor corporation refuses to assume the
options or rights or to substitute substantially equivalent options or rights,
the optionee shall have the right to exercise the option or stock purchase right
as to all the optioned stock, including shares not otherwise vested or
exercisable. In such event, the administrator shall notify the optionee that the
option or stock purchase right is fully exercisable for fifteen days from the
date of such notice and that the option terminates upon expiration of such
period.
Amendment and Termination of the 2000 Plan. The board may amend, alter,
suspend or terminate the 2000 Plan, or any part thereof, at any time and for any
reason. Unless terminated earlier, the 2000 Plan shall terminate ten years from
the date the 2000 Plan or any amendment to add shares to the 2000 Plan was last
adopted by the board.
2000 Plan Benefits. The amount and timing of options and awards granted
under the 2000 Plan are determined in the sole discretion of the administrator.
As a result, the benefits or amounts that will be received by, or allocated to,
ScanSoft's CEO, ScanSoft's other named executive officers and ScanSoft's current
directors under the 2000 Plan for 2003 are not determinable. However, the
following sets forth the options or awards granted to such persons in fiscal
year 2002. Amounts granted in 2002 may not be representative of amounts granted
in the future.
2000 NONSTATUTORY STOCK PLAN
ScanSoft's 2000 Nonstatutory Stock Plan (the "2000 Nonstatutory Plan") was
adopted by the ScanSoft board of directors in May 2000. As of December 31, 2002,
there were options to purchase 5,811,858 shares of common stock outstanding
under the 2000 Nonstatutory Plan, with exercise prices ranging from $0.6563 to
$8.74 per share. In addition, as of the same date, there were available for
future grant options to purchase 651,779 shares of common stock. Since that
date, the ScanSoft board of directors has twice amended the 2000 Nonstatutory
Plan, on February 17, 2003 and June 2, 2003, thereby increasing the number of
shares reserved for issuance under the 2000 Nonstatutory Plan by 3,000,000
shares.
General. The purpose of the 2000 Nonstatutory Plan is to attract and
retain the best available personnel for positions of substantial responsibility
with ScanSoft, to provide additional incentive to ScanSoft's employees and
consultants and to promote the success of ScanSoft's business. Options granted
under the 2000 Nonstatutory Plan are nonstatutory stock options.
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Administration. The 2000 Nonstatutory Plan generally may be administered
by the board or a committee appointed by the board. The administrator may make
any determinations deemed necessary or advisable for the 2000 Nonstatutory Plan.
Eligibility. Nonstatutory stock options may be granted under the 2000
Nonstatutory Plan to ScanSoft's employees, directors and consultants. As of
December 31, 2002, ScanSoft had approximately 489 employees, seven directors
(including two employee directors), and 24 consultants. The administrator, in
its discretion, selects the employees, directors and consultants to whom options
may be granted, the time or times at which such options shall be granted, and
the exercise price and number of shares subject to each such grant; provided,
however, the exercise price of a stock option may not be less than 100% of the
fair market value of the common stock on the date such option is granted.
Terms and Conditions of Options. Each option is evidenced by a stock
option agreement between ScanSoft and the optionee, and is subject to the
following terms and conditions:
(a) Exercise Price. The administrator determines the exercise price
of options at the time the options are granted. The exercise price of a
stock option may not be less than 100% of the fair market value of the
common stock on the date such option is granted. The fair market value of
the common stock is generally determined with reference to the closing sale
price for the common stock (or the closing bid if no sales were reported)
on the last market trading day prior to the date the option is granted.
ScanSoft may not: reduce the exercise price of any stock option
outstanding or to be granted in the future under the 2000 Nonstatutory
Plan; cancel and re-grant options at a lower exercise price (including
entering into any "6 month and 1 day" cancellation and re-grant scheme),
whether or not the cancelled options are put back into the available pool
for grant; replace underwater options with restricted stock in an exchange,
buy-back or other scheme; or replace any options with new options having a
lower exercise price or accelerated vesting schedule in an exchange,
buy-back or other scheme.
(b) Exercise of Option; Form of Consideration. The administrator
determines when options become exercisable, and may in its discretion,
accelerate the vesting of any outstanding option. The means of payment for
shares issued upon exercise of an option is specified in each option
agreement. The 2000 Nonstatutory Plan permits payment to be made by cash,
check, promissory note, other shares of ScanSoft's common stock (with some
restrictions), cashless exercises, any other form of consideration
permitted by applicable law, or any combination thereof.
(c) Term of Option. The term of each stock option is specified in
each option agreement. No option may be exercised after the expiration of
its term.
(d) Termination of Service. If an optionee's service relationship
terminates for any reason (excluding death or disability), then the
optionee generally may exercise the option within 3 months of such
termination or within such time period as specified in the option
agreement, to the extent that the option is vested on the date of
termination, (but in no event later than the expiration of the term of such
option as set forth in the option agreement). If an optionee's service
relationship terminates due to the optionee's disability, the optionee
generally may exercise the option, to the extent the option was vested on
the date of termination, within 12 months, or as specified in the option
agreement, from the date of such termination. If an optionee's service
relationship terminates due to the optionee's death, the optionee's estate
or the person who acquires the right to exercise the option by bequest or
inheritance generally may exercise the option, as to the vested shares
subject to the option (not including unvested shares), within 12 months
from the date of such termination or as defined in the option agreement.
(e) Nontransferability of Options. Unless otherwise determined by the
administrator, options granted under the 2000 Nonstatutory Plan are not
transferable other than by will or the laws of descent and distribution,
and may be exercised during the optionee's lifetime only by the optionee.
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(f) Other Provisions. The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the 2000
Nonstatutory Plan as may be determined by the administrator.
Adjustments Upon Certain Corporate Transactions. In connection with any
merger of ScanSoft with or into another corporation or the sale of all or
substantially all of ScanSoft's assets, each outstanding option shall be assumed
or an equivalent option substituted by the successor corporation. If the
successor corporation refuses to assume the options or to substitute
substantially equivalent options, the optionee shall have the right to exercise
the option as to all the optioned stock, including shares not otherwise vested
or exercisable. In such event, the administrator shall notify the optionee that
the option is fully exercisable for 15 days from the date of such notice and
that the option terminates upon expiration of such period.
Amendment and Termination of the 2000 Nonstatutory Plan. The board may
amend, alter, suspend or terminate the 2000 Nonstatutory Plan, or any part
thereof, at any time and for any reason. Unless terminated earlier, the 2000
Nonstatutory Plan shall terminate ten years from the date the 2000 Nonstatutory
Plan or any amendment to add shares to the 2000 Nonstatutory Plan was last
adopted by the board.
401(K) RETIREMENT PLAN
The 401(k) plan provides that each participant may contribute up to 15% of
his or her pre-tax gross compensation up to the statutory limit, which was
$11,000 in calendar year 2002. Through October 15, 2002, ScanSoft provided a
match of an employee's contributions dollar for dollar up to 4%. For example, if
an employee contributed 6% ScanSoft matched at 4%; if the employee contributed
4% ScanSoft matched the 4%; if the employee contributed 2% ScanSoft matched the
2%, and so on. Employees are 100% vested into the plan as soon as they start to
contribute to the plan. Effective October 16, 2002, this match was discontinued.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
ScanSoft's certificate of incorporation provides that its directors will
not be personally liable to ScanSoft or ScanSoft stockholders for monetary
damages for breach of their fiduciary duties as directors, except liability for
any of the following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- payments of dividends or approval of stock repurchases or redemptions
that are prohibited by Delaware law; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
ScanSoft's certificate of incorporation and bylaws provide that ScanSoft
shall indemnify its directors, officers, employees and other agents to the
fullest extent permitted by law. ScanSoft believes that indemnification under
its bylaws covers at least negligence and gross negligence on the part of
indemnified parties. ScanSoft's bylaws also permit it to secure insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether
Delaware law would permit indemnification.
ScanSoft has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in
ScanSoft's certificate of incorporation and bylaws. These agreements, among
other things, provide for indemnification of ScanSoft's directors and officers
for expenses,
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judgments, fines, penalties and settlement amounts incurred by any such person
in any action or proceeding arising out of such person's services as a director
or officer or at ScanSoft's request.
ScanSoft believes that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers. There
is no pending litigation or proceeding involving any of ScanSoft's directors,
officers, employees or agents. ScanSoft is not aware of any pending or
threatened litigation or proceeding that might result in a claim for
indemnification by a director, officer, employee or agent.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
At December 31, 2002, Xerox owned approximately 19% of ScanSoft's
outstanding common stock and all of ScanSoft's outstanding Series B Preferred
Stock. In connection with ScanSoft's acquisition of ScanSoft, then a wholly
owned subsidiary of Xerox, in 1999 (in which ScanSoft assumed the name
"ScanSoft"), ScanSoft issued 3,562,238 shares of Series B Preferred Stock to
Xerox. The Series B Preferred Stock is convertible into shares of common stock
on a share for share basis. The Series B Preferred Stock has a liquidation
preference of $1.30 per share plus all declared but unpaid dividends. The Series
B Preferred Stockholders are entitled to non-cumulative dividends at the rate of
$0.065 per annum per share, payable when, as and if declared by the ScanSoft
board of directors. To date no dividends have been declared by the ScanSoft
board of directors. Holders of Series B Preferred Stock have no voting rights,
except those rights provided under Delaware law.
In addition, Xerox has the opportunity to acquire additional shares of
common stock pursuant to a ten-year warrant. The warrant allows Xerox to acquire
a number of shares of common stock equal to the number of options (whether
vested or unvested) that remain unexercised at the expiration of any ScanSoft
option assumed by ScanSoft in the merger. The exercise price for each warrant
share is $0.61. If all of the assumed ScanSoft options expire without being
exercised, Xerox would be entitled to purchase 1,736,630 shares of common stock.
The warrant was fully vested on the date of grant; however, Xerox could not
exercise the warrant prior to March 2, 2002, unless, immediately after such
exercise, Xerox owned directly or indirectly less than 45% of ScanSoft's shares
of common stock outstanding immediately after such exercise. From the date of
acquisition through May 30, 2003, approximately 525,732 ScanSoft options have
been forfeited and accordingly, the Xerox warrant was exercisable for the
purchase of 525,732 shares of ScanSoft's common stock.
ScanSoft and Xerox have entered into multiple non-exclusive agreements in
which ScanSoft grants Xerox the royalty-bearing right to copy and distribute
certain versions of ScanSoft's software programs with Xerox's multi-function
peripherals. Xerox accounted for 5%, 11% and 12% of total net revenues during
each of the years ended December 31, 2002, 2001 and 2000, respectively,
amounting to $5.1 million, $7.2 million and $6.0 million, respectively. As of
December 31, 2002 and 2001, Xerox owed ScanSoft $1.5 million and $1.8 million,
respectively, pursuant to these agreements, which are included in accounts
receivable. ScanSoft believes that the terms of its agreements with Xerox are no
more favorable than those with unrelated parties.
In connection with the Caere acquisition in the first quarter of 2000 and
pursuant to a concurrent non-competition and consulting agreement, ScanSoft
agreed to pay the former Caere President and CEO, Robert Teresi, a current
member of the board of directors of ScanSoft, on the second anniversary of the
merger, March 13, 2002, the difference between $13.50 and the closing price per
share of ScanSoft common stock at that time, multiplied by 486,548. On March 5,
2002, ScanSoft negotiated a deferred payment agreement with the former Caere
President and CEO to terminate this agreement. Under the terms of the deferred
payment agreement, ScanSoft paid the former Caere President and CEO $1.0 million
in cash on March 5, 2002, and agreed to make future cash payments totaling $3.3
million, with such amounts payable in equal quarterly installments of
approximately $0.4 million over the following two years. During the year ended
December 31, 2002, ScanSoft paid three quarterly installments under this
agreement totaling $1.2 million. The total consideration under the original
agreement was accounted for in
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the Caere purchase price and accordingly had no effect on the results of
operations. The remaining liability at December 31, 2002 is $2.1 million, of
which $1.6 million is included in other current liabilities and $0.5 million is
included in other long-term liabilities.
During the year ended December 31, 2002, the law firm of Wilson Sonsini
Goodrich & Rosati, Professional Corporation acted as primary outside corporate
and securities counsel to ScanSoft. Ms. Martin, a director of ScanSoft, is a
member of Wilson Sonsini Goodrich & Rosati. Aggregate fees and costs billed to
ScanSoft during the year ended December 31, 2002 by Wilson Sonsini Goodrich &
Rosati were approximately $935,000. ScanSoft believes that the services
performed by Wilson Sonsini Goodrich & Rosati were provided on terms no more
favorable than those with unrelated parties.
SECURITIES TRANSACTIONS
On September 13, 1999, ScanSoft purchased 600,000 shares of Series A
Preferred Stock at a cost of $0.25 per share for a total investment of $150,000
in BookmarkCentral.com (which was recently renamed EchoBahn.com, Inc.). One of
ScanSoft's former directors is a founder and the current President and Chief
Executive Officer of EchoBahn. During 2001, ScanSoft wrote-off its investment in
EchoBahn after determining that the investment was impaired. ScanSoft accounted
for the investment under the cost basis method of accounting.
In September 2002, ScanSoft repurchased 1,461,378 shares of common stock
from L&H and certain other parties for $7.0 million. These shares represented a
portion of the common shares that ScanSoft issued to the selling stockholders in
connection with ScanSoft's December 12, 2001 acquisition of certain of L&H's
speech and language technology operations and ScanSoft's March 21, 2002
acquisition of the AudioMining assets of L&H Holdings USA, Inc. ScanSoft agreed
to issue 150,000 shares of its common stock to the selling stockholders if
ScanSoft did not complete an underwritten public offering for the selling
stockholders by December 15, 2002. To fulfill this obligation, on December 18,
2002, ScanSoft issued 81,900 shares to Lernout & Hauspie Speech Products, N.V.
and 68,100 shares to L&H Holdings USA, Inc.
In connection with the Philips acquisition, in January 2003 ScanSoft issued
to Philips a $27.5 million three-year, zero-interest convertible subordinate
debenture. This debenture is convertible into shares of ScanSoft's common stock
at any time at the option of Philips at a conversion price of $6.00 per share.
ScanSoft also issued a note to Philips with a principal amount of euro 5 million
due December 31, 2003 and bearing 5.0% interest per annum.
In connection with the March 31, 2003 acquisition of certain intellectual
property assets related to multimodal speech technology from Lobby7, Inc.,
ScanSoft issued a warrant expiring October 31, 2005, for the purchase of 78,000
shares of ScanSoft common stock at an exercise price of $8.10 per share.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF SCANSOFT
The following table sets forth certain information with respect to the
beneficial ownership of ScanSoft's common stock as of May 30, 2003, as to (1)
each person (or group of affiliated persons) who is known by ScanSoft to own
beneficially more than 5% of ScanSoft's common stock; (2) each of ScanSoft's
directors; (3) each officer named in the Summary Compensation Table; and (4) all
current directors and executive officers of ScanSoft as a group.
Beneficial ownership is determined in accordance with SEC rules and
includes voting or investment power with respect to securities. All shares of
common stock subject to options exercisable within 60 days of May 30, 2003 are
deemed to be outstanding and beneficially owned by the persons holding those
options for the purpose of computing the number of shares beneficially owned and
the percentage ownership of that person. They are not, however, deemed to be
outstanding and beneficially owned for the purpose of computing the percentage
ownership of any other person.
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Subject to the paragraph above, percentage ownership of outstanding shares
is based on 66,150,349 shares of common stock outstanding as of May 30, 2003.
PERCENT OF
NUMBER OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED SHARES
---------------------------------------- ------------ -----------
Xerox Imaging Systems, Inc.(2).............................. 15,941,572 22.7%
800 Long Ridge Road
Stamford, CT 06904
State of Wisconsin Investment Board......................... 11,735,000 17.7%
P.O. Box 7842
Madison, WI 53707
Koninklijke Philips Electronics N.V.(3)..................... 4,587,334 6.5%
Breitner Centre
Amstelplein 2
107 MX Amsterdam, The Netherlands
Paul A. Ricci(4)............................................ 3,279,054 4.7%
Michael K. Tivnan(5)........................................ 1,027,554 1.5%
Mark B. Myers(6)............................................ 85,000 *
Katharine A. Martin(7)...................................... 101,000 *
Robert G. Teresi(8)......................................... 247,186 *
Robert J. Frankenberg(9).................................... 216,708 *
Wayne S. Crandall(10)....................................... 658,406 1.0%
Richard S. Palmer(11)....................................... 672,917 1.0%
Robert J. Weideman(12)...................................... 278,687 *
All directors and executive officers as a group (11
persons)(13).............................................. 7,061,735 9.7%
---------------
* Less than 1%.
(1) Unless otherwise indicated, the address for the following stockholders is
c/o ScanSoft, Inc., 9 Centennial Drive, Peabody, Massachusetts 01960.
(2) Includes a warrant that as of May 30, 2003 was exercisable for up to
525,732 shares of ScanSoft's common stock, and 3,562,238 shares of
non-voting Series B Preferred Stock. The shares that underlie this warrant
and the Series B shares have not been converted into common stock and are
factored into the calculation of Xerox's beneficial ownership only for the
purposes of this table. As of May 30, 2003, Xerox owned 11,853,602 shares
of ScanSoft's common stock. All of these securities are owned of record by
Xerox Imaging Systems, Inc., a wholly owned subsidiary of Xerox
Corporation.
(3) Represents shares issuable upon conversion of a $27.5 million three-year,
zero-interest convertible debenture, convertible at any time at the option
of Koninklijke Philips Electronics N.V.
(4) Includes options to acquire 3,124,054 shares of ScanSoft's common stock
that are exercisable through July 29, 2003.
(5) Includes options to acquire 945,054 shares of ScanSoft's common stock that
are exercisable through July 29, 2003. Mr. Tivnan tendered his resignation
as an executive officer and director of ScanSoft effective April 30, 2003.
(6) Represents options to acquire shares of ScanSoft's common stock that are
exercisable through July 29, 2003.
(7) Includes options to acquire 100,000 shares of ScanSoft's common stock that
are exercisable through July 29, 2003.
(8) Includes options to acquire 75,000 shares of ScanSoft's common stock that
are exercisable through July 29, 2003.
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(9) Represents options to acquire shares of ScanSoft's common stock that are
exercisable through July 29, 2003.
(10) Includes options to acquire 630,406 shares of ScanSoft's common stock that
are exercisable through July 29, 2003.
(11) Includes 75,000 shares of restricted stock with a 2 1/2 year cliff vesting,
which vest 100% on April 17, 2004, and options to acquire 595,917 shares of
ScanSoft's common stock that are exercisable through July 29, 2003.
(12) Includes 58,854 shares of restricted stock, with restrictions lapsing 1/3
on each anniversary of the date of grant, of which 19,608 shares have been
released as of May 30, 2003 and options to acquire 218,833 shares of
ScanSoft's common stock that are exercisable through July 29, 2003.
(13) Includes 75,000 shares of restricted stock issued to Mr. Palmer (see note
11 above); 58,854 shares of restricted stock issued to Mr. Weideman (see
note 12 above); and options to acquire 6,481,787 shares of ScanSoft's
common stock that are exercisable through July 29, 2003.
DESCRIPTION OF SCANSOFT'S CAPITAL STOCK
The following description of ScanSoft's capital stock is qualified in its
entirety by the provisions of ScanSoft's amended and restated certificate of
incorporation and bylaws, which have been incorporated by reference into this
joint proxy/prospectus.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
ScanSoft's charter provides that ScanSoft is authorized to issue
140,000,000 shares of common stock, $0.001 par value per share, and 40,000,000
shares of preferred stock, $0.001 par value per share. As of May 30, 2003, there
were outstanding 66,150,349 shares of common stock held by approximately 570
stockholders of record, and 3,562,238 shares of Series B preferred stock held by
Xerox. As of May 30, 2003, there were no shares of Series A preferred stock
outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock (see the section entitled
"Preferred Stock" below), the holders of common stock are entitled to receive
such dividends, if any, as may be declared from time to time by the ScanSoft
board of directors out of legally available funds. In the event of a
liquidation, dissolution or winding up of ScanSoft, the holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior rights of the preferred stock. The common stock
has no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions available to the common stock. The
rights, preferences, and privileges of holders of the common stock are subject
to, and may be adversely affected by, the rights of holders of shares of
ScanSoft's preferred stock, as discussed below.
PREFERRED STOCK
The ScanSoft board of directors may issue preferred stock in different
series and classes and fix the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), liquidation preferences, and other rights and preferences of
preferred stock not in conflict with ScanSoft's charter or Delaware law.
ScanSoft's charter currently designates two series of preferred stock: the
Series A Participating Preferred Stock consisting of 100,000 shares and the
Series B Preferred Stock consisting of 15,000,000 shares. ScanSoft's preferred
stock may have the effect of delaying, deferring or preventing a change in
control of ScanSoft without further action by the stockholders (see the section
entitled "Anti-Takeover
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Provisions" below). Additionally, the issuance of preferred stock may adversely
affect the rights of the holders of common stock as follows:
- Dividends. ScanSoft's preferred stock is entitled to receive dividends
out of any legally available assets, when and if declared by the ScanSoft
board of directors prior and in preference to any declaration or payment
of any dividend on the common stock. In addition, after the first
issuance of the Series A Participating Preferred Stock, ScanSoft cannot
declare a dividend or make any distribution on the common stock unless
ScanSoft concurrently declares a dividend on such Series A Participating
Preferred Stock. Moreover, ScanSoft cannot pay dividends or make any
distribution on the common stock as long as dividends payable to the
Series A Participating Preferred Stock are in arrears. With respect to
the Series B Preferred Stock, ScanSoft cannot declare a dividend or make
any distribution on the common stock unless full dividends on the Series
B Preferred Stock have been paid or declared and the sum sufficient for
the payment set apart.
- Voting Rights. Each share of Series A Participating Preferred Stock
entitles its holder to 1,000 votes on all matters submitted to a vote of
ScanSoft stockholders. In addition, the Series A Participating Preferred
and the common stock holders vote together as one class on all matters
submitted to a vote of ScanSoft stockholders. The holders of Series B
Preferred Stock are not entitled to vote on any matter (except as
provided in Delaware law in connection with amendments to ScanSoft's
charter that, among other things, would alter or change the rights and
preferences of the class, in which case each share of Series B Preferred
Stock would be entitled to one vote). However, the Series B Preferred
Stock is convertible into common stock, and as a result, may dilute the
voting power of the common stock.
- Liquidation, Dissolution or Winding Up. The preferred stock is entitled
to certain liquidation preferences upon the occurrence of a liquidation
dissolution or winding up of ScanSoft. If there are insufficient assets
or funds to permit this preferential amount, then ScanSoft's entire
assets and all of its funds legally available for distribution will be
distributed ratably among the preferred stockholders. The remaining
assets, if any, will be distributed to the common stockholders on a pro
rata basis.
- Preemptive Rights. ScanSoft's Series A and Series B preferred stock do
not have any preemptive rights.
WARRANTS
As of May 30, 2003, Xerox owned a warrant to purchase up to a maximum of
525,732 shares of ScanSoft common stock at an exercise price of $0.61 per share,
and Lobby7, Inc. owned a warrant to purchase up to a maximum of 78,000 shares of
ScanSoft common stock at an exercise price of $8.10 per share.
REGISTRATION RIGHTS
Certain parties are entitled to have some of their shares of ScanSoft's
stock registered under the Securities Act pursuant to registration rights or
share purchase agreements between ScanSoft and each of these parties.
Specifically, Xerox has the right to register all of its 11,441,572 shares,
consisting of common, preferred and warrant shares; and Merrill Lynch, Pierce
Fenner & Smith Incorporated ("Merrill Lynch") has the right to register 65,100
shares of ScanSoft's common stock.
XEROX
Under a Registration Rights Agreement dated as of March 2, 1999 between
ScanSoft and Xerox, if Xerox requests that at least 10% of its registrable
securities be registered, ScanSoft may be required, on up to three occasions, to
register Xerox's common, preferred and warrant shares for public resale. If
ScanSoft is eligible to file registration statements on Form S-3, Xerox may
require ScanSoft to register their
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remaining shares for public resale on Form S-3 up to two times per 12-month
period. Depending on market conditions, however, ScanSoft may defer such
registration for up to 60 days.
Furthermore, in the event ScanSoft elects to register any of ScanSoft's
shares of common stock for purposes of effecting any public offering, Xerox is
entitled to include a portion of its shares of common stock in the registration,
but ScanSoft may reduce the number of shares proposed to be registered in view
of market conditions.
All expenses in connection with any registration, other than underwriting
discounts and commissions, will be borne by ScanSoft. Xerox's registration
rights will terminate when Xerox is entitled to sell all of its shares in any
90-day period under Rule 144 of the Securities Act.
MERRILL LYNCH
Under a Registration Rights Agreement between ScanSoft and Merrill Lynch,
upon written request, Merrill Lynch may demand to have its registrable
securities registered for public resale on a Form S-3. In certain cases,
ScanSoft may defer such registration for up to 60 days. All registration
expenses incurred in connection with ScanSoft's obligations under the
Registration Rights Agreement will be borne by ScanSoft. The registration rights
of Merrill Lynch are subordinate in all respects to the registration rights of
Xerox described above.
PHILIPS
Under a Plan of Distribution Agreement dated January 30, 2003 between
ScanSoft and Philips, Philips has agreed that prior to January 30, 2004, it will
not transfer or otherwise dispose of any shares of common stock it receives upon
conversion of its $27.5 million convertible debenture. After this date, Philips
may provide ScanSoft with notice of its desire to sell any of its shares, and
ScanSoft must discuss with Philips in good faith a mutually agreeable plan of
distribution for the shares desired to be sold. This plan may include the
registration of the shares for sale to the public or a private placement. If
ScanSoft cannot mutually agree on a plan of distribution, Philips may sell
pursuant to Rule 144 or other applicable exemption from registration a number of
shares per fiscal quarter not greater than 25% of the shares into which the
convertible debenture was initially convertible. In any event, after January 30,
2004, in the event ScanSoft elects to register any of ScanSoft's shares of
common stock for purposes of effecting any public offering, Philips is entitled
to include a portion of its shares of common stock in the registration, subject
to reduction in certain circumstances.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law, ScanSoft's Preferred Shares Rights
Agreement, and ScanSoft's certificate of incorporation and bylaws could make the
following more difficult: the acquisition of ScanSoft by means of a tender
offer, or the acquisition of control of ScanSoft by means of a proxy contest or
otherwise. These provisions, summarized below, are intended to discourage
certain types of coercive takeover practices and inadequate takeover bids, and
are designed to encourage persons seeking to acquire control of ScanSoft to
negotiate with the ScanSoft board of directors. ScanSoft believes that the
benefits of increased protection against an unfriendly or unsolicited proposal
to acquire or restructure ScanSoft outweigh the disadvantages of discouraging
such proposals. Among other things, negotiation of such proposals could result
in an improvement of their terms.
The Delaware Business Combination Statute. ScanSoft is subject to Section
203 of the General Corporation Law of the State of Delaware. In general, Section
203 prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the time the person became an interested stockholder, unless, subject
to certain other exceptions, the "business combination" or the transaction in
which the person became an interested stockholder is approved by the ScanSoft
board of directors in a prescribed manner. Generally, a "business combination"
includes a merger, asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates
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and associates, owns or, within three years prior to the determination of
interested stockholder status, did own, 15% or more of a corporation's voting
stock. The existence of this provision may have an anti-takeover effect with
respect to transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Preferred Shares Rights Agreement. On October 23, 1996, the ScanSoft board
of directors adopted a resolution creating a series of preferred stock
designated as Series A Participating Preferred Stock and declaring a dividend of
one preferred share purchase right for each outstanding share of ScanSoft's
common stock with each right entitling the registered holder to purchase one
one-thousandth of a share of ScanSoft's Series A Participating Preferred Stock.
The terms of the preferred share purchase rights are contained in a Preferred
Share Rights Agreement. This arrangement is designed to protect and maximize the
value of ScanSoft's outstanding equity interests in the company in the event of
an unsolicited attempt by an acquiror to take over ScanSoft in a manner or on
terms not approved by the ScanSoft board of directors. Takeover attempts
frequently include coercive tactics to deprive a corporation's board of
directors and its stockholders of any real opportunity to determine the
direction of the corporation.
The Preferred Shares Rights Agreement is aimed to deter such tactics. It
may have the effect of rendering more difficult or discouraging an acquisition
of ScanSoft deemed undesirable by the ScanSoft board of directors, by, for
example, causing substantial dilution to a person or group that attempts to
acquire ScanSoft on terms or in a manner not approved by the ScanSoft board of
directors. The preferred share purchase rights described above are triggered
within ten days after the accumulation of 20% or more of ScanSoft's outstanding
common stocks by a single acquiror or group.
ScanSoft's Preferred Share Rights Agreement and accompanying preferred
share purchase rights do not in any way weaken the financial strength of
ScanSoft or interfere with its business plans. Rather, ScanSoft believes that
they represent a sound and reasonable means of addressing the complex issues of
corporate policy created by the current takeover environment. Additionally, they
should not preclude any merger or business combination approved by the ScanSoft
board of directors.
Other Provisions in ScanSoft's Charter and Bylaws. ScanSoft's charter and
bylaws provide other mechanisms that may help to delay, defer or prevent a
change in control. For example, ScanSoft's charter provides that stockholders
may not take action by written consent without a meeting, but must take any
action at a duly called annual or special meeting. This provision makes it more
difficult for stockholders to take action opposed by the ScanSoft board of
directors.
ScanSoft's charter does not provide for cumulative voting in the election
of directors, which under Delaware law, precludes stockholders from cumulating
their votes in the election of directors, which consequently frustrates the
ability of minority stockholders to obtain representation on the board of
directors.
Under ScanSoft's charter, 24,900,000 shares of preferred stock remain
undesignated. The authorization of undesignated preferred stock makes it
possible for the board of directors, without stockholder approval, to issue
preferred stock with voting or other rights or preferences that could impede the
success of any attempt to obtain control of ScanSoft (see the section entitled
"Preferred Shares Rights Agreement" above).
Lastly, ScanSoft's bylaws contain advance notice procedures which apply to
stockholder proposals and the nomination of candidates for election as directors
by stockholders rather than the board.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for ScanSoft's common stock is U.S. Stock
Transfer Corporation.
NASDAQ NATIONAL MARKET LISTING
ScanSoft's common stock is quoted on the NASDAQ National Market under the
symbol "SSFT." On June 30, 2003, the last reported sale price of ScanSoft's
common stock was $5.44 per share.
MARKET PRICE OF SCANSOFT COMMON STOCK
ScanSoft's common stock commenced trading on the NASDAQ National Market on
December 11, 1995 under the symbol "VSNR," and traded under that symbol until
March 3, 1999. ScanSoft's common stock is now traded under the symbol "SSFT." As
of June 30, 2003, there were outstanding 66,206,640 shares of common stock held
by approximately 568 stockholders of record. The following table sets forth for
the periods indicated the high and low sale prices for ScanSoft's common stock
as reported on the NASDAQ National Market.
HIGH LOW
----- -----
FISCAL 2003:
First Quarter............................................. $6.50 $3.81
Second Quarter (through June 30, 2003) 6.55 4.45
FISCAL 2002:
First Quarter............................................. $6.00 $2.88
Second Quarter............................................ 8.85 5.30
Third Quarter............................................. 7.94 3.15
Fourth Quarter............................................ 7.77 3.16
FISCAL 2001:
First Quarter............................................. $1.69 $0.66
Second Quarter............................................ 1.69 0.50
Third Quarter............................................. 1.68 1.20
Fourth Quarter............................................ 5.50 1.35
On June 30, 2003, the last reported sale price of ScanSoft's common stock
on the NASDAQ National Market was $5.44 per share.
SCANSOFT DIVIDEND POLICY
ScanSoft has never declared or paid any cash dividends on its capital
stock. ScanSoft currently expects to retain future earnings, if any, to finance
the growth and development of its business and does not anticipate paying any
cash dividends in the foreseeable future.
ScanSoft's loan and security agreement with Silicon Valley Bank, dated
October 31, 2002, contains a restrictive covenant which prohibits ScanSoft from
paying or declaring any dividends on its capital stock during the term of the
agreement (except for dividends payable solely in capital stock) without Silicon
Valley Bank's prior written consent. In addition, the zero coupon convertible
subordinated debenture due in 2006 that was issued to Koninklijke Royal Philips
Electronics N.V. ("Philips") in connection with ScanSoft's acquisition of the
Speech Processing Telephony and Voice Control business units of Philips contains
a restrictive covenant which prohibits ScanSoft from paying or declaring any
dividend or distribution (other than distributions of ScanSoft's equity
securities) on ScanSoft's capital stock while the note is outstanding. This
restriction terminates if one half or more of the note is converted by Philips
into common stock.
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SPEECHWORKS 2000 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK PLAN
The SpeechWorks Amended and Restated 2000 Employee, Director and Consultant
Stock Plan (the "SpeechWorks Plan") was adopted by the SpeechWorks board of
directors in April 2000, and was last amended by the SpeechWorks board of
directors in April 2002. ScanSoft will, upon effectiveness of the merger, assume
the SpeechWorks Plan. As of June 10, 2003, an aggregate of approximately
1,569,468 shares remain available for grant under the SpeechWorks Plan. In
connection with the proposed merger, the vesting of all options held by
non-officer employees were accelerated as of the second business day following
the initial filing with the SEC of the registration statement of which this
joint proxy statement/prospectus is a part. The vesting of options held by
officers and directors will accelerate as of the second business day following
the effectiveness of the registration statement of which this joint proxy
statement/prospectus is a part. Any option not exercised prior to the closing of
the merger will be cancelled.
General. The purpose of the SpeechWorks Plan is to encourage ownership of
SpeechWorks common stock by SpeechWorks employees, directors and consultants,
and to attract and incentivize such individuals to promote SpeechWorks' success.
Administration. The SpeechWorks Plan generally may be administered by the
SpeechWorks board of directors or a committee appointed by the SpeechWorks board
of directors. The administrator may make all rules and make any determinations
deemed necessary or advisable for the administration of the SpeechWorks Plan.
The board of directors has authorized the compensation committee to administer
certain aspects of the SpeechWorks Plan.
Eligibility. The administrator, in its discretion, selects the employees,
directors and consultants to whom options may be granted, the number of shares
of common stock covered by options and the dates upon which such options become
exercisable, the exercise price of options, the duration of options, any
restrictions imposed on shares subject to options and the number of shares of
common stock subject to any stock awards and the terms and conditions of such
awards; provided, however, that incentive stock options, as such term is defined
under the Internal Revenue Code, may only be granted to employees.
Terms and Conditions of Options. Each option is evidenced by a stock
option agreement between SpeechWorks and the optionee, and is subject to the
following terms and conditions:
(a) Exercise Price. The administrator determines the exercise price
of options at the time the options are granted. The exercise price for
incentive stock options cannot be less than the fair market value per share
of the underlying common stock on the grant date. The exercise price for
incentive stock options granted to holders of more than 10% of the voting
stock of SpeechWorks cannot be less than 110% of the fair market value per
share of the underlying common stock on the grant date. The maximum fair
market value of the underlying stock with respect to which incentive stock
options are exercisable for the first time in any calendar year may not
exceed $100,000. The maximum number of shares with respect to which awards
may be granted to any participant may not exceed 1,000,000 shares per
calendar year.
(b) Term of Option. The term of incentive stock options and
non-qualified options cannot exceed ten years. In the case of incentive
stock options granted to holders of more than 10% of the voting stock of
SpeechWorks, the term cannot exceed five years.
(c) Exercise of Options; Form or Consideration. The SpeechWorks Plan
permits payment of the exercise price of options in cash, or at the
discretion of the SpeechWorks board of directors, by delivery of shares of
SpeechWorks common stock having a fair market value equal to the purchase
price, in connection with a "cashless exercise" of the option, by delivery
to SpeechWorks of a promissory note or by any combination of the foregoing.
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Terms and Conditions of Stock Grants. Each restricted or unrestricted
stock award is subject to the following terms and conditions:
(a) Repurchase Right. Stock awards entitle recipients to acquire
shares of SpeechWorks common stock, subject to any right of SpeechWorks to
repurchase all or part of the shares from the recipient as specified in the
applicable award.
(b) Form or Consideration. The SpeechWorks Plan permits payment of
the purchase price of shares pursuant to a stock award in cash, or at the
discretion of the SpeechWorks board of directors, by delivery of shares of
SpeechWorks common stock having a fair market value equal to the purchase
price, by delivery to SpeechWorks of a promissory note or by any
combination of the foregoing.
Adjustments Upon Certain Corporate Transactions. The SpeechWorks board of
directors is required to make appropriate adjustments in connection with the
SpeechWorks Plan and any outstanding awards to reflect stock dividends, stock
splits and certain other events. In the event of a merger, consolidation or
other acquisition event, as defined in the SpeechWorks Plan, the SpeechWorks
board of directors shall either provide for (i) outstanding options or other
stock awards to be assumed or substituted for, (ii) the acceleration of awards
to make them fully exercisable for a specified period, after which they will
terminate or (iii) a cash out of the value of any outstanding options. Upon the
liquidation or dissolution of SpeechWorks, all outstanding option and stock
awards will terminate, subject to exercise or acceptance immediately prior to
such event of the vested option or stock award. If any award expires or is
terminated, surrendered, cancelled or forfeited, the unused shares of common
stock covered by the award will again be available for grant under the
SpeechWorks Plan subject, however, in the case of incentive stock options, to
any limitations under the Code.
Amendment and Termination of the SpeechWorks Plan. No award under the
SpeechWorks Plan may be made after May 9, 2010, but awards previously granted
may extend beyond that date. The SpeechWorks board of directors may at any time
amend, suspend or terminate the SpeechWorks Plan, except to the extent such
amendment requires the approval of the SpeechWorks stockholders.
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COMPARISON OF RIGHTS OF HOLDERS OF SCANSOFT COMMON
STOCK AND SPEECHWORKS COMMON STOCK
The following is a description of the material differences between the
rights of holders of ScanSoft common stock and the rights of holders of
SpeechWorks common stock. While we believe that this description covers the
material differences between the two, this summary may not contain all of the
information that is important to you. This summary is not intended to be a
complete discussion of the certificates of incorporation and bylaws of ScanSoft
and SpeechWorks and it is qualified in its entirety by applicable Delaware law
as well as by ScanSoft's and SpeechWorks' respective certificates of
incorporation and bylaws. You should carefully read this entire joint proxy
statement/prospectus and the other documents we refer to for a more complete
understanding of the differences between being a stockholder of ScanSoft and
being a stockholder of SpeechWorks. ScanSoft and SpeechWorks have filed with the
SEC their respective certificates of incorporation and bylaws and will send
copies of these documents to you upon your request. See the section entitled
"Where You Can Find More Information" on page .
ScanSoft and SpeechWorks are both Delaware corporations. The rights of each
company's stockholders are generally governed by the law of the State of
Delaware and each company's certificate of incorporation and bylaws. Upon
completion of the merger, stockholders of SpeechWorks will be entitled to become
stockholders of ScanSoft, and the ScanSoft certificate of incorporation and
bylaws will govern the rights of former SpeechWorks stockholders. No changes to
the ScanSoft certificate of incorporation or bylaws will be adopted in
connection with the merger.
The following is only a summary comparison of the material rights of a
SpeechWorks stockholder to the material rights of a ScanSoft stockholder arising
from the governing organizational instruments of these companies. The following
summary is not intended to be a complete discussion of the respective
certificates of incorporation and bylaws of ScanSoft and SpeechWorks. We
encourage you to read carefully the certificates of incorporation and bylaws of
ScanSoft and SpeechWorks. The identification of specific differences is not
meant to indicate that other equally or more significant differences do not
exist. For information on how to obtain these documents, see the section
entitled "Where You Can Find More Information." You are encouraged to obtain and
read these documents along with this entire joint proxy/prospectus, as this
summary may not contain all of the information important to you.
If your shares are held by a broker or other financial intermediary in
"street name" rather than directly by you as a person whose name is entered on
the share register of either ScanSoft or SpeechWorks, you must rely on
procedures established by that broker or financial intermediary in order to
assert your rights as a stockholder against either ScanSoft or SpeechWorks, as
applicable.
AUTHORIZED CAPITAL STOCK
ScanSoft's amended and restated certificate of incorporation authorizes the
issuance of 180,000,000 shares of capital stock, consisting of:
- 140,000,000 shares of common stock, par value $0.001 per share; and
- 40,000,000 shares of preferred stock, par value $0.001 per share.
SpeechWorks' restated certificate of incorporation authorizes the issuance
of 110,000,000 shares of capital stock, consisting of:
- 100,000,000 shares of common stock, par value $0.001 per share; and
- 10,000,000 shares of preferred stock, par value $0.001 per share.
BOARD OF DIRECTORS
ScanSoft's certificate of incorporation provides that the number of
directors comprising the ScanSoft board of directors shall be fixed, and may be
changed from time to time, by an amendment to ScanSoft's bylaws that has been
duly adopted by the ScanSoft board of directors or by the ScanSoft stockholders
at
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an annual meeting. ScanSoft's bylaws provide that the number of directors
comprising the ScanSoft board of directors shall be determined by resolution of
the ScanSoft board of directors or the ScanSoft stockholders. The ScanSoft board
of directors currently has five members. Upon completion of the merger, the
ScanSoft board of directors will have eight members.
SpeechWorks' certificate of incorporation provides that the number of
directors comprising the SpeechWorks board of directors shall be fixed from time
to time exclusively pursuant to a resolution adopted by a majority of the
SpeechWorks board of directors. The SpeechWorks board of directors currently has
seven members. SpeechWorks' certificate of incorporation provides that the
directors are to be divided into three classes. At each annual meeting of
SpeechWorks stockholders, the members of one of the three classes of directors
are to be elected by SpeechWorks stockholders to serve until the third
succeeding annual meeting of stockholders after their election.
REMOVAL OF DIRECTORS
ScanSoft's bylaws provide that any director, or the entire ScanSoft board
of directors, may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors.
SpeechWorks' certificate of incorporation provides that any director, or
the entire SpeechWorks board of directors, may be removed from office at any
time only for cause and only by the affirmative vote of the holders of at least
80% of the voting power of all of the then outstanding shares of capital stock
then entitled to vote an election of the directors voting as a single class.
SpeechWorks' certificate of incorporation further provides that a director may
be removed for cause only after reasonable notice and an opportunity to be heard
by the stockholders.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
ScanSoft's bylaws provide that vacancies on the ScanSoft board of directors
and newly created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in office,
though less than a quorum, or by the sole remaining director.
SpeechWorks' certificate of incorporation provides that newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the SpeechWorks board of directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
shall be filled only by a majority vote of the directors then in office even
though less than a quorum, or by a sole remaining director and not by the
stockholders.
STOCKHOLDER ACTION BY WRITTEN CONSENT
ScanSoft's certificate of incorporation provides that no action required to
be taken or that may be taken at any annual or special meeting of the ScanSoft
stockholders may be taken without a meeting, and that the power of the ScanSoft
stockholders to consent in writing without a meeting to the taking of action is
specifically denied.
SpeechWorks' certificate of incorporation provides that action required or
permitted to be taken by the SpeechWorks stockholders may be effected only at a
duly called annual or special meeting of the SpeechWorks stockholders and not by
written consent.
ABILITY TO CALL SPECIAL MEETINGS OF STOCKHOLDERS
ScanSoft's bylaws provide that special meetings of the ScanSoft board of
directors may be called by the president or any two of the directors in office.
ScanSoft's bylaws provide that special meetings of the ScanSoft stockholders may
be called by the president or secretary at the request in writing of a majority
of the ScanSoft board of directors, or at the request in writing of stockholders
owning not less than 10% of the entire capital stock of ScanSoft issued and
outstanding and entitled to vote.
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SpeechWorks' bylaws provide that special meetings of the SpeechWorks board
of directors may be called by the chairman of the board of directors or the
chief executive officer, or by a majority of the board of directors.
SpeechWorks' certificate of incorporation provides that a special meeting of the
SpeechWorks stockholders may only be called by the board of directors.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND PROPOSALS
ScanSoft's bylaws provide that for nominations or other proposals to be
properly brought by a stockholder before any stockholder meeting the stockholder
must have given timely notice thereof in writing to ScanSoft's Secretary. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than 20 days nor
more than 60 days prior to the date of the meeting. If the presiding officer of
the meeting determines that business was not properly brought before the
meeting, such person shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
SpeechWorks' bylaws provide that, for nominations to the board of directors
or for other business to be properly brought by a stockholder before a meeting
of stockholders, the stockholder must have given timely notice of the proposal
in writing to SpeechWorks' Secretary. For an annual meeting, a stockholder's
notice generally must be delivered not less than 45 days nor more than 75 days
prior to the anniversary of the mailing date of the proxy statement for the
previous year's annual meeting. For a special meeting, the notice must generally
be delivered not earlier than 90 days prior to the special meeting or 10 days
following the day on which public announcement of the meeting is first made. If
it is determined that business was not properly brought before a meeting, such
business will not be conducted at the meeting.
AMENDMENT OF CERTIFICATE OF INCORPORATION
ScanSoft's certificate of incorporation may be amended as provided by
Delaware law; provided, however, that ScanSoft's certificate of incorporation
may not be amended in any manner which would materially alter or change the
powers, preferences or special rights of ScanSoft's Series A Participating
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding shares of ScanSoft's Series
A Participating Preferred Stock, voting separately as a class.
SpeechWorks' certificate of incorporation may be amended in the manner
prescribed by Delaware General Corporation Law; provided, however, that in
addition to the vote of the holders of any class or series of stock of
SpeechWorks required by law, the affirmative vote of the holders of shares of
voting stock of SpeechWorks representing at least 80% of the voting power of all
of the then outstanding shares of capital stock of SpeechWorks entitled to vote
generally in the election of directors shall be required to amend certain
enumerated articles of SpeechWorks' certificate of incorporation.
AMENDMENT OF BYLAWS
ScanSoft's certificate of incorporation provides that the ScanSoft board of
directors is expressly authorized to make, repeal, alter, amend and rescind any
or all of ScanSoft's bylaws. ScanSoft's bylaws provide that, except for Section
7 of Article VII, ScanSoft's bylaws may be altered, amended or repealed or new
bylaws adopted by ScanSoft stockholders and the ScanSoft board of directors.
SpeechWorks certificate of incorporation provides (i) that the SpeechWorks
board of directors is expressly empowered to adopt, amend or repeal SpeechWorks'
bylaws and (ii) that SpeechWorks stockholders shall also have the power to
adopt, amend or repeal the by-laws of the corporation, provided that the
affirmative vote of the holders of 80% of the voting power of all of the
outstanding shares of capital stock then entitled to vote generally in the
election of directors, voting together as a single class, shall be required for
the stockholders to adopt, amend or repeal any provision of the by-laws of the
corporation.
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INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the General Corporation Law of the State of Delaware
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reasonable cause to believe that such
person's conduct was unlawful.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against such person and incurred by such person
in any such capacity, arising out of such person's status as such, whether or
not the corporation would otherwise have the power to indemnify such person
against liability under Section 145.
Each of ScanSoft and SpeechWorks' certificates of incorporation contains a
provision eliminating the personal liability of its directors to the company or
its stockholders for monetary damages for breach of fiduciary duty as a
director. ScanSoft's certificate of incorporation further provides that ScanSoft
is authorized to provide, to the fullest extent permitted by applicable law,
indemnification for its agents through bylaw provisions, agreements with such
agents, vote of stockholders or disinterested directors or otherwise, with
respect to actions for breach of duty to ScanSoft, it stockholders and others.
SpeechWorks' certificate of incorporation provides that SpeechWorks shall
indemnify and advance expenses to its directors and officers to fullest extent
permitted by applicable law. The bylaws of ScanSoft generally provide for the
mandatory indemnification of, and payment of expenses incurred by, its directors
and officers to the fullest extent permitted by applicable law unless the
proceedings were initiated by the director or officer and not authorized by the
board of directors. The bylaws of SpeechWorks generally provide for the
indemnification of, and payment of expenses incurred by its directors and
officers to fullest extent permitted by applicable law. ScanSoft and SpeechWorks
have also entered into indemnification agreements with their respective
directors and officers.
In addition, in accordance with the terms of the merger agreement and upon
completion of the merger, ScanSoft has agreed, as permitted by law, to indemnify
persons who were directors or officers of SpeechWorks or its subsidiaries before
the effective time of the merger who incur liabilities or losses from any
threatened or actual claim or proceeding based on the merger agreement or a
claim arising from the fact that the person was a director or officer of
SpeechWorks or its subsidiaries. ScanSoft has also agreed for a period of three
years after the effective time of the merger, to maintain directors' and
officers' liability insurance covering those persons who were covered by
SpeechWorks directors' and officers' liability insurance policy as of April 23,
2003, on comparable terms to those applicable as of April 23, 2003 to ScanSoft
directors and officers.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described above, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
STOCKHOLDER RIGHTS PLAN
Under General Corporation Law of the State of Delaware, every corporation
may create and issue rights entitling the holders of such rights to purchase
from the corporation shares of its capital stock of any class or classes,
subject to any provisions in its certificate of incorporation. The price and
terms of such
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shares must be stated in the certificate of incorporation or in a resolution
adopted by the board of directors for the creation and issuance of such rights.
SCANSOFT RIGHTS PLAN
On October 23, 1996, the ScanSoft board of directors adopted a resolution
creating a series of preferred stock designated as Series A Participating
Preferred Stock and declaring a dividend of one preferred share purchase right
for each outstanding share of ScanSoft common stock with each right entitling
the registering holder to purchase one one-thousandth of a share of ScanSoft's
Series A Participating Preferred Stock at an exercise price of $27.50, subject
to adjustment. Each share of ScanSoft common stock issued in connection with the
merger will have one right attached.
The rights under ScanSoft's rights agreement currently are attached to and
trade only together with outstanding certificates representing ScanSoft common
stock. The rights will separate from ScanSoft common stock and be represented by
separate and distinct certificates approximately 10 days after someone acquires
or commences a tender offer for 20% or more of the outstanding ScanSoft common
stock. After the rights separate from ScanSoft's common stock, certificates
representing the rights will be mailed to record holders of ScanSoft common
stock. Once distributed, the rights certificates alone will represent the
rights.
If an acquiror (which could be a person or group) obtains 20% or more of
ScanSoft common stock, then each right will entitle the holder to purchase a
number of shares of ScanSoft common stock having a then current market value
equal to two times the exercise price.
Each right will entitle the holder to purchase a number of shares of common
stock of the acquiring entity having a then current market value of twice the
purchase price if an acquiror obtains, or commences a tender or exchange offer
to obtain, 20% or more of ScanSoft common stock and any of the following occurs:
- ScanSoft merges into another entity;
- an acquiring entity merges into ScanSoft; or
- ScanSoft sells more than 50% in the aggregate of its assets or earning
power.
Under ScanSoft's rights agreement, any rights that are or were owned by an
acquiror or its affiliates of more than 20% of ScanSoft's outstanding common
stock will be null and void.
ScanSoft's rights agreement provides that after an acquiror obtains 20% or
more of ScanSoft's outstanding common stock, but less than 50% of ScanSoft's
outstanding common stock, the ScanSoft board of directors may, at its option,
exchange all or part of the then outstanding and exercisable rights (other than
rights owned by the acquiror or its affiliates) for ScanSoft common stock. In
such an event, the exchange ratio will be one common share per right, adjusted
to reflect any stock split, stock dividend or similar transaction.
At its option, the ScanSoft board of directors may redeem all of the
outstanding rights under the ScanSoft rights agreement at any time on or prior
to the close of business on the earlier of (1) the tenth day following the time
that an acquiror obtains 20% or more of ScanSoft's outstanding common stock or
such later date as may be determined by a majority of the board and publicly
announced by ScanSoft, or (2) October 23, 2006. The redemption price under
ScanSoft's rights agreement is $0.01 per right. The right to exercise the rights
will terminate upon the action of the ScanSoft board of directors ordering the
redemption of the rights and the only right of the holders of the rights will be
to receive the redemption price.
Holders of rights will have no rights as stockholders of ScanSoft,
including without limitation the right to vote or receive dividends, simply by
virtue of holding the rights.
The provisions of ScanSoft's rights agreement may be amended by the board
of directors prior to the date 10 days after any person acquires 20% or more of
ScanSoft's common stock without approval of the holders of the rights. However,
after the date any person acquires 20% or more of ScanSoft's common stock, the
rights agreement may not be amended in any manner that would adversely affect
the interests of the holders of the rights, excluding any interests of the
acquiror.
169
The rights issued under ScanSoft's rights agreement are designed to protect
and maximize the value of the outstanding equity interests in ScanSoft in the
event of an unsolicited attempt by an acquiror to take over ScanSoft in a manner
or on terms that are not approved by the ScanSoft board of directors. The rights
are designed to deter unfair tactics, including a gradual accumulation of shares
in the open market of a 20% or greater position, followed by a merger or a
partial or two-tier tender offer that does not treat all ScanSoft stockholders
equally.
Subject to the restrictions described above, the rights may be redeemed by
ScanSoft at $0.01 per right at any time prior to the time when the rights
separate from the common stock. Accordingly, the rights should not interfere
with any merger or business combination approved by the ScanSoft board of
directors. The rights are not intended to prevent a takeover of ScanSoft.
However, the rights may have the effect of rendering more difficult or
discouraging an acquisition of ScanSoft deemed undesirable by the ScanSoft board
of directors. The rights will cause substantial dilution to a person or group
that attempts to acquire ScanSoft on terms or in a manner not approved by the
ScanSoft board of directors, except pursuant to an offer conditioned upon
redemption of the rights.
SpeechWorks has not adopted a stockholders rights plan.
LEGAL MATTERS
The validity of the shares of ScanSoft common stock offered by this joint
proxy statement/prospectus and certain federal income tax consequences of the
merger will be passed upon for ScanSoft by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
Hale and Dorr LLP, Boston, Massachusetts will pass upon certain federal
income tax consequences of the merger for SpeechWorks.
EXPERTS
The financial statements of ScanSoft, Inc. as of December 31, 2002 and 2001
and for each of the three years in the period ended December 31, 2002 included
in this joint proxy statement/prospectus have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of SpeechWorks International Inc. as of December
31, 2002 and 2001 and for each of the three years in the period ended December
31, 2002 incorporated by reference into this joint proxy statement/prospectus
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The combined balance sheets of Philips Speech Processing Telephony and
Voice Control (a division of Royal Philips Electronics N.V.) as of December 31,
2002 and 2001, and the related combined statements of operations and
comprehensive loss, changes in the net investment of the Philips Group, and cash
flows for each of the years in the two-year period ended December 31, 2002,
appearing elsewhere herein have been included in reliance upon the report of
KPMG Accountants N.V., Eindhoven, The Netherlands, independent accountants, upon
the authority of said firm as experts in auditing and accounting.
The financial statements of the Speech and Language Technologies operations
of Lernout & Hauspie Speech Products N.V. as of September 30, 2001 and for the
nine months ended September 30, 2001 included in this joint proxy
statement/prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
DOCUMENTS INCORPORATED BY REFERENCE
This joint proxy statement/prospectus incorporates documents by reference
that are not included in or delivered with this document. The SEC allows
SpeechWorks to "incorporate by reference" the information
170
that it files with it, which means that SpeechWorks can disclose important
information to you by referring you to those documents. Documents that are
incorporated by reference contain important information about SpeechWorks and
its finances.
All documents filed by SpeechWorks under section 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date hereof and before the date of the respective
special meeting of stockholders are incorporated by reference into and are a
part of this joint proxy statement/prospectus from the date of filing of each
such document.
You should rely only on the information contained in this document or that
ScanSoft or SpeechWorks has referred to you. Neither ScanSoft nor SpeechWorks
has authorized anyone to provide you with information that is different.
The following documents, which were filed by SpeechWorks with the SEC, are
incorporated by reference into this joint proxy statement/prospectus:
- SpeechWorks' registration statement on Form 8-A, as filed with the SEC on
June 20, 2000;
- SpeechWorks' annual report on Form 10-K for the fiscal year ended
December 31, 2002, as filed with the SEC on March 26, 2003;
- SpeechWorks' definitive proxy statement on Schedule 14A, as filed with
the SEC on April 25, 2003; and
- SpeechWorks' quarterly report on Form 10-Q for the quarter ended March
31, 2003, as filed with the SEC on May 15, 2003.
Any statement contained in a document incorporated or deemed to be
incorporated in this document by reference will be deemed to be modified or
superseded for purposes of this joint proxy statement/prospectus to the extent
that a statement contained in this document or any other subsequently filed
document that is deemed to be incorporated in this document by reference
modifies or supersedes the statement. Any statement so modified or superseded
will not be deemed, except as so modified or superseded, to constitute a part of
this joint proxy statement/prospectus.
The documents incorporated by reference into this joint proxy
statement/prospectus are available from SpeechWorks upon request. SpeechWorks
will provide a copy of any and all of the information that is incorporated by
reference in this joint proxy statement/prospectus (not including exhibits to
the information unless those exhibits are specifically incorporated by reference
into this joint proxy statement/prospectus) to any person, without charge, upon
written or oral request. Any request for documents should be made by August 4,
2003 to ensure timely delivery of the documents.
WHERE YOU CAN FIND MORE INFORMATION
ScanSoft has filed a registration statement on Form S-4 under the
Securities Act with the SEC with respect to ScanSoft common stock to be issued
to SpeechWorks stockholders pursuant to the merger. This joint proxy
statement/prospectus constitutes the prospectus of ScanSoft filed as part of the
registration statement. This joint proxy statement/prospectus does not contain
all of the information set forth in the registration statement because certain
parts of the registration statement are omitted in accordance with the rules and
regulations of the SEC. The registration statement and its exhibits are
available for inspection and copying as set forth below.
In addition, ScanSoft and SpeechWorks file annual, quarterly and current
reports, proxy and information statements and other information with the SEC
under the Exchange Act of 1934. Copies of these reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the SEC at:
Judiciary Plaza
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
171
Reports, proxy statements and other information concerning ScanSoft and
SpeechWorks may be inspected at:
The National Association of Securities Dealers
1735 K Street, N.W.
Washington, D.C. 20006
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. The SEC maintains a Website that
contains reports, proxy statements and other information regarding each of us.
The address of the SEC web site is http://www.sec.gov.
You may also obtain these documents by requesting them in writing or by
telephone from the appropriate company at the following addresses:
Requests for documents relating to ScanSoft Requests for documents relating to
should be directed to: SpeechWorks should be directed to:
ScanSoft, Inc. SpeechWorks International, Inc.
Investor Relations Legal Department
9 Centennial Drive 695 Atlantic Avenue
Peabody, Massachusetts 01960 Boston, Massachusetts 02111
(978) 977-2000 (617) 428-4444
ScanSoft stockholders should call Richard Mack (978) 977-2000 with any
questions about the merger.
SpeechWorks stockholders should call W. Robert Kellegrew, Jr., Esq. of the
SpeechWorks legal department at (617) 428-444 with any questions about the
merger.
INFORMATION ON SCANSOFT WEB SITE
Information on any ScanSoft Internet web site is not part of this document
and you should not rely on that information in deciding whether to approve the
share issuance, unless that information is also in this joint proxy
statement/prospectus or in a document that is incorporated by reference in this
joint proxy statement/prospectus.
INFORMATION ON SPEECHWORKS WEB SITE
Information on any SpeechWorks Internet web site is not part of this
document and you should not rely on that information in deciding whether to
adopt the merger agreement and approve the merger, unless that information is
also in this joint proxy statement/prospectus or in a document that is
incorporated by reference in this joint proxy statement/prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS JOINT
PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION
TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER,
SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH OR INCORPORATED INTO THIS JOINT PROXY STATEMENT/PROSPECTUS
BY REFERENCE OR IN OUR AFFAIRS SINCE THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS WITH RESPECT TO SPEECHWORKS AND ITS SUBSIDIARIES WAS
PROVIDED BY SPEECHWORKS AND ITS SUBSIDIARIES AND THE INFORMATION CONTAINED IN
THIS JOINT PROXY STATEMENT/PROSPECTUS WITH RESPECT TO SCANSOFT AND ITS
SUBSIDIARIES WAS PROVIDED BY SCANSOFT AND ITS SUBSIDIARIES, AS THE CASE MAY BE.
172
SCANSOFT, INC
INDEX TO FINANCIAL STATEMENTS
PAGE
----
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to the Unaudited Pro Forma Combined Financial
Statements............................................. F-2
Unaudited Pro Forma Combined Balance Sheet as of March 31,
2003................................................... F-4
Unaudited Pro Forma Combined Statement of Operations for
the Year Ended December 31, 2002....................... F-5
Unaudited Pro Forma Combined Statement of Operations for
the Three Months Ended March 31, 2003.................. F-6
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-7
CONSOLIDATED FINANCIAL STATEMENTS OF SCANSOFT, INC. AS OF
DECEMBER 31, 2002 AND 2001 AND FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001 AND 2000
Report of Independent Accounts............................ F-12
Consolidated Balance Sheets............................... F-13
Consolidated Statements of Operations..................... F-14
Consolidated Statements of Stockholders' Equity........... F-15
Consolidated Statements of Cash Flows..................... F-16
Notes to Consolidated Financial Statements................ F-17
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF SCANSOFT,
INC. AS OF MARCH 31, 2003 AND FOR THREE MONTHS ENDED MARCH
31, 2003 AND 2002
Consolidated Balance Sheet (Unaudited).................... F-51
Consolidated Statements of Operations (Unaudited)......... F-52
Consolidated Statements of Cash Flows (Unaudited)......... F-53
Notes to Unaudited Consolidated Financial Statements...... F-54
COMBINED FINANCIAL STATEMENTS OF THE PHILIPS SPEECH
PROCESSING TELEPHONY AND VOICE CONTROL DIVISION OF ROYAL
PHILIPS ELECTRONICS N.V. AS OF DECEMBER 31, 2002 AND 2001
Independent Auditors' Report.............................. F-69
Combined Balance Sheets................................... F-70
Combined Statements of Operations and Comprehensive
Loss................................................... F-71
Changes in the Net Investment of the Philips Group........ F-72
Combined Statements of Cash Flows......................... F-73
Notes to the Combined Financial Statements................ F-74
FINANCIAL STATEMENTS OF THE SPEECH AND LANGUAGE TECHNOLOGIES
OPERATIONS OF LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
Report of Independent Accountants......................... F-92
Statement of Assets and Liabilities as of September 30,
2001................................................... F-93
Statement of Revenue and Direct Operating Expenses for the
Nine Months Ended September 30, 2001................... F-94
Notes to Financial Statements............................. F-95
F-1
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On April 23, 2003, ScanSoft and SpeechWorks signed a definitive merger
agreement. Pursuant to the merger agreement and subject to its terms and
conditions, SpeechWorks common stockholders will receive 0.860 shares of
ScanSoft common stock for each share of SpeechWorks common stock.
The merger, which is expected to close in the third calendar quarter of
2003, is contingent upon the fulfillment of specified conditions, including all
required regulatory approvals, the adoption of the merger agreement and the
approval of the merger by SpeechWorks stockholders and the approval of the
issuance of shares of ScanSoft common stock in connection with the merger by
ScanSoft stockholders. The merger will be a tax-free merger and will be
accounted for as a purchase of a business.
On October 7, 2002, ScanSoft entered into a definitive agreement with Royal
Philips Electronics ("Philips") to acquire the Philips Speech Processing
Telephony and Voice Control business units ("PSP") and related intellectual
property. On January 30, 2003, ScanSoft completed the acquisition of PSP on the
terms set forth in the purchase agreement dated October 7, 2002, as amended. As
consideration for these business units and intellectual property, ScanSoft paid
3.1 million euros ($3.4 million) in cash at closing, subject to adjustment in
accordance with the provisions of the purchase agreement, as amended, and agreed
to a deferred payment of 1.0 million euros in cash prior to December 31, 2003,
issued a 5.0 million euro note due December 31, 2003 and bearing 5.0% interest
per annum and issued a $27.5 million three-year, zero-interest subordinated
debenture, convertible at any time at Philips' option into shares of our common
stock at $6.00 per share. The transaction was accounted for as a purchase, as
such the consolidated balance sheet of ScanSoft at March 31, 2003 includes the
assets acquired and liabilities assumed of PSP. The results of operations of PSP
for the period subsequent to January 30, 2003 are included within the unaudited
historical consolidated statement of operations of ScanSoft for the three months
ended March 31, 2003.
The following tables show summary unaudited pro forma financial information
as if ScanSoft, PSP and SpeechWorks had been combined as of the first day of the
earliest year presented for statement of operations purposes and as if ScanSoft
and SpeechWorks had been combined as of March 31, 2003 for balance sheet
purposes.
The unaudited pro forma combined financial information of SpeechWorks is
based on estimates and assumptions, which are preliminary and have been made
solely for purposes of developing such pro forma information. The estimated pro
forma adjustments arising from the proposed acquisition of SpeechWorks are
derived from the estimated purchase price and estimated fair values of the
assets acquired and liabilities assumed. Based on the fair value of ScanSoft's
common stock for a period of five days before and after the announcement of the
proposed merger with SpeechWorks, the average per share fair value of ScanSoft
common stock for purposes of accounting for the merger in accordance with
generally accepted accounting standards is $5.26. Accordingly, the final
purchase price will be determined based on the total shares of SpeechWorks
common stock outstanding, after applying the exchange ratio of 0.860, multiplied
by $5.26. Accordingly, the final stock-related purchase price is expected to
differ from the estimated purchase price of $167,865,000 reflected in the
unaudited pro forma financial information, primarily as a result of the actual
number of shares of common stock that will be issued prior to the completion of
the merger based on the exercise of stock options which will fully vest prior to
the merger. The final determination of purchase price, fair value and resulting
goodwill may differ significantly from that reflected in the pro forma statement
of operations and balance sheet.
The unaudited pro forma combined balance sheet data reflects the
preliminary purchase price of PSP. The final purchase price of PSP is
preliminary, pending resolution of the determination of the fair value of
allocation of certain contractual liabilities assumed by ScanSoft that are still
being determined based on the contractual nature of assignability of these
contracts. Additionally, the purchase price is subject to adjustment based on a
calculation set forth in the purchase agreement, as amended, which must be
agreed upon by the parties and which may result in an adjustment either to
increase or decrease the total purchase consideration. Upon final determination
of the fair value of the liabilities referred to above and the purchase price
adjustment, a corresponding adjustment will be recorded to goodwill.
F-2
The historical PSP financial information for the year ended December 31,
2002 has been derived from the audited financial statements of PSP included in
this joint proxy statement/prospectus and have been translated from euros to US
dollars using the exchange rates in effect at the end of the period for the
balance sheet and using average exchange rates for the respective periods for
the statement operations. The historical PSP financial information for the
period from January 1, 2003 to January 30, 2003 has been derived from the
unaudited financial statements of PSP which are not included in this joint proxy
statement/prospectus.
The pro forma data are presented for illustrative purposes only and are not
necessarily indicative of the operating results or financial position that would
have occurred if each transaction had been consummated as of January 1, 2002 for
statement of operations or March 31, 2003, for financial position respectively,
nor are the data necessarily indicative of future operating results or financial
position. The unaudited pro forma combined financial statements and related
notes thereto should be read in conjunction with the historical consolidated
financial statements of ScanSoft and PSP, and related notes thereto, and
"ScanSoft's Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this joint proxy statement/prospectus and the
historical consolidated financial statements of SpeechWorks incorporated by
reference in this joint proxy statement/prospectus or as filed by SpeechWorks
with the SEC. See the section entitled "Where You Can Find More Information" on
page 171.
F-3
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 2003
SPEECHWORKS
ACQUISITION
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
SCANSOFT (A) SPEECHWORKS (B) ADJUSTMENTS COMBINED
------------ --------------- ----------- ---------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............ $ 20,277 $ 42,675 $ 2,518(1) $ 65,470
Accounts receivable, net............. 19,482 11,188 (731)(1)(2) 29,939
Receivables from related party....... 1,231 -- 88(2) 1,319
Inventory............................ 1,367 433 -- 1,800
Prepaid expenses and other current
assets............................ 4,119 2,057 -- 6,176
--------- --------- --------- ---------
Total current assets............ 46,476 56,353 1,875 104,704
Goodwill............................... 97,117 10,707 (10,707)(1)
112,764(1) 209,881
Other intangible assets, net........... 49,569 4,926 (4,926)(1)
13,910(1) 63,479
Property and equipment, net............ 3,387 5,031 -- 8,418
Other assets........................... 1,207 2,321 900(1) 4,428
--------- --------- --------- ---------
Total Assets........................... $ 197,756 $ 79,338 $ 113,816 $ 390,910
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... 8,847 1,450 -- 10,297
Accrued expenses..................... 11,923 4,817 4,500(1) 21,240
Deferred revenue..................... 2,782 7,603 (1,466)(1) 8,919
Note payable......................... 5,458 904 -- 6,362
Deferred payment for business
acquisition....................... 1,052 -- -- 1,052
Deferred payment for technology
license........................... 9,434 -- -- 9,434
Other current liabilities............ 1,666 -- -- 1,666
--------- --------- --------- ---------
Total current liabilities....... 41,162 14,774 3,034 58,970
Deferred revenue....................... 209 250 -- 459
Note payable, net of current portion... 27,524 1,020 -- 28,544
Other liabilities...................... 3,236 5,493 1,976(1) 10,705
--------- --------- --------- ---------
Total liabilities............... 72,131 21,537 5,010 98,678
--------- --------- --------- ---------
Stockholders' equity:
Preferred stock...................... 4,631 -- -- 4,631
Common stock......................... 68 34 (34)(1)
32(1) 100
Additional paid-in capital........... 276,007 236,979 (236,979)(1)
167,833(1) 443,840
Treasury stock....................... (8,031) -- -- (8,031)
Deferred compensation................ (147) (5,118) 5,118(1)
(1,258)(1) (1,405)
Accumulated other comprehensive
loss.............................. (53) (1) 1(1) (53)
Accumulated deficit.................. (146,850) (174,093) 174,093(1) (146,850)
--------- --------- --------- ---------
Total stockholders' equity...... 125,625 57,801 108,806 292,232
--------- --------- --------- ---------
Total Liabilities and Stockholders'
Equity............................... $ 197,756 $ 79,338 $ 113,816 $ 390,910
========= ========= ========= =========
---------------
(A) As reported in ScanSoft's Quarterly Report on Form 10-Q for the three months
ended March 31, 2003, as filed with the SEC.
(B) As reported in SpeechWorks' Quarterly Report on Form 10-Q for the three
months ended March 31, 2003, as filed with the SEC.
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
F-4
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
PSP
ACQUISITION PRO FORMA
HISTORICAL HISTORICAL PRO FORMA COMBINED
SCANSOFT (A) PSP ADJUSTMENTS SCANSOFT/PSP
------------ ---------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Product licenses.................... $101,524 $ 15,253 $ -- $116,777
Professional services............... -- -- --
Related party....................... 5,095 550 -- 5,645
Other revenues...................... -- -- -- --
Non-cash stock compensation......... -- --
-------- -------- ------- --------
Total revenue....................... 106,619 15,803 -- 122,422
-------- -------- ------- --------
Costs and expenses:
Cost of revenue.................... 16,419 2,382 (29)(5) 18,772
Cost of professional services
-- non-cash compensation......... -- -- -- --
-- all other expenses............ -- -- -- --
Cost of other revenue.............. -- -- -- --
Cost of revenue from amortization
of intangible assets............. 9,470 -- 484(6) 9,954
Research and development
-- non-cash stock compensation... -- -- -- --
-- all other expenses............ 27,633 9,856 -- 37,489
Selling general and administrative
-- non-cash stock compensation... -- -- -- --
-- all other expenses............ 43,771 15,279 -- 59,050
Amortization of other intangible
assets........................... 1,682 -- 749(6) 2,431
Restructuring and other charges.... 1,041 -- -- 1,041
-------- -------- ------- --------
Total costs and expenses............ 100,016 27,517 1,204 128,737
-------- -------- ------- --------
Income (loss) from operations....... 6,603 (11,714) (1,204) (6,315)
Other income (expense), net......... (16) 3 (286)(7)(8)(9) (299)
-------- -------- ------- --------
Income (loss) before income taxes... 6,587 (11,711) (1,490) (6,614)
Provision for (benefit from) income
taxes.............................. 254 (315) 315(10) 254
-------- -------- ------- --------
Net income (loss)................... $ 6,333 $(11,396) $(1,805) (6,868)
======== ======== ======= ========
Net income (loss) per common share:
Basic.............................. $ 0.09 $ (0.11)
Diluted............................ $ 0.09 $ (0.11)
Weighted average common shares:
Basic.............................. 67,010 (3,562)(11) 63,448
Diluted............................ 72,796 (9,348)(11) 63,448
SPEECHWORKS
HISTORICAL ACQUISITION
SPEECHWORKS PRO FORMA PRO FORMA
(B) ADJUSTMENTS COMBINED
----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Product licenses.................... $ 17,773 $ -- $134,550
Professional services............... 19,663 (292)(2) 19,371
Related party....................... -- 378(2) 6,023
Other revenues...................... 1,873 (86)(2) 1,787
Non-cash stock compensation......... (3,302) (3,302)
-------- ------- --------
Total revenue....................... 36,007 -- 158,429
-------- ------- --------
Costs and expenses:
Cost of revenue.................... 307 -- 19,079
Cost of professional services
-- non-cash compensation......... 554 -- 554
-- all other expenses............ 12,776 -- 12,776
Cost of other revenue.............. 1,991 -- 1,991
Cost of revenue from amortization
of intangible assets............. 1,284 (753)(3)(4) 10,485
Research and development
-- non-cash stock compensation... 527 -- 527
-- all other expenses............ 14,674 -- 52,163
Selling general and administrative
-- non-cash stock compensation... 3,227 -- 3,227
-- all other expenses............ 41,193 -- 100,243
Amortization of other intangible
assets........................... 3,832 (2,190)(3)(4) 4,073
Restructuring and other charges.... 8,006 -- 9,047
-------- ------- --------
Total costs and expenses............ 88,371 (2,943) 214,165
-------- ------- --------
Income (loss) from operations....... (52,364) 2,943 (55,736)
Other income (expense), net......... 292 -- (7)
-------- ------- --------
Income (loss) before income taxes... (52,072) 2,943 (55,743)
Provision for (benefit from) income
taxes.............................. (175) -- 79
-------- ------- --------
Net income (loss)................... $(51,897) $ 2,943 $(55,822)
======== ======= ========
Net income (loss) per common share:
Basic.............................. $ (0.60)
Diluted............................ $ (0.60)
Weighted average common shares:
Basic.............................. 29,754(12) 93,202
Diluted............................ 29,754(12) 93,202
---------------
(A) As reported in ScanSoft's annual financial statements for the year ended
December 31, 2002 included elsewhere in this joint proxy
statement/prospectus.
(B) As reported in SpeechWorks' annual financial statements for the year ended
December 31, 2002 incorporated by reference in this joint proxy
statement/prospectus.
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
F-5
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
PSP
ACQUISITION PRO FORMA
HISTORICAL HISTORICAL PRO FORMA COMBINED
SCANSOFT (A) PSP (C) ADJUSTMENTS SCANSOFT/PSP
------------ ---------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Product licenses.................... $26,516 $1,116 $ -- $27,632
Professional services............... -- -- -- --
Related party....................... 1,320 -- -- 1,320
Other revenues...................... -- -- --
Non-cash stock compensation......... -- -- -- --
------- ------ -------- -------
Total revenue....................... 27,836 1,116 -- 28,952
------- ------ -------- -------
Costs and expenses:
Cost of revenue.................... 4,302 11 (2)(5) 4,311
Cost of professional services
-- non-cash compensation......... -- -- -- --
-- all other expenses............ -- -- -- --
Cost of other revenue.............. -- -- -- --
Cost of revenue from amortization
of intangible assets............. 2,057 -- 40(6) 2,097
Research and development
-- non-cash stock compensation... -- -- -- --
-- all other expenses............ 7,177 837 -- 8,014
Selling general and administrative
-- non-cash stock compensation... -- -- -- --
-- all other expenses............ 13,261 874 -- 14,135
Amortization of other intangible
assets........................... 361 -- 63(6) 424
Restructuring and other charges.... 529 -- -- 529
------- ------ -------- -------
Total costs and expenses............ 27,687 1,722 101 29,510
------- ------ -------- -------
Income (loss) from operations....... 149 (606) (101) (558)
Other income (expense), net......... 22 (10) (14)(7)(8)(9) (2)
------- ------ -------- -------
Income (loss) before income taxes... 171 (616) (115) (560)
Provision for (benefit from) income
taxes.............................. 95 -- -- 95
------- ------ -------- -------
Net income (loss)................... $ 76 $ (616) $ (115) (655)
======= ====== ======== =======
Net income (loss) per common share:
Basic.............................. $ 0.00 $ (0.01)
Diluted............................ $ 0.00 $ (0.01)
Weighted average common shares:
Basic.............................. 67,689 (3,562)(11) 64,127
Diluted............................ 77,220 (13,093)(11) 64,127
SPEECHWORKS
HISTORICAL ACQUISITION
SPEECHWORKS PRO FORMA PRO FORMA
(B) ADJUSTMENTS COMBINED
----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Product licenses.................... $ 4,066 $ -- $31,698
Professional services............... 5,413 (113)(2) 5,300
Related party....................... -- 124(2) 1,444
Other revenues...................... 280 (11)(2) 269
Non-cash stock compensation......... (1,028) -- (1,028)
------- ------- -------
Total revenue....................... 8,731 -- 37,683
------- ------- -------
Costs and expenses:
Cost of revenue.................... 103 -- 4,414
Cost of professional services
-- non-cash compensation......... 120 -- 120
-- all other expenses............ 3,636 -- 3,636
Cost of other revenue.............. 301 -- 301
Cost of revenue from amortization
of intangible assets............. 374 (241)(3)(4) 2,230
Research and development
-- non-cash stock compensation... 106 -- 106
-- all other expenses............ 2,800 -- 10,814
Selling general and administrative
-- non-cash stock compensation... 421 -- 421
-- all other expenses............ 8,743 -- 22,878
Amortization of other intangible
assets........................... 958 (547)(3)(4) 835
Restructuring and other charges.... 687 -- 1,216
------- ------- -------
Total costs and expenses............ 18,249 (788) 46,971
------- ------- -------
Income (loss) from operations....... (9,518) 788 (9,288)
Other income (expense), net......... 88 -- 86
------- ------- -------
Income (loss) before income taxes... (9,430) 788 (9,202)
Provision for (benefit from) income
taxes.............................. (35) -- 60
------- ------- -------
Net income (loss)................... $(9,395) $ 788 $(9,262)
======= ======= =======
Net income (loss) per common share:
Basic.............................. $ (0.10)
Diluted............................ $ (0.10)
Weighted average common shares:
Basic.............................. 30,775(13) 94,902
Diluted............................ 30,775(13) 94,902
---------------
(A) As reported in ScanSoft's quarterly report on Form 10-Q for the three months
ended March 31, 2003, as filed with the SEC.
(B) As reported in SpeechWorks' quarterly report on Form 10-Q for the three
months ended March 31, 2003, as filed with the SEC.
(C) Derived from PSP financial information for the period from January 1, 2003
through January 30, 2003.
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
F-6
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Pro forma adjustments reflect only those adjustments which are factually
determinable and do not include the impact of contingencies which will not be
known until the later of the closing of the transactions or the resolution of
the contingency. Pro forma adjustments include the following:
(1) To record the fair value of the assets to be acquired and the
liabilities to be assumed of SpeechWorks, subject to adjustment pending the
completion of a post-closing review of the purchased assets. The pro forma
information assumes that ScanSoft will issue 31,913,545 shares of its common
stock valued at $167,865,000 (based on average closing price of ScanSoft's
common stock of $5.26 per share for a period of five days before and after the
announcement of the proposed acquisition) as the consideration for the merger
with SpeechWorks. The shares are based upon the outstanding shares of
SpeechWorks common stock at March 31, 2003 of 33,883,537 plus 3,225,236
additional shares of SpeechWorks common stock assumed to be outstanding on March
31, 2003. The 3,225,236 additional shares of SpeechWorks common stock are based
upon the assumed exercise of stock options which will fully vest prior to the
effective time of the merger. The number of shares assumed to be exercised based
on the exercise prices of SpeechWorks stock options outstanding at March 31,
2003 which are below the price of ScanSoft's common stock at March 31, 2003
after consideration of the exchange ratio, or $3.87 per share. In addition, the
pro forma adjustments include $5,918,000 of cash received associated with the
assumed exercise of SpeechWorks stock options just prior to closing and the
payment of $3,400,000 related to investment bankers fees and legal and
accounting fees. ScanSoft also has accounted for $4,500,000 for anticipated
transaction fees as additional purchase consideration, which include legal and
accounting fees, investment bankers' fees, tax structuring fees, intellectual
property filing fees, due diligence fees and fees paid for directors' and
officers' liability insurance premiums for the former SpeechWorks board of
directors.
The acquisition of SpeechWorks by ScanSoft is expected to give rise to the
consolidation and elimination of certain SpeechWorks and ScanSoft personnel and
duplicate facilities. The pro forma balance sheet adjustments do not include any
amounts which may be recorded in accordance with Emerging Issue Task Force No.
95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination" as ScanSoft does not expect that a final integration plan will be
established until just prior to or immediately after the closing of the
transaction. However, ScanSoft, along with its' financial advisors Evercore
Partners, has prepared a preliminary analysis of the restructuring activities.
Based on this analysis, ScanSoft currently estimates that the integration
actions will result in costs of approximately $10.1 million primarily associated
with severance and duplicate facilities. ScanSoft estimates full year operating
synergies of approximately $27.5 million resulting from these actions. In
connection with the acquisition, ScanSoft will assume lease obligations
associated with office space which will become available beginning in January
2005. The gross lease payments associated with this additional office space,
amounting to $13,400,000, have not been recorded in the historical financial
statements of SpeechWorks. ScanSoft's plans with respect to this space will be
assessed in connection with the integration plan, however, the estimated
operating synergies and related costs do not reflect any plans with respect to
this space by ScanSoft. ScanSoft has not recorded the lease payments associated
with this office space in the pro forma financial statements, except with
respect to the above market lease rate.
ScanSoft believes that certain restructuring actions are an integral
component of the acquisition plan to enable the benefits of the combined
companies to be optimized and the benefits of the acquisition to be realized.
ScanSoft expects to complete these restructuring efforts within one year of the
closing.
F-7
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the transaction is as follows (in thousands):
Estimated consideration:
Common stock.............................................. $167,865
Transaction costs......................................... 4,500
--------
Total estimated purchase consideration................. $172,365
========
Preliminary allocation of the purchase consideration:
Fair value of net tangible assets acquired................ $ 45,691
Identifiable intangible assets............................ 13,910
Goodwill.................................................. 112,764
--------
$172,365
========
ScanSoft believes that the $13,910,000 of value ascribed to identifiable
intangible assets will be allocated to completed and core technology, customer
relationships (including license agreements) and tradenames.
The pro forma adjustments to SpeechWorks historical data made in
determining the net tangible assets acquired include the elimination of
$4,926,000 of intangible assets, $10,707,000 of goodwill and $57,801,000 of
stockholders' equity. The pro forma adjustments also include the following
adjustments to record the fair value of net tangible assets acquired and
liabilities assumed:
- Adjustment to reduce deferred revenue to the fair value associated with
performance obligations assumed by ScanSoft. A corresponding adjustment
to reduce accounts receivable associated with amounts which are due from
customers under sales transactions for which revenue was deferred by
SpeechWorks due to uncertainty of collectibility and which do not meet
the criteria of a performance obligation under Emerging Issues Task Force
Issue No. 01-03 Accounting in a Business Combination for Deferred Revenue
of an Acquiree.
- Adjustment of $1,100,000 to record the fair value of the liability
associated with ScanSoft's indemnification of former SpeechWorks
directors and $900,000 to record an asset for the related fair value of
the insurance policy associated with the indemnification provision.
- Adjustment of $824,000 to reduce the long-term facilities restructuring
accrual to its net present value. The difference between the undiscounted
and discounted lease payments will be recorded as non-cash interest
expense over the remaining lease term of 13 years.
- Adjustment of $1,700,000 to record a liability associated with the
above-market lease rate associated with certain assumed operating leases
for facilities.
- Adjustment to record $1,258,000 of deferred compensation associated with
unvested restricted stock which will be amortized to income over the
remaining vesting periods.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the pro forma adjustments to SpeechWorks historical income statement
data do not include the elimination of non-cash stock-based compensation expense
recorded in the historical financial statements which will not continue in the
post-acquisition financial statements of ScanSoft.
(2) Adjustment to reclassify related party transactions. For the year ended
December 31, 2002, SpeechWorks recognized professional services revenue and
other revenues of $292,000 and $86,000, respectively, from a transaction entered
into with a related party of ScanSoft. For the three months ended March 31,
2003, SpeechWorks recognized professional services revenue and other revenues of
$113,000
F-8
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and $11,000, respectively, from this related party. At March 31, 2003,
SpeechWorks had accounts receivable of $88,000 due from this related party.
(3) Adjustment to record amortization expense of $2,173,000 and $544,000
for the identifiable intangible assets associated with the SpeechWorks
acquisition for the year ended December 31, 2002 and the three months ended
March 31, 2003, respectively. Finalization of the allocation of the purchase
price to tangible and identifiable intangible assets acquired and liabilities
assumed is preliminary pending collection of data to evaluate estimates of
future revenues and earnings to determine a discounted cash flow valuation of
certain intangibles that meet the separate recognition criteria of FAS 141.
ScanSoft expects this process and subsequent allocation of purchase price to be
complete within 180 days of the closing of the transaction. ScanSoft's
preliminary assessment is that the weighted average useful life of the acquired
identifiable intangible assets will be six years. The acquired identifiable
intangible assets will be amortized using the straight-line method. An increase
in the amount of identifiable intangible assets or a change in the allocation
between the acquired identifiable intangible assets and goodwill for the
SpeechWorks acquisition of $1,000,000 would result in a change in pro forma
annual amortization expense of approximately $166,000. An increase in the
weighted average useful life of the acquired identifiable intangible assets from
six years to seven years would result in a decrease in pro forma amortization
expense of approximately $331,000 and $83,000 for the year ended December 31,
2002 and the three months ended March 31, 2003, respectively. A decrease in the
weighted average useful life of the acquired identifiable intangible assets from
six years to five years would result in an increase in pro forma amortization
expense of approximately $464,000 and $116,000 for the year ended December 31,
2002 and the three months ended March 31, 2003, respectively.
(4) Adjustment to eliminate amortization expense of $5,116,000 and
$1,332,000 for the year ended December 31, 2002 and the three months ended March
31, 2003, respectively, related to intangible assets of SpeechWorks existing
prior to the acquisition.
(5) Adjustment to eliminate amortization expense of $29,000 and $2,000 for
the year ended December 31, 2002 and the three months ended March 31, 2003,
respectively, related to intangible assets of PSP existing prior to the
acquisition.
(6) Adjustment to record amortization expense of $1,233,000 and $103,000
for the year ended December 31, 2002 and the three months ended March 31, 2003,
respectively, for the identifiable intangible assets associated with the PSP
acquisition, as if the acquisition had occurred on January 1, 2002.
(7) Adjustment to record interest expense of $236,000 and $20,000 for the
year ended December 31, 2002 and the three months ended March 31, 2003,
respectively, on the 5.0 million euro promissory note issued as partial purchase
consideration for the PSP acquisition, bearing interest at five percent per
year, as if the acquisition had occurred on January 1, 2002.
(8) Adjustment to record imputed interest expense of $47,000 and $4,000 for
the year ended December 31, 2002 and the three months ended March 31, 2003,
respectively, on the non-interest bearing deferred payment of 1.0 million euro
to be paid on December 31, 2003 as partial consideration for the PSP
acquisition, as if the acquisition had occurred on January 1, 2002.
(9) Adjustment to eliminate interest income (expense) of $3,000 and
($10,000) for the year ended December 31, 2002 and the three months ended March
31, 2003, respectively, recorded on intercompany balances between PSP and
Philips, as if the acquisition had occurred on January 1, 2002.
(10) Adjustment to eliminate the income tax benefit of $315,000 for the
year ended December 31, 2002 recorded by PSP in its historical statements of
operations which would not have been realized by ScanSoft had the acquisition
occurred on January 1, 2002.
F-9
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(11) Adjustment to exclude the assumed conversion of Series B participating
preferred stock of 3,562,000 for the year ended December 31, 2002 and the three
months ended March 31, 2003, respectively, and to exclude common stock
equivalents totaling 9,348,000 and 13,093,000 for the year ended December 31,
2002 and the three months ended March 31, 2003, respectively, because their
impact would be antidilutive. The pro forma net loss per share and the shares
used in pro forma net loss per share do not include the effects of the assumed
conversion to common stock of the convertible debenture issued to Philips as
partial purchase consideration for the PSP acquisition because the impact would
be antidilutive. The total shares of common stock to be issued upon conversion
of the debenture would be 4,583,333.
(12) Adjustment to include the issuance of 29,754,000 shares of ScanSoft
common stock upon closing as if the acquisition had occurred on January 1, 2002.
The 29,754,000 shares reflect 27,819,000 shares of SpeechWorks common stock
outstanding on January 1, 2002 and the assumed conversion of stock options for
1,935,000 shares of SpeechWorks common stock, which will fully vest prior to the
effective time of the merger and for which exercise prices are below market
value on January 1, 2002, multiplied by the exchange ratio of 0.860.
(13) Adjustment to include the issuance of 30,775,000 shares of ScanSoft
common stock upon closing as if the acquisition had occurred on January 1, 2002.
The 30,775,000 shares reflect 28,477,000 shares of SpeechWorks common stock
outstanding on January 1, 2002 and the assumed conversion of stock options for
2,298,000 shares of SpeechWorks common stock, which will fully vest prior to the
effective time of the merger and for which exercise prices are below market
value on January 1, 2002, multiplied by the exchange ratio of 0.860.
F-10
SCANSOFT'S CONSOLIDATED FINANCIAL STATEMENTS
F-11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ScanSoft, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
ScanSoft, Inc. and its subsidiaries at December 31, 2002 and December 31, 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
other intangible assets.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2003, except as to Note 20
for which the date is March 11, 2003
F-12
SCANSOFT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
----------------------
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,853 $ 14,324
Accounts receivable, less allowances of $5,903 and $6,273,
respectively........................................... 15,650 12,464
Receivables from related party (Note 19).................. 1,518 1,802
Inventory................................................. 1,241 507
Prepaid expenses and other current assets................. 3,167 1,614
--------- ---------
Total current assets................................... 40,429 30,711
Goodwill.................................................. 63,059 65,231
Other intangible assets, net.............................. 33,823 43,301
Property and equipment, net............................... 2,846 2,150
Other assets.............................................. 3,533 677
--------- ---------
Total assets........................................... $ 143,690 $ 142,070
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,085 $ 5,320
Accrued expenses.......................................... 9,773 14,471
Deferred revenue.......................................... 1,790 1,375
Note payable (Note 9)..................................... 3,273 227
Other current liabilities (Note 19)....................... 1,666 --
--------- ---------
Total current liabilities.............................. 23,587 21,393
Deferred revenue............................................ 244 2,534
Long-term note payable, net of current portion.............. -- 3,273
Other liabilities (Note 19)................................. 481 336
--------- ---------
Total liabilities...................................... 24,312 27,536
--------- ---------
Commitments and contingencies (Notes 10, 13 and 20)
Stockholders' equity:
Preferred stock, $0.001 par value; 40,000,000 shares
authorized; 3,562,238 shares issued and outstanding
(liquidation preference $4,631)........................ 4,631 4,631
Common stock, $0.001 par value; 140,000,000 shares
authorized; 65,540,154 and 62,754,211 shares issued and
63,422,776 and 62,098,211 shares outstanding,
respectively........................................... 66 63
Additional paid-in capital................................ 269,858 264,893
Treasury stock, at cost (2,117,378 and 656,000 shares,
respectively).......................................... (8,031) (1,031)
Deferred compensation..................................... (173) (276)
Accumulated other comprehensive loss...................... (47) (487)
Accumulated deficit....................................... (146,926) (153,259)
--------- ---------
Total stockholders' equity............................. 119,378 114,534
--------- ---------
Total liabilities and stockholders' equity............. $ 143,690 $ 142,070
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Revenue, third parties...................................... $101,524 $ 55,509 $ 41,977
Revenue, related party...................................... 5,095 7,208 5,984
-------- -------- --------
Total revenue.......................................... 106,619 62,717 47,961
-------- -------- --------
COSTS AND EXPENSES:
Cost of revenue........................................... 16,419 12,849 12,692
Cost of revenue from amortization of intangible assets.... 9,470 14,192 11,569
Research and development.................................. 27,633 13,968 14,967
Selling, general and administrative....................... 43,771 25,311 27,111
Amortization of goodwill and other intangible assets...... 1,682 13,328 11,017
Restructuring and other charges, net...................... 1,041 -- 4,811
Acquired in-process research and development.............. -- -- 18,291
-------- -------- --------
Total costs and expenses............................... 100,016 79,648 100,458
-------- -------- --------
Income (loss) from operations............................... 6,603 (16,931) (52,497)
Other income (expense):
Interest income........................................... 354 209 112
Interest expense.......................................... (369) (166) (620)
Other (expense) income, net............................... (1) (306) 226
-------- -------- --------
Income (loss) before income taxes........................... 6,587 (17,194) (52,779)
Provision for (benefit from) income taxes................... 254 (317) 472
-------- -------- --------
Net income (loss)........................................... $ 6,333 $(16,877) $(53,251)
======== ======== ========
Net income (loss) per share: basic.......................... $ 0.09 $ (0.34) $ (1.26)
======== ======== ========
Net income (loss) per share: diluted........................ $ 0.09 $ (0.34) $ (1.26)
======== ======== ========
Weighted average common shares outstanding: basic........... 67,010 49,693 42,107
======== ======== ========
Weighted average common shares outstanding: diluted......... 72,796 49,693 42,107
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------ ---------- ------ ----------
Balance at December 31, 1999............................. 3,562,238 $4,631 26,690,027 $27 $100,397
Issuance of common stock under employee stock
compensation plans...................................... 354,203 815
Issuance of common stock and common stock options in
connection with Caere merger............................ 19,028,518 19 118,047
Comprehensive loss:
Net loss..............................................
Foreign currency translation adjustment...............
Comprehensive loss....................................
--------- ------ ---------- --- --------
Balance at December 31, 2000............................. 3,562,238 4,631 46,072,748 46 219,259
Issuance of common stock under employee stock
compensation plans...................................... 623,534 1 1,130
Issuance of common stock in connection with L&H
acquisition............................................. 7,400,000 8 27,792
Issuance of common stock in private placement............ 8,261,905 8 15,721
Issuance of common stock in connection with settlement of
Caere acquisition liability............................. 262,200 700
Issuance of restricted stock............................. 133,824 291
Compensation expense associated with restricted stock....
Repurchase of common stock at cost.......................
Comprehensive loss:
Net loss..............................................
Foreign currency translation adjustment...............
Comprehensive loss....................................
--------- ------ ---------- --- --------
Balance at December 31, 2001............................. 3,562,238 4,631 62,754,211 63 264,893
Issuance of common stock under employee stock
compensation plans...................................... 1,449,484 1 2,682
Issuance of common stock in connection with AudioMining
acquisition............................................. 121,359 638
Issuance of common stock in private placement............ 1,000,000 1 5,592
Issuance of common stock issued to L&H in connection with
registration rights as amended.......................... 150,000 1 (1)
Issuance of common stock in connection with settlement of
note payable............................................ 65,100 336
Compensation expense associated with restricted stock....
Recognition of liability in connection with the
settlement of a stock price guarantee................... (4,282)
Repurchase of common stock at cost.......................
Comprehensive income:
Net income............................................
Foreign currency translation adjustment...............
Comprehensive income..................................
--------- ------ ---------- --- --------
Balance at December 31, 2002............................. 3,562,238 $4,631 65,540,154 $66 $269,858
========= ====== ========== === ========
ACCUMULATED
TREASURY STOCK OTHER
------------------- DEFERRED COMPREHENSIVE ACCUMULATED
SHARES DOLLARS COMPENSATION LOSS DEFICIT
--------- ------- ------------ ------------- -----------
Balance at December 31, 1999............................. -- -- -- $ (83,131)
Issuance of common stock under employee stock
compensation plans......................................
Issuance of common stock and common stock options in
connection with Caere merger............................
Comprehensive loss:
Net loss.............................................. (53,251)
Foreign currency translation adjustment............... $ (93)
Comprehensive loss....................................
--------- ------- ----- ----- ---------
Balance at December 31, 2000............................. (93) (136,382)
Issuance of common stock under employee stock
compensation plans......................................
Issuance of common stock in connection with L&H
acquisition.............................................
Issuance of common stock in private placement............
Issuance of common stock in connection with settlement of
Caere acquisition liability.............................
Issuance of restricted stock............................. $(291)
Compensation expense associated with restricted stock.... 15
Repurchase of common stock at cost....................... 656,000 $(1,031)
Comprehensive loss:
Net loss.............................................. (16,877)
Foreign currency translation adjustment............... (394)
Comprehensive loss....................................
--------- ------- ----- ----- ---------
Balance at December 31, 2001............................. 656,000 (1,031) (276) (487) $(153,259)
Issuance of common stock under employee stock
compensation plans......................................
Issuance of common stock in connection with AudioMining
acquisition.............................................
Issuance of common stock in private placement............
Issuance of common stock issued to L&H in connection with
registration rights as amended..........................
Issuance of common stock in connection with settlement of
note payable............................................
Compensation expense associated with restricted stock.... 103
Recognition of liability in connection with the
settlement of a stock price guarantee...................
Repurchase of common stock at cost....................... 1,461,378 (7,000)
Comprehensive income:
Net income............................................ 6,333
Foreign currency translation adjustment............... 440
Comprehensive income..................................
--------- ------- ----- ----- ---------
Balance at December 31, 2002............................. 2,117,378 $(8,031) $(173) $ (47) $(146,926)
========= ======= ===== ===== =========
TOTAL COMPREHENSIVE
STOCKHOLDERS' INCOME
EQUITY (LOSS)
------------- -------------
Balance at December 31, 1999............................. $ 21,924
Issuance of common stock under employee stock
compensation plans...................................... 815
Issuance of common stock and common stock options in
connection with Caere merger............................ 118,066
Comprehensive loss:
Net loss.............................................. (53,251) $(53,251)
Foreign currency translation adjustment............... (93) (93)
--------
Comprehensive loss.................................... $(53,344)
-------- ========
Balance at December 31, 2000............................. 87,461
Issuance of common stock under employee stock
compensation plans...................................... 1,131
Issuance of common stock in connection with L&H
acquisition............................................. 27,800
Issuance of common stock in private placement............ 15,729
Issuance of common stock in connection with settlement of
Caere acquisition liability............................. 700
Issuance of restricted stock............................. --
Compensation expense associated with restricted stock.... 15
Repurchase of common stock at cost....................... (1,031)
Comprehensive loss:
Net loss.............................................. (16,877) (16,877)
Foreign currency translation adjustment............... (394) (394)
--------
Comprehensive loss.................................... $(17,271)
-------- ========
Balance at December 31, 2001............................. 114,534
Issuance of common stock under employee stock
compensation plans...................................... 2,683
Issuance of common stock in connection with AudioMining
acquisition............................................. 638
Issuance of common stock in private placement............ 5,593
Issuance of common stock issued to L&H in connection with
registration rights as amended..........................
Issuance of common stock in connection with settlement of
note payable............................................ 336
Compensation expense associated with restricted stock.... 103
Recognition of liability in connection with the
settlement of a stock price guarantee................... (4,282)
Repurchase of common stock at cost....................... (7,000)
Comprehensive income:
Net income............................................ 6,333 6,333
Foreign currency translation adjustment............... 440 440
--------
Comprehensive income.................................. $ 6,773
-------- ========
Balance at December 31, 2002............................. $119,378
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 6,333 $(16,877) $(53,251)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 2,007 1,762 2,091
Amortization of goodwill and other intangible assets... 11,152 27,520 22,586
Accounts receivable allowances......................... 370 (1,102) (2,904)
Gain on disposal or sale of property and equipment..... (30) -- --
Write-off of acquired in-process research and
development.......................................... -- -- 18,291
Provision for impairment of intangible assets.......... -- -- 3,490
Non-cash portion of restructuring charges.............. 113 -- 272
Deferred compensation.................................. 103 15 --
Gain on settlement of acquisition liability............ -- (1,050) --
Other.................................................. -- (83) --
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable.................................... (2,921) (252) 3,740
Inventory.............................................. (456) 418 257
Prepaid expenses and other current assets.............. (1,372) 18 278
Other assets........................................... (2,738) 435 (441)
Accounts payable....................................... 532 (542) (700)
Accrued expenses....................................... 1,166 (543) (1,547)
Deferred revenue....................................... (1,916) 653 2,292
------- -------- --------
Net cash provided by (used in) operating
activities........................................ 12,343 10,372 (5,546)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property and equipment........... (2,410) (943) (1,048)
Proceeds from sale of property and equipment.............. 42 344 --
Cash paid for acquisitions, including transaction costs... (3,606) (10,118) --
Cash of businesses acquired, net of cash paid............. -- -- 1,419
Net change in restricted cash............................. -- 62 --
------- -------- --------
Net cash provided by (used in) investing activities.... (5,974) (10,655) 371
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term bank borrowings, net........................... -- (3,400) 3,400
Payments of capital lease obligation...................... (320) -- (1,600)
Payment of note payable................................... (641) -- (1,600)
Purchase of treasury stock................................ (7,000) (1,031) --
Payments under deferred payment agreement................. (2,233) -- --
Proceeds from issuance of common stock, net of issuance
costs.................................................. 5,593 15,731 --
Proceeds from issuance of common stock under employee
stock compensation plans............................... 2,683 1,131 815
------- -------- --------
Net cash provided by (used in) financing
activities........................................ (1,918) 12,431 2,615
------- -------- --------
Effects of exchange rate changes on cash and cash
equivalents............................................... 78 (395) (31)
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 4,529 11,753 (2,591)
Cash and cash equivalents at beginning of year.............. 14,324 2,571 5,162
------- -------- --------
Cash and cash equivalents at end of year.................... $18,853 $ 14,324 $ 2,571
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRESENTATION
ScanSoft, Inc. was incorporated as Visioneer, Inc. in March 1992 and
through December 1998, developed and sold scanner hardware and software
products. On January 6, 1999, Visioneer sold the hardware business and the
Visioneer brand name to Primax Electronics, Ltd., and on March 2, 1999,
Visioneer acquired ScanSoft, in a cash election merger, from Xerox Corporation.
The corporate entity "Visioneer" survived the merger, but changed its name to
"ScanSoft, Inc." In addition, Visioneer changed the ticker symbol for its common
stock that trades on the NASDAQ, to "SSFT." On March 13, 2000, the Company
merged with Caere Corporation ("Caere"), a California-based digital imaging
software company. On December 12, 2001, the Company acquired the speech and
language technologies operations of Lernout & Hauspie Speech Products, N.V.
(L&H). The acquisitions of Caere and L&H were accounted for under the purchase
method of accounting and, accordingly, the results of operations from the
acquired businesses have been included in the Company's financial statements as
of the acquisition dates. (see Note 18)
When we refer to "we" or "ScanSoft" or "the Company" in this Annual Report
on Form 10-K, we mean the current Delaware corporation ScanSoft, Inc., including
all of its consolidated subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The most significant estimates and assumptions included in the financial
statements are revenue recognition, including estimating valuation allowances
(specifically sales returns and other allowances), the recoverability of
intangible assets, including goodwill, and valuation allowances for deferred tax
assets. Actual amounts could differ significantly from these estimates.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany transactions and balances have
been eliminated.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency, with the exception of Budapest, for which the functional currency is
the U.S. dollar. Assets and liabilities of foreign subsidiaries that are
denominated in foreign currencies are translated into U.S. dollars at exchange
rates in effect at the balance sheet date. Revenue and expense items are
translated using the average exchange rates for the period. Net unrealized gains
and losses resulting from foreign currency translation are included in other
comprehensive income (loss), which is a separate component of stockholders'
equity, except for Budapest for which foreign currency translation adjustments
are recorded in other income (expense). Foreign currency transaction gains and
losses are included in results of operations. The Company reported foreign
currency transaction gains and (losses) of $2,000, $0.2 million and $(0.1)
million for the years ended 2002, 2001 and 2000, respectively.
Revenue Recognition
The Company derives revenue from the sale of its software products to
end-users through distribution partners and value added resellers (VARs),
royalties received from OEM partners, license fees from sales
F-17
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of its products to end-users and from services, primarily maintenance associated
with software license transactions. Additionally shipping and handling costs
billed to customers are recorded as revenue with the related costs recognized in
cost of revenues.
The Company applies the provisions of Statement of Position 97-2 Software
Revenue Recognition, as amended by Statement of Position 98-9 Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, to
all transactions involving the sale of software products. In addition, the
Company applies the provisions of Staff Accounting Bulletin 101, Revenue
Recognition in Financial Statements. Accordingly, provided that the fee is fixed
or determinable and collection of the receivable is reasonably assured, the
Company generally recognizes revenue from sales of its software products upon
receipt of evidence of the arrangement and upon product shipment or deployment,
except for shipments to a distributor or reseller.
Under the terms of our agreements with distributors and authorized
resellers (including VARs), title and risk-of-loss pass to the customer upon
shipment, at which time the transaction is invoiced and payment is due.
Agreements provide distributors and resellers rights of return. As a result, the
Company recognizes revenue from sales to distributors and resellers only upon
sale of the products by the distributor or reseller to retailers or end-users.
Based on reports from distributors and resellers of their inventory balances at
the end of each period, the Company records an allowance against accounts
receivable for the sales price of all inventory subject to return.
In addition, the Company records reserves for estimated sales returns by
retailers and end-users to it directly or through the Company's distributors or
resellers based on historical returns experience. The provision for these
estimated returns is recorded as a reduction of revenue at the time that the
related revenue is recorded. Such returns from retailers and end-users have not
been significant. Also, from time to time, the Company offers its customers
rebates or offers price protection incentive programs to retailers for the sale
of the Company's products. The Company estimates the impact on revenue of rebate
or price protection programs based upon its historical experience with similar
programs for like products. The estimated reserve for such rebates or programs
is recorded as a reduction of revenue in the period when the rebate or price
protection program is available to the end-user or retailer.
The Company also receives royalties from agreements with original equipment
manufacturers (OEMs). Under the terms of its OEM licensing agreements, the
Company ships a master disk to the OEM and permits the OEM to make multiple
copies. Royalty payments are due to the Company upon the OEM's deployment of
copies of licensed software. Royalty revenue derived from sales to OEM partners
is recognized when software copies are deployed and payment becomes due.
Historically, the Company had not been able to obtain royalty reports from OEM
customers with whom the Company had significant past experience and, therefore,
recognized revenue based on estimated deployments in the respective period. The
Company has determined that it is now able to obtain royalty reports on a timely
basis and as a result can more accurately record OEM revenue based on reports of
actual deployments received from OEM customers. Therefore, beginning with the
fourth quarter of 2002, OEM revenue is recorded based on actual deployments as
reported by OEM customers. This change did not have a material effect on our
financial position, results of operations or cash flows. Additionally, the
differences between actual and estimated deployments were not material for the
years ended December 31, 2001 or 2000, or for any interim period during those
years.
The Company applies the residual method to account for revenues when an
order contains one or more elements to be delivered in the future (for example,
maintenance and support services or training) and when evidence of the fair
value of all undelivered elements exists. Under the residual method, the fair
value of the undelivered elements is initially deferred and the remaining
portion of the arrangement fee is recognized as revenues related to the
delivered elements. If evidence of the fair value of one or more of the
undelivered elements does not exist, all revenues are deferred and recognized
only when delivery of
F-18
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
those elements occurs or when fair value can be established. Vendor-specific
objective evidence (VSOE) of the fair value of each undelivered element is based
on the prices charged by the Company to its customers when these elements are
sold separately or, in the case of some maintenance services, based on the
contractual maintenance renewal rates. VSOE of the fair value of training
service is based on the fee charged per day or per student, depending on the
type of training provided.
The Company recognizes revenue from the sale of maintenance and support to
end-users ratably over the contract period, usually one year. Payments received
in advance for maintenance and support revenue are initially recorded as
deferred revenue. Revenue from training service is recognized as it is provided.
The Company's products do not require installation or implementation by the
Company and do not require significant production, modification or customization
of the software. However, the Company occasionally enters into software license
agreements with customers that require significant modification of the software.
Revenue is recognized under these arrangements in accordance with Statement of
Position 81-1 (SOP 81-1), Accounting for Performance of Construction-Type and
Certain Performance-Type Contracts. Under the percentage-of-completion method,
the Company determines progress toward completion based on costs incurred to
date as compared with total estimated costs at the contract completion date.
Anticipated losses, if any, are recognized in the period in which determined.
Effective January 1, 2002, the Company implemented EITF 01-9, Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products). The implementation resulted in a $0.3 million, $1.1 million
and $1.1 million reduction in total revenue and a corresponding reduction of
selling, general and administrative expense for the years ended 2002, 2001 and
2000, respectively.
Costs of Revenue
Cost of revenue consists primarily of material and fulfillment costs,
third-party royalties, salaries for product support personnel, and engineering
costs associated with certain contracts which are accounted for under the
percentage of completion method of accounting.
Costs of Revenue from Amortization of Intangible Assets
Cost of revenue from amortization of intangible assets includes the
amortization of acquired patents and core and completed technology.
Cash Equivalents
Cash equivalents are short-term, highly liquid instruments with original
maturities of 90 days or less at the date of acquisition. The Company invests
primarily in commercial paper.
Accounts Receivable
The Company establishes reserves against its accounts receivable for
potential credit losses when it determines receivables are at risk for
collection based upon the length of time the receivables are outstanding as well
as various other criteria. Receivables are written off against these reserves in
the period they are determined to be uncollectible.
Inventory
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market value.
F-19
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the term of the related lease or the useful
life, if shorter. The cost and related accumulated depreciation of sold or
retired assets are removed from the accounts and any gain or loss is included in
operations. Repairs and maintenance costs are expensed as incurred.
Long-lived and Intangible Assets and Goodwill
The Company has significant long-lived tangible and intangible assets,
including goodwill, which are susceptible to valuation adjustments as a result
of changes in various factors or conditions. The most significant long-lived
tangible and intangible assets are fixed assets, patents, core technology, and
trademarks which are amortized using the straight-line method over their
estimated useful lives. The values of intangible assets, with the exception of
goodwill, were initially determined by a risk-adjusted, discounted cash flow
approach. We assess the potential impairment of identifiable intangible assets
and fixed assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important, which
could trigger an impairment of such assets, include the following:
- Significant underperformance relative to historical or projected future
operating results;
- Significant changes in the manner of or use of the acquired assets or the
strategy for our overall business;
- Significant negative industry or economic trends;
- Significant decline in our stock price for a sustained period; and
- A decline in our market capitalization below net book value.
Future adverse changes in these or other unforeseeable factors could result
in an impairment charge that would impact future results of operations and
financial position in the reporting period identified.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets or SFAS 142.
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. The standard also includes provisions for the reassessment of the
useful lives of existing recognized intangible assets and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS 142 required us to complete a transitional impairment test of
goodwill within six months of the date of adoption. We have reassessed the
useful lives of our existing intangible assets, other than goodwill, and believe
that the original useful lives remain appropriate. In addition, we have
determined that we operate in one reporting unit and, therefore, have completed
our transitional goodwill impairment test on an enterprise-wide level. Based on
this analysis, we have determined that goodwill recorded was not impaired, and
no impairment charge has been recorded. We will complete additional goodwill
impairment analyses at least annually, or more frequently when events and
circumstances occur indicating that the recorded goodwill might be impaired.
Significant judgments and estimates are involved in determining the useful
lives of our intangible assets, determining what reporting units exist and
assessing when events or circumstances would require an interim impairment
analysis of goodwill or other long-lived assets to be performed. Changes in
events or circumstances, including but not limited to technological advances or
competition which could result in shorter useful lives, additional reporting
units which may require alternative methods of estimating fair value, or
economic or market conditions which may affect previous assumptions and
estimates, could have
F-20
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a significant impact on our results of operations or financial position through
accelerated amortization expense or impairment charges. (See Notes 4 and 5)
Research and Development Costs
Costs incurred in the research and development of new software products and
enhancements to existing products, other than certain software development costs
that qualify for capitalization, are expensed as incurred. Software development
costs incurred subsequent to the establishment of technological feasibility, but
prior to the general release of the product, are capitalized and amortized to
cost of revenue over the estimated useful life of the related products. In the
years ended December 31, 2002, 2001 and 2000, costs eligible for capitalization
were not material.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. A valuation allowance against deferred tax assets is recorded if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. The Company does not
provide for U.S. income taxes on the undistributed earnings of its foreign
subsidiaries, which the Company considers to be permanent investments.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net loss and other comprehensive
income (loss), which includes foreign currency translation adjustments. For the
purposes of comprehensive loss disclosures, the Company does not record tax
provisions or benefits for the net changes in the foreign currency translation
adjustment, as the Company intends to permanently reinvest undistributed
earnings in its foreign subsidiaries.
Concentration of Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents, and trade
accounts receivable. The Company places its cash and cash equivalents with
financial institutions with high credit ratings. The Company performs ongoing
credit evaluations of its customers' financial condition and does not require
collateral, since management does not anticipate nonperformance of payment. The
Company also maintains reserves for potential credit losses and such losses have
been within management's expectations. At December 31, 2002, no customer
represented greater than 10% of our net accounts receivable balance. At December
31, 2001, three customers represented 16%, 11% and 5%, of our net accounts
receivable balance, respectively.
Fair Value Disclosures of Financial Instruments
Financial instruments include cash equivalents, accounts receivable, and
long-term notes payable and are carried in the financial statements at amounts
that approximate their fair value as of December 31, 2002 and 2001.
Advertising Costs
Advertising costs are expensed as incurred and are classified as selling,
general and administrative costs. The Company incurred advertising costs of $3.0
million, $2.5 million and $1.9 million for the years ended December 31, 2002,
2001 and 2000, respectively.
F-21
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Basic net income per share for the year ended
December 31, 2002 includes the assumed conversion of the Series B Preferred
Stock, which participates in dividends with common stock when and if declared as
well as the weighted average impact of vested restricted stock. Diluted net
income (loss) per share is computed by dividing net income (loss) available to
common stockholders by the weighted-average number of common shares outstanding
for the period plus potential dilutive common shares, which include the assumed
conversion of the Series B Preferred Stock, and the effect, when dilutive, of
outstanding stock options, warrants, and unvested shares of restricted stock
using the treasury stock method. All potential dilutive common shares are
excluded from the computation of net loss per share because they are
antidilutive. Dilutive common equivalent shares consist of stock options and
warrants and are calculated using the treasury stock method.
The following is a reconciliation of the shares used in the computation of
basic and diluted net income (loss) per share (in thousands, except per share
amounts):
YEAR ENDED
----------------------------
2002 2001 2000
------ -------- --------
Net income (loss)...................................... $6,333 $(16,877) $(53,251)
Basic:
Weighted average common shares outstanding........... 63,448 49,693 42,107
Assumed conversion of Series B Preferred Stock....... 3,562 -- --
------ -------- --------
Weighted average common shares:
basic.................................................. 67,010 49,693 42,107
====== ======== ========
Net income (loss) per share:
basic.................................................. $ 0.09 $ (0.34) $ (1.26)
====== ======== ========
Effect of dilutive common equivalent shares:
Stock options..................................... 5,223 -- --
Warrants.......................................... 468 -- --
Unvested restricted stock......................... 95 -- --
------ -------- --------
Weighted average common shares:
diluted................................................ 72,796 49,693 42,107
====== ======== ========
Net income (loss) per share:
diluted................................................ $ 0.09 $ (0.34) $ (1.26)
====== ======== ========
For the year ended December 31, 2002, stock options to purchase 1,039,955
shares of common stock were outstanding but were excluded from the calculation
of diluted net income per share because the options' exercise prices were
greater than the average market price of the Company's common stock.
Additionally, stock options to purchase 5,080,343 and 5,179,653 shares of common
stock were not included in the calculation of diluted net loss per share for the
years ended December 31, 2001 and 2000, respectively, because they were
antidilutive.
Potential weighted average common shares, including stock options, unvested
restricted stock, preferred shares and warrants at December 31, 2001 and 2000,
were 11,755,150 and 9,534,865,
F-22
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. These potential common shares were excluded from the calculation
of diluted net loss per share as their inclusion would have been antidilutive
for the period presented.
On January 30, 2003, the Company issued a $27.5 million subordinated
debenture which is convertible into the Company's common stock at $6.00 per
share. (See Note 20)
Accounting for Stock-Based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed in Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. The Company follows the disclosure provisions of Statement of
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
(see Note 11). Deferred compensation is recorded for restricted stock granted to
employees based on the fair value of the Company's common stock at the date of
grant and is amortized over the period in which the restrictions lapse. All
stock-based awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123 and related interpretations.
Had compensation expense for the Company's stock-based compensation plans
been determined based on fair market value at the grant dates, as prescribed by
SFAS No. 123, the Company's net loss and pro forma net income (loss) and net
(income) loss and pro forma net income (loss) per share would have been as
follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
------- -------- --------
Net income (loss) -- as reported...................... $ 6,333 $(16,877) $(53,251)
Stock-based compensation.............................. 9,217 5,020 4,168
------- -------- --------
Net loss -- pro forma................................. $(2,884) $(21,897) $(57,419)
======= ======== ========
Net income (loss) per share -- as reported: basic and
diluted............................................. $ 0.09 $ (0.34) $ (1.26)
Net loss per share -- pro forma: basic and diluted.... $ (0.04) $ (0.44) $ (1.36)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
expected volatility of 80% for 2002 and 130% for 2001 and 2000, risk-free
interest rate of 4.33% to 2.26% for options granted in 2002, 3.66% to 4.97% for
options granted in 2001 and 5.02% to 6.68% for options granted in 2000, and a
weighted average expected option term of 3.5 years for 2002 and 5 years for 2001
and 2000, respectively. The Company has not paid dividends to date and assumed
no dividend yield.
For the Employee Stock Purchase Plan, the fair value of each purchase right
was estimated at the beginning of the offering period using the Black-Scholes
option-pricing model with the following assumptions used in 2002, 2001 and 2000:
expected volatility of 80% for 2002, 133% to 168% for 2001 and 128% for 2000;
risk-free interest rate of 1.65% to 3.36%, 3.41% to 5.04% and 6.10% for 2002,
2001 and 2000, respectively; and expected lives of six months for all three
years. The Company has not paid dividends and assumed no dividend yield. The
weighted-average fair value of all purchase rights granted in 2002, 2001 and
2000, were $1.49, $1.04 and $1.73, respectively.
Recently Issued Accounting Standards
On December 31, 2002, the FASB issued FASB Statement No. 148 (SFAS 148),
Accounting for Stock-Based Compensation -- Transition and Disclosure, amending
FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation. This
Statement amends SFAS 123 to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of
F-23
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting for stock-based employee compensation. It also amends the disclosure
provisions of that Statement to require prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with respect
to stock-based employee compensation. Finally, SFAS 148 amends APB Opinion No.
28, Interim Financial Reporting, to require disclosure about those effects in
interim financial information. For entities that voluntarily change to the fair
value based method of accounting for stock-based employee compensation, the
transition provisions are effective for fiscal years ending after December 15,
2002. For all other companies, the disclosure provisions and the amendment to
APB No. 28 are effective for interim periods beginning after December 15, 2002.
SFAS 148 did not have any effect on our financial position, results of
operations or cash flows as we have elected to continue to follow the
recognition provisions of APB No. 25.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of
FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.
FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies (SFAS 5), relating to the guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees.
FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under that
guarantee. FIN 45 covers guarantee contracts that have any of the following four
characteristics: (a) contracts that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying that is
related to an asset, a liability, or an equity security of the guaranteed party
(e.g., financial and market value guarantees), (b) contracts that contingently
require the guarantor to make payments to the guaranteed party based on another
entity's failure to perform under an obligating agreement (performance
guarantees), (c) indemnification agreements that contingently require the
indemnifying party (guarantor) to make payments to the indemnified party
(guaranteed party) based on changes in an underlying that is related to an
asset, a liability, or an equity security of the indemnified party, such as an
adverse judgment in a lawsuit or the imposition of additional taxes due to
either a change in the tax law or an adverse interpretation of the tax law, and
(d) indirect guarantees of the indebtedness of others.
FIN 45 specifically excludes certain guarantee contracts from its scope.
Additionally, certain guarantees are not subject to FIN 45's provisions for
initial recognition and measurement but are subject to its disclosure
requirements. The initial recognition and measurement provisions are effective
for guarantees issued or modified after December 31, 2002. The Company has
evaluated the impact of FIN 45 on its financial statements and determined that
the recognition provision will not have an impact on the financial position or
results of operations for 2002.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, or SFAS 146. This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring), or EITF 94-3. SFAS 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. EITF 94-3 allowed for an exit cost
liability to be recognized at the date of an entity's commitment to an exit
plan. SFAS 146 also requires that liabilities recorded in connection with exit
plans be initially measured at fair value. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early adoption encouraged. The Company does not expect the adoption
of SFAS 146 will have a material impact on its financial position or results of
operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144). The objectives of SFAS 144 are to
F-24
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
address significant issues relating to the implementation of FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (SFAS 121), and to develop a single accounting model,
based on the framework established in SFAS 121, for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. SFAS
144 supersedes SFAS 121; however, it retains the fundamental provisions of SFAS
121 for (1) the recognition and measurement of the impairment of long-lived
assets to be held and used and (2) the measurement of long-lived assets to be
disposed of by sale. SFAS 144 supersedes the accounting and reporting provisions
of Accounting Principles Board No. 30, Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions (APB
30), for segments of a business to be disposed of. However, SFAS 144 retains the
requirement of APB 30 that entities report discontinued operations separately
from continuing operations and extends that reporting requirement to "a
component of an entity" that either has been disposed of or is classified as
"held for sale." SFAS 144 also amends the guidance of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception
to consolidation for a temporarily controlled subsidiary. SFAS 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, including interim periods, and, generally, its provisions are to be
applied prospectively. The Company adopted the provisions of SFAS 144 in 2002
and its adoption had no impact on its results of operations.
3. INVENTORY
Inventory consists of the following (in thousands):
DECEMBER 31,
-------------
2002 2001
------ ----
Raw materials............................................... $ 26 $107
Finished goods............................................ 1,215 400
------ ----
$1,241 $507
====== ====
4. GOODWILL
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets." SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets, including how goodwill and other
intangible assets should be accounted for after they have been initially
recognized. SFAS 142 provides that goodwill and intangible assets that have
indefinite useful lives not be amortized but rather be tested at least annually
for impairment; intangible assets with finite useful lives will continue to be
amortized over their useful lives.
The Company adopted SFAS 142 on January 1, 2002 and discontinued the
amortization of goodwill (including acquired workforce) of approximately $65.2
million. Upon adoption, the Company reclassified $31,000 of previously
amortizable acquired workforce to goodwill. The Company had previously been
recording amortization expense on goodwill and acquired workforce of $10.4
million annually or $2.6 million per quarter.
Under SFAS 142, the Company was required to complete a transitional
impairment test on all goodwill effective as of January 1, 2002 on a reporting
unit basis. A reporting unit is defined as an operating segment or one level
below an operating segment referred to as a component. A component of an
operating segment is a reporting unit if the component constitutes a business
and discrete financial information is prepared and regularly reviewed by
management. The Company determined that it operates
F-25
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in one reporting unit and, therefore, has completed the transitional goodwill
impairment test on an enterprise-wide basis.
SFAS 142 provides for a two-step impairment test to identify potential
goodwill impairment. The first step of the goodwill impairment test compares the
fair value of a reporting unit with its carrying value, including goodwill. If
the fair value of a reporting unit exceeds its carrying value, goodwill of the
reporting unit is considered not impaired, thus the second step of the
impairment test, which determines the amount of goodwill impairment, is
unnecessary.
The fair value of the reporting unit was determined using the Company's
market capitalization as of January 1, 2002. As the fair value of the reporting
unit as of January 1, 2002 was in excess of the carrying amount of the net
assets, the Company concluded that its goodwill was not impaired, and no
impairment charge was recorded. The Company performed its annual assessment for
2002 in the fourth quarter. Based on the Company's market capitalization as of
November 30, 2002, the fair value of the reporting unit was in excess of the
carrying amount of the net assets as of November 30, 2002. Therefore, no further
analysis was required under SFAS 142.
Intangible assets are amortized on a straight-line basis over their
estimated useful lives of three to twelve years. As required, upon adoption of
SFAS 142, the Company reassessed the useful lives of its intangible assets and
determined that no adjustments were required.
The following summary reflects the consolidated results of operations as if
SFAS 142 had been adopted at the beginning of the periods presented (in
thousands, except net income (loss) per share amounts):
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
------ -------- --------
Net income (loss):
Reported net income (loss)........................... $6,333 $(16,877) $(53,251)
Effect of goodwill amortization...................... -- 10,387 9,601
------ -------- --------
Adjusted net income (loss)........................... $6,333 $ (6,490) $(43,650)
====== ======== ========
Basic net income (loss) per share:
Reported basic net income (loss) per share........... $ 0.09 $ (0.34) $ (1.26)
Effect of goodwill amortization...................... -- .21 .23
------ -------- --------
Adjusted basic net income (loss) per share........... $ 0.09 $ (0.13) $ (1.03)
====== ======== ========
Diluted net income (loss) per share:
Reported diluted net income (loss) per share......... $ 0.09 $ (0.34) $ (1.26)
Effect of goodwill amortization...................... -- .21 .23
------ -------- --------
Adjusted diluted net income (loss) per share......... $ 0.09 $ (0.13) $ (1.03)
====== ======== ========
F-26
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
DECEMBER 31, 2002
Patents and core technology.................... $48,130 $19,190 $28,910
Completed technology........................... 16,340 16,340 --
Trademarks..................................... 7,461 2,836 4,625
Non-competition agreement...................... 4,048 4,048 --
Acquired favorable lease....................... 553 553 --
OEM relationships.............................. 1,100 812 288
Other.......................................... 200 200 --
------- ------- -------
$77,832 $43,979 $33,823
======= ======= =======
DECEMBER 31, 2001
Patents and core technology.................... $46,456 $11,771 $34,685
Completed technology........................... 16,340 14,714 1,626
Trademarks..................................... 7,461 1,784 5,677
Non-competition agreement...................... 4,048 3,646 402
Acquired favorable lease....................... 553 355 198
OEM relationships.............................. 1,100 524 576
Assembled workforce............................ 374 270 104
Other.......................................... 200 167 33
------- ------- -------
$76,532 $33,231 $43,301
======= ======= =======
The balances of patents and core technology, trademarks and assembled
workforce at December 31, 2002 reflect the impact of the restatement described
in Note 18. As a result of the restatement, $16.6 million, $2.9 million and $3.3
million of patents and core technology, trademarks and assembled workforce,
respectively, were reallocated to goodwill.
Aggregate amortization expense was $11.2 million ($9.5 million included in
cost of revenue) for the year ended December 31, 2002. Estimated amortization
expense for each of the five succeeding fiscal years as of December 31, 2002 is
as follows (in thousands):
SELLING,
COST OF GENERAL AND
YEAR ENDING REVENUE ADMINISTRATIVE TOTAL
----------- ------- -------------- -------
2003................................................. $ 7,905 $ 944 $ 8,849
2004................................................. 7,461 516 7,977
2005................................................. 3,060 516 3,576
2006................................................. 2,026 301 2,327
2007................................................. 2,026 258 2,284
Thereafter........................................... 7,281 1,529 8,810
------- ------ -------
Total................................................ $29,759 $4,064 $33,823
======= ====== =======
F-27
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
USEFUL LIFE -----------------
(IN YEARS) 2002 2001
----------- ------- -------
Computers, software and equipment...................... 3 $ 7,650 $ 6,300
Leasehold improvements................................. 2-4 1,315 436
Furniture and fixtures................................. 3 443 193
Construction in process................................ -- 9 176
------- -------
9,417 7,105
Accumulated depreciation............................... (6,571) (4,955)
------- -------
$ 2,846 $ 2,150
======= =======
Depreciation expense, associated with property and equipment, for the years
ended December 31, 2002, 2001 and 2000 was $2.0 million, $1.8 million, and $2.1
million, respectively.
In January 2002, the Company entered into a one-year capital lease
agreement for certain equipment. Total payments during the year were $0.3
million. No further obligation exists as of December 31, 2002. 7. ACCRUED
EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
-----------------
2002 2001
------- -------
Accrued compensation........................................ $ 2,122 $ 2,775
Accrued sales and marketing incentives...................... 1,802 1,160
Accrued restructuring....................................... 665 634
Accrued royalties........................................... 238 750
Accrued professional fees................................... 472 571
Accrued acquisition liabilities............................. 1,437 6,065
Accrued transaction costs................................... 217 882
Accrued taxes and other..................................... 2,820 1,634
------- -------
$ 9,773 $14,471
======= =======
8. RESTRUCTURING AND OTHER CHARGES
In connection with the acquisition of Caere in the first quarter of 2000,
ScanSoft identified 46 employees of Caere whose positions were eliminated upon
consummation of the acquisition. These positions included 22 in research and
development, 14 in general and administrative functions, and 10 in sales and
marketing. Additionally, the Caere president and CEO position was eliminated. As
a result, ScanSoft established as part of the purchase price allocation, a
restructuring reserve of $0.5 million for severance payments to employees, and a
restructuring reserve of $1.1 million for severance to the Caere former
president and CEO, the payments of which will continue through March 2005.
In June 2000, ScanSoft implemented a restructuring plan to strategically
refocus our business and bring operating expenses in line with net revenues. As
a result, the Company eliminated 65 employee
F-28
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
positions including 29 in research and development, 13 in general and
administrative functions and 23 in support and marketing. ScanSoft recorded a
restructuring charge in the amount of $1,069,000 for severance payments to these
employees and a restructuring charge of $0.4 million for certain termination
fees to be incurred as a result of exiting the Los Gatos facility. Additionally,
ScanSoft wrote-off $3.5 million of net intangible assets acquired as part of the
Caere acquisition including the acquired work force of $1.1 million and the
favorable building lease of $2.4 million, which were impaired as a result of the
restructuring action.
The Company was obligated to pay retention bonuses amounting to
approximately $0.8 million and $0.2 million relating to key employees who were
employed in the Caere integration and restructuring of the companies,
respectively. These retention bonuses were expensed as incurred and were not
included in the purchase price of the acquisition. As of December 31, 2000, the
Company had paid all of these bonuses.
During the fourth quarter of 2000, the Company incurred an additional $0.3
million of facility related exit costs related to leasehold improvements on the
Los Gatos facility in space vacated by the Company.
Additionally, during the fourth quarter the Company reversed $0.4 million
of restructuring accruals taken in June 2000. Facility related contracts
accounted for $0.3 million of the reserve. The remaining $0.1 million related to
severance accruals for employees who left the Company prior to being eligible to
receive severance benefits.
Through December 31, 2001 ScanSoft paid $1.9 million in severance payments
related to these restructuring actions.
In January 2002, the Company announced, and in March 2002 completed, a
restructuring plan to consolidate facilities, worldwide sales organizations,
research and development teams and other personnel following the December 12,
2001 L&H acquisition. As a result, the Company exited facilities in both North
America and Europe, eliminating 21 employee positions, including 12 in research
and development and 9 in selling, general and administrative functions. In the
first quarter of 2002, the Company recorded a restructuring charge in the amount
of $0.6 million for severance payments to these employees, and a restructuring
charge of $0.4 million for certain termination fees to be incurred as a result
of exiting the facilities, including the write-off of previously recorded
assembled workforce of $0.1 million.
During the fiscal year ended December 31, 2002, the Company paid a total of
$0.8 million in severance payments, of which $0.6 million related to the March
2002 restructuring and $0.2 million related to severance paid to the former
Caere President and CEO, pursuant to a 2000 restructuring.
At December 31, 2002, the remaining restructuring accrual from the current
and prior restructuring activities amounted to $0.7 million. This balance is
comprised of $0.2 million of lease exit costs resulting from the 2002
restructuring and $0.5 million of severance to the former Caere President and
CEO. The lease exit costs and severance due to the former Caere President and
CEO will be paid through January 2004 and March 2005, respectively.
F-29
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the 2002, 2001 and 2000 restructuring
accrual activity (in thousands):
LEASE INTANGIBLE
EMPLOYEE EXIT ASSET
RESTRUCTURING AND OTHER CHARGES ACCRUAL RELATED COSTS IMPAIRMENT TOTAL
--------------------------------------- -------- ----- ---------- ------
Restructuring reserve provided in March 2000
acquisition.................................... $1,552 $1,552
Restructuring and other charges for June 2000
restructuring.................................. 1,069 $397 $3,490 4,956
Additional restructuring charges for June 2000
restructuring.................................. 276 276
Reversal of excess restructuring charges related
to June 2000 restructuring..................... (73) (347) (420)
Non-cash write-off............................... (276) (3,490) (3,766)
Cash payments.................................... (1,120) (1,120)
------ ---- ------ ------
Balance at December 31, 2000..................... 1,428 50 -- 1,478
Cash payments.................................... (794) (50) (844)
------ ---- ------ ------
Balance at December 31, 2001..................... $ 634 $ -- $ -- $ 634
Restructuring and other charges for March 2002
restructuring.................................. 576 465 -- 1,041
Non-cash write-off............................... (113) -- (113)
Cash payments.................................... (764) (133) (897)
------ ---- ------ ------
Balance at December 31, 2002..................... $ 446 $219 $ -- $ 665
====== ==== ====== ======
9. DEBT
Credit Facility
On October 31, 2002, the Company entered into a two year Loan and Security
Agreement (the "Loan Agreement") with Silicon Valley Bank (the "Bank") that
consisted of a $10 million revolving loan (the "Credit Facility"). Borrowings
under the Credit Facility will bear interest at the Bank's prime rate plus
0.375% or 0.75%, (4.625% at December 31, 2002) which is determined by the
Company's fixed charge coverage ratio, as defined in the Loan Agreement. The
maximum aggregate amount of borrowings outstanding at any one time will be
limited to the lesser of $10.0 million or a borrowing base equal to either 80%
or 70% of eligible accounts receivable, as defined in the Loan Agreement, based
on the Company's fixed charge coverage ratio. As of December 31, 2002, based
upon the calculated borrowing base, available borrowings totaled approximately
$8.6 million. Borrowings under the loan agreement cannot exceed the borrowing
base and must be repaid in the event they exceed the calculated borrowing base
or upon expiration of the two year loan term. Pursuant to the Loan Agreement,
the Company will be required to maintain certain financial and non-financial
covenants, the most restrictive of which is a quarterly minimum fixed charge
coverage ratio of 1.25 to 1.00. Borrowings under the Loan Agreement are
collateralized by substantially all of the Company's personal property,
predominantly its accounts receivable, but not its intellectual property. As of
December 31, 2002, there was no outstanding balance under this Credit Facility
and the Company was in compliance with all debt covenants.
Our loan and security agreement with Silicon Valley Bank, dated October 31,
2002, contains a restrictive covenant which prohibits us from paying or
declaring any dividends on our capital stock during the term of the agreement
(except for dividends payable solely in capital stock) without Silicon Valley
Bank's prior written consent. In addition, the zero coupon convertible
subordinated debenture due in 2006
F-30
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that was issued to Koninklijke Royal Philips Electronics N.V. ("Philips") in
connection with our acquisition of the Speech Processing Telephony and Voice
Control business units of Philips contains a restrictive covenant which
prohibits us from paying or declaring any dividend or distribution (other than
distributions of our equity securities) on our capital stock while the note is
outstanding. This restriction terminates if one half or more of the note is
converted by Philips into common stock.
On March 14, 2000, the Company entered into a one year Credit Agreement
(the "Agreement") with its then primary financial institution for a $10 million
revolving loan (the "Prior Credit Facility"). Borrowings under the Prior Credit
Facility bore interest at the prime rate plus one percent and, as amended,
expired on September 30, 2001. The maximum aggregate amount of borrowings
outstanding at any one time as amended was $5.0 million. During 2001, the
Company repaid all amounts due under the Prior Credit Facility, which included
principal and interest amounting to $3.4 million. The Prior Credit Facility was
terminated and cancelled upon the final payment.
Note Payable
In connection with the L&H acquisition (see Note 18), the Company issued a
$3.5 million promissory note (the "Note") to Lernout & Hauspie Speech Products,
N.V. The unsecured Note had a stated maturity date of December 15, 2004 and bore
interest at 9% per annum. Payments of principal and interest in the amount of
$133,000 were due quarterly commencing on March 15, 2002, for a total of eleven
payments. During the year ended December 31, 2002, four quarterly payments were
made in accordance with the terms and conditions of the promissory note.
In connection with an agreement to repurchase 1,461,378 shares of common
stock from L&H Holdings USA, Inc. and Lernout & Hauspie Speech Products N.V.
(collectively, L&H) (see Note 10), entered into by the Company in September
2002, the terms of the Note were amended to provide for the acceleration of the
maturity date of the outstanding principal and interest to January 1, 2003 if
consummation of the underwritten public offering (also described in Note 10) did
not occur by January 1, 2003. The Company did not complete the offering by
January 1, 2003 and accordingly, the debt became immediately due and payable. To
fulfill this obligation, on January 3, 2003, the Company paid $3.3 million in
full settlement of all of the outstanding principal and accrued interest under
the Note. The Company has classified the debt as current in its balance sheet at
December 31, 2002.
10. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 40,000,000 shares of preferred
stock, par value $0.001 per share. The Company has designated 100,000 shares as
Series A Preferred Stock and 15,000,000 as Series B Preferred Stock. In
connection with the acquisition of ScanSoft (see Note 1), the Company issued
3,562,238 shares of Series B Preferred Stock to Xerox Corporation ("Xerox"). The
Series B Preferred Stock is convertible into shares of common stock on a
one-for-one basis. The Series B Preferred Stock has a liquidation preference of
$1.30 per share plus all declared but unpaid dividends. The Series B Preferred
Stock holders are entitled to non-cumulative dividends at the rate of $0.065 per
annum per share, payable when, as and if declared by the Board of Directors. To
date no dividends have been declared by the Board of Directors. Holders of
Series B Preferred Stock have no voting rights, except those rights provided
under Delaware law. The undesignated shares of preferred stock will have rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, as
shall be determined by the Board of Directors upon issuance of the preferred
stock. The Company has reserved 3,562,238 shares of its common stock for
issuance upon conversion of the Series B Preferred Stock.
F-31
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock Warrants
In connection with the ScanSoft acquisition (see Note 1), the Company
issued Xerox a ten-year warrant that allows Xerox to acquire a number of shares
of common stock equal to the number of stock options (whether vested or
unvested) that remains unexercised at the expiration of any ScanSoft stock
option assumed by the Company in the merger. The exercise price for each warrant
share is $0.61. If all of the assumed ScanSoft options expire without being
exercised, Xerox would be entitled to purchase 1,736,630 shares of common stock.
From the date of acquisition through December 31, 2002, 525,732 ScanSoft options
have been forfeited and accordingly, the Xerox warrant at December 31, 2002 was
exercisable for the purchase of 525,732 shares of the Company's common stock.
Stock Repurchase
During 2001, the Board of Directors authorized the repurchase of up to 2
million shares of common stock for a period of one year ending on August 22,
2002. Purchases were made in the open market and in privately negotiated
transactions. Repurchased shares are available for issuance under employee stock
plans or in the ordinary course of business. During the year ended December 31,
2001 the Company repurchased 656,000 shares of common stock at a cost of $1.0
million. No other shares were repurchased under the program.
In September of 2002, the Company repurchased 1,461,378 shares of common
stock from L&H Holdings USA, Inc. and Lernout & Hauspie Speech Products N.V.
(collectively, L&H) and certain other parties at $4.79 per share for a total
consideration of $7.0 million. The price per share was based on the greater of
$4.79 or the twenty day trading average beginning August 14, 2002, which was
$4.67. These shares represented a portion of the common shares that were issued
to L&H in connection with the December 12, 2001 acquisition of certain of L&H's
speech and language technology operations and the March 21, 2002 acquisition of
the AudioMining assets of L&H Holdings USA, Inc.
As of December 31, 2002 and 2001, the Company had 2,117,378 and 656,000
shares of common stock in treasury at a cost of $8.0 million and $1.0 million,
respectively.
Other
On April 12, 2002, the Company completed a private placement of 1.0 million
shares of common stock at a purchase price of $6.00 per share with SF Capital
Partners Ltd. ("SF Capital"), resulting in proceeds, net of issuance costs, of
$5.6 million. In purchasing these shares, SF Capital was provided with certain
registration rights which required that the shares be registered no later than
August 10, 2002. The shares held by SF Capital were were registered on February
10, 2003.
In connection with the agreement to repurchase 1,461,378 shares of common
stock from L&H Holdings USA, Inc. and Lernout & Hauspie Speech Products N.V.
(collectively, L&H) entered into by the Company in September 2002, the Company
agreed to issue an additional 150,000 shares of its common stock to L&H if it
did not complete an underwritten public offering of the shares held by L&H by
December 15, 2002. The Company further agreed to issue an additional 150,000
shares of its common stock to L&H if it did not complete an underwritten public
offering by February 15, 2003. The Company also would be required to issue an
additional 100,000 shares of its common stock to L&H if, by February 15, 2003,
it failed to file a registration statement to register the shares remaining
unsold. The value ascribed to the potential right to acquire additional shares
of the Company's common stock was valued at $0.3 million using a
probability-weighted, Black-Scholes valuation model and recorded as a credit to
additional paid-in capital, with a corresponding reduction in additional paid-in
capital because the Company has an accumulated deficit. Accordingly, the right
had no net effect on the Company's financial position or results of operations.
The Company completed the public offering on February 14, 2003.
F-32
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because the offering was not completed by December 15, 2002, the Company issued
L&H 150,000 shares of common stock on December 18, 2002.
During December 2001, the Company issued 262,200 shares of its common stock
in partial settlement of a $2.1 million liability assumed in connection with the
Caere acquisition. The common stock was valued at $0.7 million based on the fair
value of the common stock on the date the agreement was reached. The Company
also agreed to pay $0.7 million in cash as part of the settlement. The Company
realized a gain on this settlement of $0.7 million as a reduction of general and
administrative expenses in 2001.
On December 21, 2001, the Company committed to issuing 65,100 shares of its
common stock in partial settlement of a $1.0 million liability incurred as part
of the Caere acquisition. The common stock was valued at $0.3 million based on
the fair value of the common stock on the date agreement was reached. The
Company also agreed to pay $0.3 million in cash as part of the settlement. The
Company realized a gain on this settlement of $0.3 million as a reduction of
general and administrative expenses in 2001. The $0.3 million value of the
common stock is reflected in other long-term liabilities at year-end as the
shares were not issued as of December 31, 2001. The stock was issued in January
2002.
11. STOCK COMPENSATION PLANS
Stock Option and Award Plans
The Company has several stock-based compensation plans under which
employees, officers, directors and consultants may be granted stock awards or
options to purchase the Company's common stock generally at the fair market
value on the date of grant. Plans do not allow for options to be granted at
below fair market value nor can they be re-priced at anytime. Options become
exercisable over various periods, typically two to four years and have a maximum
term of 10 years. At December 31, 2002, 18,028,104 shares were authorized for
grant under the Company's stock-based compensation plans, of which 2,882,397
were available for future grant. To date, all stock options have been granted
with exercise prices equal to or greater than the fair market value of the
Company's common stock on the date of grant.
During 2001, the Company awarded 133,824 shares of restricted common stock
to senior executives at a weighted average fair value at the grant date of $2.72
resulting in deferred compensation of $291,000. Restrictions lapse over a period
of 2 to 4 years depending on the grant. The restricted stock awards entitle the
participant to full dividend and voting rights. Unvested shares are restricted
as to disposition and subject to forfeiture under certain circumstances.
Deferred compensation expense is amortized to compensation expense over the
period that the restrictions lapse. During 2002 and 2001, compensation expense
of $103,000 and $15,000 was recognized, respectively. No restricted stock was
awarded for the year ended December 31, 2002.
F-33
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes activity under all stock option plans and
for options granted outside the plans:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- --------------
Balance at December 31, 1999................................ 4,178,837 $2.77
Options granted............................................. 7,453,007 $2.26
Options granted in exchange for Caere options............... 4,577,993 $2.51
Options exercised........................................... (307,307) $0.97
Options canceled............................................ (3,536,878) $2.80
----------
Balance at December 31, 2000................................ 12,365,652 $2.49
Options granted............................................. 3,891,021 $2.39
Options exercised........................................... (527,582) $1.96
Options canceled............................................ (2,511,922) $3.27
----------
Balance at December 31, 2001................................ 13,217,169 $2.33
Options granted............................................. 4,965,913 $5.43
Options exercised........................................... (1,362,299) $1.83
Options canceled............................................ (1,675,076) $4.03
----------
Balance at December 31, 2002................................ 15,145,707 $3.20
==========
The weighted average grant date fair value per share of options granted was
$3.12, $1.92 and $1.83 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Stock options to purchase 8,389,293, 6,502,668 and 4,088,911 shares of
common stock were exercisable as of December 31, 2002, 2001 and 2000,
respectively.
The following table summarizes information about stock options outstanding
under the Company's stock compensation plans at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
EXERCISE SHARES REMAINING AVERAGE SHARES AVERAGE
PRICE RANGE OUTSTANDING LIFE IN YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- ----------- ------------- -------------- ----------- --------------
$0.41 - $1.23 1,717,044 7.46 $0.90 1,264,731 $0.89
$1.25 - $1.28 787,931 7.61 1.28 638,216 1.28
$1.31 - $1.34 2,782,819 7.63 1.34 2,764,370 1.34
$1.41 - $2.22 1,674,869 6.83 1.76 1,215,901 1.77
$2.28 - $3.40 1,621,170 7.58 3.15 805,982 3.06
$3.60 - $4.30 2,461,171 8.28 4.22 635,343 4.21
$4.45 - $5.20 729,509 8.09 4.85 264,097 4.90
$5.36 - $5.36 1,687,590 9.33 5.36 461,049 5.36
$5.38 - $6.97 1,644,104 7.75 6.65 339,604 6.38
$7.14 - $8.74 39,500 9.53 7.54 0 0.00
---------- ---------
$0.41 - $8.74 15,145,707 7.85 $3.20 8,389,293 $2.25
========== =========
F-34
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan, as amended on June 29,
1999, authorizes the issuance of a maximum of 1,000,000 shares of common stock
in semi-annual offerings to employees at a price equal to the lower of 85% of
the closing price on the applicable offering commencement date or 85% of the
closing price on the applicable offering termination date. The Company issued
87,185, 95,952 and 46,896 shares of common stock under this plan during the
years ended December 31, 2002, 2001 and 2000 respectively. The weighted average
fair value of common stock on the grant date was $1.48, $0.71 and $1.08 during
the years ended December 31, 2002, 2001 and 2000 respectively.
12. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss), net of taxes, was $6.8 million, ($17.3)
million and ($53.3) million for the years ended December 31, 2002, 2001 and 2000
respectively. Total comprehensive income (loss) consisted of net income or loss
and foreign currency translation adjustments for the respective periods.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has various operating leases for office space around the world.
These obligations extend through 2008. Future minimum payments under operating
leases with an initial term of more than one year are as follows (in thousands):
YEAR ENDING
DECEMBER 31,
------------
2003........................................................ $2,020
2004........................................................ 1,827
2005........................................................ 1,779
2006........................................................ 1,421
2007........................................................ 332
Thereafter.................................................. 83
------
Total....................................................... $7,462
======
Total rent expense under operating leases for the years ended December 31,
2002, 2001 and 2000 was $1.8 million, $0.8 million and $0.8 million,
respectively.
Litigation and Other Claims
Like many companies in the software industry, the Company has from time to
time been notified of claims that it may be infringing certain intellectual
property rights of others. These claims have been referred to counsel, and they
are in various stages of evaluation and negotiation. If it appears necessary or
desirable, the Company may seek licenses for these intellectual property rights.
There is no assurance that licenses will be offered by all claimants, that the
terms of any offered licenses will be acceptable to the Company or that in all
cases the dispute will be resolved without litigation, which may be time
consuming and expensive, and may result in injunctive relief or the payment of
damages by the Company.
From time to time, we receive information concerning possible infringement
by third parties of our intellectual property rights, whether developed,
purchased or licensed by us. In response to any such circumstance, we have our
counsel investigate the matter thoroughly and we take all appropriate action to
defend our rights in these matters.
F-35
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 27, 2002, AllVoice Computing plc filed an action against the
Company in the United States District Court for the Southern District of Texas
claiming patent infringement. In the lawsuit, AllVoice alleges that the Company
is infringing United States Patent No. 5,799,273 entitled "Automated
Proofreading Using Interface Linking Recognized Words to Their Audio Data While
Text Is Being Changed" (the "'273 Patent"). The '273 Patent generally discloses
techniques for manipulating audio data associated with text generated by a
speech recognition engine. Although the Company has several products in the
speech recognition technology field, the Company believes that its products do
not infringe the '273 Patent because they do not use the claimed techniques.
Damages are sought in an unspecified amount. The Company filed an Answer on
December 23, 2002. For the reasons described here, the Company believes this
claim has no merit, and intends to defend the action vigorously.
In December 2001, the Massachusetts Institute of Technology and Electronics
For Imaging, Inc. sued the Company in the United States District Court for the
Eastern District of Texas for patent infringement. The patent infringement claim
was filed against more than 200 defendants. In their lawsuit, MIT and EFI allege
that the Company is infringing United States Patent No. 4,500,919 entitled
"Color Reproduction System" (the "'919 Patent"). MIT and EFI allege that the
'919 Patent discloses a system for adjusting the colors of a scanned image on a
television screen and outputting the modified image to a device. The Company has
several products that permit a user to adjust the color of an image on a
computer monitor. The Company has asserted that its products do not infringe the
'919 Patent because its products do not contain all elements of the structure
required by the claimed invention and because its products do not perform all of
the steps required by the claimed method. Further, the Company believes there
may be prior art that would render the '919 Patent invalid. The '919 Patent
expired on May 6, 2002. Damages are sought in an unspecified amount. The Company
filed an Answer and Counterclaim on June 28, 2002. For the reasons described
here, the Company believes this claim has no merit, and intends to defend the
action vigorously.
On August 16, 2001, Horst Froessl sued the Company in the United States
District Court for the Northern District of California for patent infringement.
In his lawsuit, Froessl alleges that the Company is infringing United States
Patent No. 4,553,261 entitled "Document and Data Handling and Retrieval System"
(the "'261 Patent"). Froessl alleges that the '261 Patent discloses a system for
receiving and optically scanning documents, converting selected segments of the
digitalized scan data into machine code, and storing and retrieving the
documents and the digitalized and converted segments. Although the Company has
several products in the scanning technology field, the Company has asserted that
its products do not infringe the '261 Patent because its products do not contain
all elements of the structure required by the claimed invention and because its
products do not perform all of the steps required by the claimed method.
Further, the Company believes there may be prior art that would render the '261
Patent invalid. Damages are sought in an unspecified amount. The Company filed
an Answer and Counterclaim on September 19, 2001. For the reasons described
here, the Company believes this claim has no merit, and intends to defend the
action vigorously.
The Company believes that the final outcome of these matters will not have
a significant adverse effect on its financial position and results of
operations, and the Company believes it will not be required to expend a
significant amount of resources defending such claims. However, should the
Company not prevail in any such litigation, its operating results and financial
position could be adversely impacted.
Guarantees
The Company has entered into agreements to indemnify its directors and
officers to the fullest extent authorized or permitted under applicable law.
These agreements, among other things, provide for the indemnification of its
directors and officers for expenses, judgments, fines, penalties and settlement
amounts incurred by any such person in his or her capacity as a director or
officer of the company, whether or not such person is acting or serving in any
such capacity at the time any liability or expense is
F-36
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incurred for which indemnification can be provided under the agreements. The
Company has a Director and Officer insurance policy in effect that reduces its
exposure under these agreements and enables it to recover a portion of any
future amounts paid. While the maximum potential amount of any future payments
under these agreements is uncertain, as a result of its insurance coverage the
Company believes the estimated fair value of these agreements is minimal.
The Company currently includes indemnification provisions in the contracts
it enters with its customers and business partners. Generally, these provisions
require the Company to defend claims arising out of its products' infringement
of third-party intellectual property rights, breach of contractual obligations
and/or unlawful or otherwise culpable conduct on its part. The indemnity
obligations imposed by these provisions generally cover damages, costs and
attorneys' fees arising out of such claims. In most, but not all, cases the
Company's total liability under such provisions is limited to either the value
of the contract or a specified, agreed upon, amount. In some cases, its total
liability under such provisions is unlimited. In many, but not all, cases the
term of the indemnity provision is perpetual. Although these provisions are
included in most of its contracts with customers and business partners, as noted
above, the Company is currently indemnifying the liabilities of only four
parties pursuant to such provisions. Each of these four parties is a defendant
in a case filed by the Massachusetts Institute of Technology and Electronics for
Imaging, Inc. in the United States District Court for the Eastern District of
Texas in December 2001. The case, which alleges patent infringement by certain
ScanSoft products, is more fully described above. The Company's indemnity
obligations in this case have required it to incur costs and attorney fees of
approximately $0.1 million to date. The Company cannot predict the outcome of
this case or the total additional indemnity costs it may produce, though it may
be required to indemnify one or more defendants in addition to those it is
already indemnifying. While the maximum potential amount of future payments the
Company could be required to make under all the indemnification provisions in
its contracts with customers and business partners is unlimited, it believes
that the estimated fair value of these provisions is moderate due to the low
frequency with which these provisions have been triggered.
14. 401(K) SAVINGS PLAN
The Company has established a retirement savings plan under Section 401(k)
of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers
substantially all employees of the Company who meet minimum age and service
requirements, and allows participants to defer a portion of their annual
compensation on a pre-tax basis. Through October 15, 2002, the Company matched
an employee's contributions dollar for dollar up to 4%. Employees are 100%
vested into the plan as soon as they start to contribute to the plan. Effective
October 16, 2002, this match was discontinued. The Company's contributions to
the 401(k) Plan totaled $0.6 million, $0.4 million and $0.4 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
15. SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended December 2002, 2001 and 2000, the Company made cash
payments for interest totaling $0.3 million, $0.1 million and $0.6 million,
respectively.
During the years ended December 2002, 2001 and 2000, the Company made cash
payments for income taxes totaling $0.6 million, $0.3 million and $0.3 million,
respectively.
During December 2002, the Company issued 150,000 shares of common stock
valued at $0.3 million in connection with the agreement to repurchase 1,461,378
shares of common stock from L&H. (see Note 10)
During 2002, the Company entered into favorable settlement agreements
related to liabilities assumed in the L&H acquisition, resulting in a reduction
of $2.2 million of the assumed liabilities recorded at the
F-37
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of acquisition with a corresponding reduction recorded to the carrying
value of goodwill. (see Note 18)
During March 2002, the Company issued 121,359 shares of the Company's
common stock valued at $0.6 million in connection with a purchase agreement in
which the Company acquired patents and core technology associated with the
Audiomining assets of the speech and language technology assets of L&H. In
addition, the Company issued a 9% promissory note in the principal amount of
$0.4 million with principal and interest to be repaid in full on July 31, 2002
and $0.5 million in cash, for total consideration of $1.5 million.
During January 2002, the Company issued 65,100 shares of its common stock
in partial settlement of a $1.0 million liability incurred as part of the Caere
acquisition. The common stock was valued at $0.3 million based on the fair value
of the common stock on December 21, 2001, the date the agreement was reached.
During January 2002, the Company acquired $0.3 million of equipment through
a one-year capital lease arrangement. No further obligation exists as of
December 31, 2002.
During December 2001, the Company issued 262,200 shares of its common stock
in partial settlement of a $2.1 million liability assumed in connection with the
Caere acquisition. The common stock was valued at $0.7 million based on the fair
value of the common stock on the date agreement was reached.
During December 2001, the Company issued 7.4 million shares of the
Company's common stock valued at $27.8 million, a 9% promissory note in the
principal amount of $3.5 million in connection with the L&H acquisition (see
Note 18) in which the Company acquired patents, trademarks, tradenames, product
and customer contracts associated with certain of the speech and language
technology assets of L&H.
During March 2000, the Company acquired all of the outstanding capital
stock of Caere Corporation. As consideration, the Company issued 19.0 million
shares of common stock valued at $98.5 million and stock options for the
purchase of approximately 4.6 million shares of the Company's common stock
valued at $15.5 million in exchange for outstanding employee stock options of
Caere. In addition, pursuant to a concurrent non-competition agreement and
subject to certain other conditions, the Company agreed to pay in cash the
former Caere President and CEO on the second anniversary of the merger, March
13, 2002, the difference between $13.50 and the closing price per share of
ScanSoft common stock at that time, multiplied by 486,548. (see Note 19)
16. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in a single segment. The following table presents
total revenue information by geographic area and principal product line (in
thousands):
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
-------- ------- -------
North America.......................................... $ 77,540 $49,266 $39,479
Other foreign countries................................ 29,079 13,451 8,482
-------- ------- -------
Total................................................ $106,619 $62,717 $47,961
======== ======= =======
F-38
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
-------- ------- -------
Digital Capture........................................ $ 62,454 $60,966 $47,961
Speech................................................. 44,165 1,751 --
-------- ------- -------
Total................................................ $106,619 $62,717 $47,961
======== ======= =======
Revenue classification above is based on the country in which the sale
originates or is invoiced. Revenue in other countries predominately relates to
sales to customers in Asia and Europe. Intercompany sales are insignificant as
products sold in other countries are sourced within Europe or the United States.
A number of the Company's North American OEM customers distribute its
products throughout the world but because these customers do not provide the
geographic dispersion of products sales, the Company recorded the revenue in the
North America category.
For the year ended December 31, 2002, two distribution and fulfillment
partners, Ingram Micro and Digital River, accounted for 25% and 12% of our
consolidated revenue, respectively. During the year ended December 31, 2001,
Ingram Micro and Digital River accounted for 28% and 15% of our consolidated
revenue, respectively. During the year ended December 31, 2000, Ingram Micro and
Digital River accounted for 7% and 11% of our consolidated revenue,
respectively.
The following table summarizes the Company's long-lived assets, excluding
intangible assets, by geographic location (in thousands):
DECEMBER 31,
---------------
2002 2001
------ ------
North America............................................... $1,992 $2,165
Other foreign countries..................................... 1,951 662
------ ------
$3,943 $2,827
====== ======
17. INCOME TAXES
The components of the income tax provision (benefit) are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
------ ------ -----
Federal..................................................... $(900) $ (16) $ --
Foreign................................................... 907 277 382
State..................................................... 247 (578) 90
----- ----- ----
Provision (benefit) for income taxes................... $ 254 $(317) $472
===== ===== ====
The benefit for federal and state income taxes in 2002 and 2001,
respectively relate to refunds related to Caere Corporation.
F-39
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For financial reporting purposes, income (loss) before income taxes
includes the following components (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
------ -------- --------
North America.......................................... $4,585 $(17,797) $(53,609)
Foreign................................................ 2,002 603 830
------ -------- --------
Total................................................ $6,587 $(17,194) $(52,779)
====== ======== ========
The cumulative amount of undistributed earnings of foreign subsidiaries,
which is intended to be permanently reinvested and for which U.S. income taxes
have not been provided, totaled approximately $3.5 million at December 31, 2002.
Deferred tax assets (liabilities) consist of the following (in thousands):
DECEMBER 31,
-------------------
2002 2001
-------- --------
Deferred tax assets
Net operating loss carryforwards.......................... $ 33,212 $ 36,439
Federal and state credit carryforwards.................... 4,903 4,011
Capitalized start-up and development costs................ 1,062 1,108
Accrued expense and other reserves........................ 3,600 3,374
Deferred revenue.......................................... 558 1,136
Depreciation.............................................. 2,210 1,960
Other..................................................... 8 4
-------- --------
Gross deferred tax assets................................. 45,553 48,032
Deferred tax liabilities
Acquired intangibles...................................... (4,538) (7,767)
Valuation allowance......................................... (41,015) (40,265)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
At December 31, 2002 and 2001, the Company provided a valuation allowance
for the full amount of its net deferred tax assets due to the uncertainty of
realization of those assets as a result of the recurring and cumulative losses
from operations.
The Company monitors the realization of its deferred tax assets based on
changes in circumstances, for example, recurring periods of income for tax
purposes following historical periods of cumulative losses or changes in tax
laws or regulations. Our income tax provisions and our assessment of the
realizability of our deferred tax assets involve significant judgments and
estimates. If we continue to generate taxable income through profitable
operations in future years we may be required to recognize these deferred tax
assets through the reduction of the valuation allowance which would result in a
material benefit to our results of operations in the period in which the benefit
is determined.
F-40
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's effective tax rate to the statutory
federal rate is as follows:
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001 2000
----- ----- -----
Federal statutory tax rate............................ 34.0% (34.0)% (34.0)%
Nondeductible amortization and in-process research and
development......................................... 0.0% 20.0% 5.3%
Foreign taxes......................................... 6.6% (0.4)% 0.4%
State tax, net of federal benefit..................... 3.1% (4.4)% 0.1%
Other................................................. (2.2)% 2.3% --
Change in valuation allowance......................... (17.4)% 16.5% 29.1%
Federal research and development credits.............. (6.5)% (1.8)% --
Federal benefit -- refundable taxes................... (13.7)% -- --
----- ----- -----
3.9% (1.8)% 0.9%
===== ===== =====
At December 31, 2002 and 2001, the Company had federal net operating loss
carryforwards of approximately $82 million and $90 million, respectively, of
which approximately $9.1 million and $4.1 million, respectively, relate to tax
deductions from stock compensation. The tax benefit related to the stock
compensation, when realized, will be accounted for as additional paid-in capital
rather than as a reduction of the provision for income tax. At December 31, 2002
the Company had federal and state research and development credit carryforwards
of approximately $3.4 million and $2.3 million respectively. At December 31,
2001, the Company had federal and state research and development credit
carryforwards of approximately $2.8 million and $1.6 million, respectively. The
net operating loss and credit carryforwards will expire at various dates through
2021, if not utilized. Utilization of the net operating losses and credits may
be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
18. ACQUISITIONS
Audiomining Acquisition:
On February 22, 2002, the Company entered into a definitive asset purchase
agreement (the "Purchase Agreement") to acquire certain assets and intellectual
property from L&H Holdings USA, Inc. The transaction was completed on March 21,
2002. Pursuant to the Purchase Agreement, the Company acquired patents and core
technology associated with the Audiomining assets of the speech and language
technology assets of L&H and paid $1.5 million in total consideration to L&H as
follows: $0.5 million in cash, 121,359 shares of the Company's common stock
valued at $0.6 million (based on the average of the closing share price of the
Company's stock 5 days before and after the date the transaction was completed)
and a 9% promissory note in the principal amount of $0.4 million (the "Note"),
with principal and interest to be repaid in full on July 31, 2002. The Company
incurred $0.2 million of acquisition related costs. The purchase price including
acquisition costs of $1.7 million was allocated to core technology.
On July 31, 2002, the Company repaid all amounts due under the Note, which
included principal and interest of $0.4 million.
F-41
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table identifies the intangible assets acquired in connection
with Audiomining and their respective lives:
AMOUNT LIFE
(IN THOUSANDS) (IN YEARS)
-------------- ----------
Core technology...................................... $1,674 3.5
------
$1,674
======
Acquisition of Lernout & Hauspie (L&H) Speech Products N.V. Assets:
On December 7, 2001, the Company entered into a definitive asset purchase
agreement (the "Purchase Agreement") to acquire certain assets and intellectual
property relating to the former L&H entities that were in bankruptcy under the
jurisdiction of both the U.S. Bankruptcy Court for the District of Delaware and
the Commercial Court of Ieper, Belgium. The Company purchased these assets in a
closed auction proceeding administered by the creditors committee of the former
entities and approved by both the U.S. and Belgium courts on December 11, 2001.
The transaction was completed on December 12, 2001 and the Company's results
from operations include L&H activities since that date.
Pursuant to the Purchase Agreement, the Company acquired patents,
trademarks, tradenames, product and customer contracts associated with certain
of the speech and language technology assets of L&H. In addition, the Company
obtained rights to accounts receivable related to the customer contracts
acquired and fixed assets. The Company also hired 223 employees from L&H. The
Company paid $41.3 million in total consideration to the creditors as follows:
$10.0 million in cash, 7.4 million shares of the Company's common stock valued
at $27.8 million (based on the average of the closing share price of our stock 3
days before and after the proposed acquisition was announced) and a 9%
promissory note in the principal amount of $3.5 million, to be repaid in
installments of $0.1 million of principal and interest quarterly commencing on
March 15, 2002, for a total of eleven payments. All remaining principal and
interest shall become due on December 15, 2004. The Company incurred
approximately $1.0 million of acquisition related costs.
On December 27, 2001, the Company filed a Form 8-K reporting the
transaction as an acquisition of assets. The Company had ongoing discussions
with the SEC regarding historical financial statement requirements related to
the acquisition. Following these discussions, the Company concluded that, for
purposes of Rule 3-05 of Regulation S-X, the L&H transaction was an acquisition
of a business and not an acquisition of assets. In connection with these
discussions, the Company also concluded that the transaction should be reported
as an acquisition of a business for accounting purposes rather than an
acquisition of assets, as previously reported. On August 14, 2002, the Company
filed a Form 10-Q/A to restate the financial statements as of and for the
quarter ended March 31, 2002 to reflect the impact of the change in the
accounting for the acquisition. The change in the accounting for the transaction
was determined to have an immaterial impact on the financial position, results
of operations or cash flows of the Company for the year ended December 31, 2001.
The results of operations of the acquired business have been included in the
financial statements of the Company as of the date of acquisition.
F-42
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The change in accounting for the transaction resulted in a reallocation of
the purchase price from amortizable intangible and tangible assets to goodwill.
The following summarizes the impact of the reallocation of the purchase price
(in 000's):
DECEMBER 31, 2001
---------------------
AS
PREVIOUSLY AS
REPORTED REVISED
---------- --------
Balance Sheet:
Goodwill, net............................................. $ 42,169 $ 65,231
Other intangible assets, net.............................. 66,107 43,301
Property and equipment, net............................... 2,406 2,150
-------- --------
Total goodwill, other intangible assets and property and
equipment, net............................................ $110,682 $110,682
======== ========
Information presented below is consistent with disclosure related to the
acquisition of a business.
The purchase price was allocated to the tangible and intangible assets
acquired (patents and core technology and trade names and trademarks) and
liabilities assumed based on their respective fair market values. The total
identifiable tangible assets amounted to $21.0 million. The excess of the
purchase price over the fair value of the identifiable intangible assets and net
liabilities assumed amounted to $23.0 million and was allocated to goodwill. The
Company believes that the acquisition resulted in an excess of the purchase
price over the fair value of the net assets acquired because the Company
purchased, in an auction as a result of L&H's bankruptcy status, a substantial
portfolio of patents and core technology in speech and language technology which
were internally developed or acquired by L&H over the course of several years.
Furthermore, the acquisition enabled the Company to enter the speech and
language market immediately upon completion of the acquisition. The entire $23.0
million allocated to goodwill is deductible for tax purposes. The purchase price
including acquisition costs was allocated as follows (in thousands):
Identified intangible assets................................ $20,970
Goodwill.................................................... 23,031
Net current liabilities assumed............................. (1,701)
-------
$42,300
=======
Net current liabilities assumed primarily relate to accounts receivable and
assumed liabilities for products which were sold prior to the acquisition date
and which were expected to be upgraded with newer versions in 2002 and
liabilities for development contracts with customers. During 2002, the Company
entered into favorable settlement agreements related to these liabilities
resulting in a reduction of $2.2 million of the assumed liabilities recorded at
the date of acquisition with a corresponding reduction recorded to the carrying
value of goodwill.
The values of the patents, core technology and trade names and trademarks
were determined using the income approach. The income approach requires a
projection of revenues and expenses specifically attributed to the intangible
assets. The discounted cash flow ("DCF") method is then applied to the potential
income streams after making necessary adjustments with respect to such factors
as the wasting nature of the identifiable intangible assets and the allowance of
a fair return on the net tangible assets and other intangible assets employed.
There are several variations on the income approach, including the relief-
from-royalty method, the avoided cost method and the lost profits method. The
relief-from-royalty method was used to value the patents, core technology and
trade names and trademarks. The relief-from-royalty method is used to estimate
the cost savings that accrue to the owner of the intangible assets that would
otherwise have to pay royalties or licensee fees on revenues earned through the
use of the asset. The
F-43
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
royalty rate used in the analysis is based on an analysis of empirical,
market-derived royalty rates for guideline intangible assets.
Typically, revenue is projected over the expected remaining useful life of
the intangible asset. The market-derived royalty rate is then applied to
estimate the royalty savings. The key assumptions used in valuing the patents
and core technology are as follows: royalty rate 5%, discount rate 15%, tax rate
40% and estimated life of 10 years. The key assumptions used in valuing the
trade names and trademarks are as follows: observed royalty rate 1%, discount
rate 15%, tax rate 40% and estimated life of 12 years.
OEM contracts and customer relationships, as well as completed technology,
were determined to have de minimus values and, accordingly, no amount of the
purchase price was allocated to these intangible assets. A discounted cash flow
method was used to estimate the residual cash flows attributable to OEM
contracts and customer relationships. The projections included negative cash
flows over the early years of the relationship and, when combined with the
contributory asset charged for the other technology-based assets, such as
patents and core technology which are required to realize revenue under these
arrangements, resulted in de minimus value for the OEM contracts and the
customer relationships. The completed technology was valued using individual
cash flow projections for each technology, adjusted for capital charges, and
discounted to present value using a weighted average cost of capital. Cash flow
projections and operating profits are negative for the initial years and when
considered with the short life cycle of the application-based completed
technology, the value ascribable to the completed technology was de minimus.
The following table identifies the intangible assets acquired and their
respective lives over which the assets will be amortized on a straight-line
basis:
AMOUNT LIFE
(IN THOUSANDS) (IN YEARS)
-------------- ----------
Patents and core technology................................. $17,870 10
Trade names and trademarks.................................. 3,100 12
-------
$20,970
=======
Caere Acquisition:
On March 13, 2000, the Company acquired all of the outstanding capital
stock of Caere Corporation, a California-based company that designed, developed
and marketed a range of optical character recognition software tools, for
approximately $48.5 million in cash, 19.0 million shares of common stock of the
Company valued at $98.5 million, and the issuance of stock options for the
purchase of approximately 4.6 million shares of the Company's common stock
valued at $15.5 million, in exchange for outstanding employee stock options of
Caere. The fair value of the employee stock options was estimated using the
Black-Scholes option pricing model. In addition, pursuant to a concurrent
non-competition agreement and subject to certain other conditions, the Company
agreed to pay in cash the former Caere President and CEO on the second
anniversary of the merger, March 13, 2002, the difference between $13.50 and the
closing price per share of ScanSoft common stock at that time, multiplied by
486,548. The value of this stock price guarantee at the date of acquisition was
approximately $4.1 million and has been included in the total purchase price of
the acquisition (see Note 19). Additionally, in conjunction with the
acquisition,
F-44
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company incurred approximately $1.8 million of acquisition related costs.
The purchase price of Caere, including acquisition costs was allocated as
follows (in thousands):
Property and equipment...................................... $ 2,865
Current and other tangible assets........................... 58,400
Liabilities assumed......................................... (16,985)
Goodwill.................................................... 61,095
Core technology............................................. 17,905
Completed technology........................................ 16,340
Other identified intangible assets.......................... 10,448
Acquired in-process research and development................ 18,291
--------
$168,359
========
The amounts allocated to identifiable tangible and intangible assets,
including acquired in-process research and development, were based on the fair
value of the assets. Goodwill represents the amount by which the cost of
acquired net assets exceeded the fair values of those net assets on the date of
purchase. Acquired in-process research and development represented development
projects that had not yet reached technological feasibility and had no
alternative future use. Accordingly, the amount of $18.3 million was charged to
operations upon consummation of the acquisition.
The values of the core technology, developed technology and acquired
in-process technology were determined by a risk adjusted, discounted cash flow
approach. The value of in-process research and development was determined by
estimating the costs to develop the in-process projects into commercially viable
products, estimating the resulting net cash flows from the sale of such
products, discounting net cash flows back to their present values, and adjusting
those results to reflect the projects' stages of completion at the acquisition
date. These include projects (primarily major version upgrades) in each of
Caere's major products, including OmniPage, OmniForm, and PageKeeper. The
discount rates used were 14% for developed technology, 19% for core technology,
and 24% for in-process technology. The discount rate for in-process technology
takes into consideration the Company's weighted average cost of capital adjusted
for the inherent uncertainties surrounding the successful development of the
in-process research and development, the profitability levels of such technology
and the uncertainty of technological advances, which could potentially impact
the estimates described above.
The percentage of completion of the in-process projects ranged from 50% to
67% at the date of the acquisition. Revenues were initially projected to be
generated in late 2000 for each of the product versions in development at the
acquisition date. As of December 31, 2000, revenues from these projects were
expected to be generated beginning in the second quarter of 2001. All these
projects were completed during 2001.
F-45
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table following identifies the intangible assets acquired in connection
with Caere and their respective lives:
AMOUNT LIFE
(IN THOUSANDS) (IN YEARS)
-------------- ----------
Goodwill.................................................... $ 61,095 6
Core technology............................................. 17,905 5
Completed technology........................................ 16,340 2
Other identified intangible assets.......................... 10,448 2-5
--------
$105,788
========
Other identified intangible assets consist of a non-compete agreement,
acquired work force, a favorable building lease agreement, and patents on the
Caere technology. These assets have expected useful lives of 2, 3, 4 and 5
years, respectively, and are being amortized accordingly.
During the year ended December 31, 2000, the Company, as a result of a June
restructuring (see Note 8), wrote-off $1.1 million of acquired workforce and
$2.4 million of the favorable building lease established as part of the
identifiable intangible assets acquired from Caere. The portion of the assets
impaired related directly to the number of employees terminated and facility
space vacated in connection with these restructuring actions.
This acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Caere and the fair market value of
acquired assets and assumed liabilities have been included in the financial
statements of the Company as of the date of acquisition.
Pro Forma Results (Unaudited)
The following table reflects unaudited pro forma results of operations of
the Company as if that the acquisition of L&H had occurred on January 1, 2001
(in thousands, except per share data):
YEAR ENDED
DECEMBER 31,
2001
------------
Revenues.................................................... $ 93,561
Net loss.................................................... $(53,803)
Net loss per diluted share.................................. $ (0.95)
The unaudited pro forma results of operations are not necessarily
indicative of the actual results that would have occurred had the transactions
actually taken place at the beginning of these periods
19. RELATED PARTIES
At December 31, 2002, Xerox owned approximately 19% of the Company's
outstanding common stock and all of the Company's outstanding Series B Preferred
Stock. In addition, Xerox has the opportunity to acquire additional shares of
common stock pursuant to a warrant (see Note 10). The Company and Xerox have
entered into multiple non-exclusive agreements in which the Company grants Xerox
the royalty-bearing right to copy and distribute certain versions of the
Company's software programs with Xerox's multi-function peripherals. Xerox
accounted for 5%, 11% and 12% of total net revenues during each of the years
ended December 31, 2002, 2001 and 2000, respectively. As of December 31, 2002
and 2001, Xerox owed the Company $1.5 million and $1.8 million, respectively,
pursuant to these agreements, which are included in accounts receivable.
F-46
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Caere acquisition in the first quarter of 2000 and
pursuant to a concurrent non-competition and consulting agreement, the Company
agreed to pay in cash to the former Caere President and CEO, a current member of
the Board of Directors of the Company, on the second anniversary of the merger,
March 13, 2002, the difference between $13.50 and the closing price per share of
ScanSoft common stock at that time, multiplied by 486,548. On March 5, 2002, the
Company negotiated a deferred payment agreement with the former Caere President
and CEO to terminate this agreement. Under the terms of the deferred payment
agreement, the Company paid $1.0 million in cash on March 5, 2002 and agreed to
make future cash payments totaling $3.3 million, with such amounts payable in
equal quarterly installments of approximately $0.4 million over the following
two years. During the year ended December 31, 2002, the Company paid three
quarterly installments under this agreement totaling $1.2 million.
The total consideration of this agreement was accounted for in the original
Caere purchase price and had no effect on the results of operations. The
remaining liability at December 31, 2002 is $2.1 million, of which $1.6 million
is included in other current liabilities and $0.5 million is included in other
long-term liabilities.
20. SUBSEQUENT EVENTS
On March 11, 2003, the Company received $3.8 million of net proceeds from
the exercise of the over allotment option of 1,072,500 shares granted to the
underwriters as part of the underwritten offering completed on February 14,
2003.
On February 14, 2003, the Company completed an underwritten public offering
of 7,184,406 shares of the Company's common stock at $3.80 per share. Of the
total shares sold, 6,184,406 shares were sold on behalf of Lernout & Hauspie
Speech Products N.V., and L&H Holdings USA, Inc. The Company sold 1,000,000
common shares and received gross proceeds of $3.8 million. After considering
offering costs the estimated net proceeds amounted to approximately $2.1
million.
On January 30, 2003, the Company completed the acquisition of the Speech
Processing Telephony and Voice Control business units (together, "PSP") of Royal
Philips Electronics, and related intellectual property on the terms set forth in
the purchase agreement dated October 7, 2002, as amended. As consideration for
these business units and intellectual property, the Company paid 3.1 million
euros ($3.4 million) in cash at closing, subject to adjustment in accordance
with the provisions of the purchase agreement, as amended, and agreed to pay an
additional 1.0 million euros in cash prior to December 31, 2003, issued a 5.0
million euro note due December 31, 2003 and bearing 5.0% interest per annum and
issued a $27.5 million three-year, zero-interest subordinated debenture,
convertible at any time at Philips' option into shares of the Company's common
stock at $6.00 per share. The zero coupon convertible subordinated debenture
contains a restrictive covenant which prohibits the Company from paying or
declaring any dividend or distribution (other than distributions of our equity
securities) on its capital stock while the note is outstanding. This restriction
terminates if one half or more of the note is converted by Philips into common
stock.
The Telephony business unit offers speech-enabled services including
directory assistance, interactive voice response and voice portal applications
for enterprise customers, telephony venders and carriers. The Voice Control
business unit offers a product portfolio including small footprint speech
recognition engines for embedded applications such as voice-controlled climate,
navigation and entertainment features in automotive vehicles, as well as voice
dialing for mobile phones.
The acquisition of PSP enhances the Company's market share in key markets
and provides the Company additional competitive advantages in its target
markets, specifically the telephony, automotive and embedded markets. In
addition, the acquisition enhances the distribution channel adding new
F-47
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reference accounts for both customer relationships and technology partners.
These incremental intangible benefits attributed to excess purchase
consideration resulting in goodwill.
The Company's results of operations for fiscal year 2002 reported on this
Form 10-K do not include the effect of operations for PSP as the acquisition was
completed on January 30, 2003, subsequent to year-end.
Under the terms of the purchase agreement the purchase price is subject to
adjustment based on a comparison of net assets at the closing date to the net
assets of PSP set forth in the agreement, and the amount by which the cash
contributed by Philips to PSP in January 2003 exceeded or was less then 800,000
euros. Philips is required to provide to the Company a balance sheet for PSP as
of January 30, 2003, as well as a statement detailing the amount of cash
contributed to PSP during the month of January 2003. As of the date of this
report filed on Form 10-K, neither the closing balance sheet nor the
contribution schedule for January were available from Philips. Also, severance
costs associated with the restructuring actions are anticipated. As a result, it
is impractical to provide information with respect to the purchase price
allocation as of the date of closing. It is anticipated that the majority of the
purchase price of $39.4 million will be allocated to goodwill and other
intangible assets.
On January 3, 2003, in connection with a promissory note debt covenant
violation, the Company paid $3.3 million in full settlement of all principal and
accrued interest on the promissory note issued in connection with the L&H
acquisition on December 12, 2001.
21. QUARTERLY DATA (UNAUDITED)
The following information has been derived from unaudited consolidated
financial statements that, in the opinion of management, include all recurring
adjustments necessary for a fair presentation of such information.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002
Total revenue............................ $23,765 $26,184 $28,235 $28,435 $106,619
Net income (loss).......................... $(2,882) $ 1,950 $ 2,825 $ 4,440 $ 6,333
Net income (loss) per share:
Basic.................................... $ (0.05) $ 0.03 $ 0.04 $ 0.07 $ 0.09
Diluted.................................. $ (0.05) $ 0.03 $ 0.04 $ 0.06 $ 0.09
Weighted average common shares outstanding:
Basic.................................... 62,304 67,595 67,865 66,709 67,010
Diluted.................................. 62,304 76,677 74,787 73,850 72,796
2001
Total revenue............................ $12,501 $14,864 $16,765 $18,587 $ 62,717
Net income (loss).......................... $(6,900) $(4,395) $(3,214) $(2,368) $(16,877)
Net income (loss) per share:
Basic.................................... $ (0.15) $ (0.09) $ (0.06) $ (0.04) $ (0.34)
Diluted.................................. $ (0.15) $ (0.09) $ (0.06) $ (0.04) $ (0.34)
Weighted average common shares outstanding:
Basic.................................... 46,100 48,939 50,875 52,858 49,693
Diluted.................................. 46,100 48,939 50,875 52,858 49,693
F-48
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Scansoft, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 9, 2003, except as to Note 20 for which the date is March
11, 2003, appearing in this Joint Proxy Statement/ Prospectus of ScanSoft, Inc.
also included an audit of the financial statement schedule listed in Item
21(b)(2) of this Joint Proxy Statement/Prospectus. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2003
F-49
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
ACCOUNTS RECEIVABLE
2002 2001 2000
------ ------- ------
Balance at beginning of year................................ $6,273 $ 7,375 $3,690
Additions charged to costs and expenses..................... 200 186 726
Additions charged to other accounts......................... (73)(a) (1,185)(a) 3,116(a)
Deductions and write-offs................................... (497) (103) (157)
------ ------- ------
Balance at end of year...................................... $5,903 $ 6,273 $7,375
====== ======= ======
---------------
(a) Net increase (decrease) in amounts recorded against revenue as of December
31, 2002, 2001 and 2000, respectively.
F-50
SCANSOFT, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MARCH 31,
2003
---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 20,277
Accounts receivable, less allowances of $9,202............ 19,482
Receivables from related party............................ 1,231
Inventory................................................. 1,367
Prepaid expenses and other current assets................. 4,119
--------
Total current assets................................. 46,476
Goodwill.................................................. 97,117
Other intangible assets, net.............................. 49,569
Property and equipment, net............................... 3,387
Other assets.............................................. 1,207
--------
Total assets......................................... $197,756
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,847
Accrued expenses.......................................... 11,923
Deferred revenue.......................................... 2,782
Note payable.............................................. 5,458
Deferred payment for business acquisition................. 1,052
Deferred payment for technology license................... 9,434
Other current liabilities................................. 1,666
--------
Total current liabilities............................ 41,162
Deferred revenue............................................ 209
Long-term note payable...................................... 27,524
Other liabilities........................................... 3,236
--------
Total liabilities.................................... 72,131
--------
Commitments and contingencies (Notes 5, 13 and 16)
Stockholders' equity:
Preferred stock, $0.001 par value; 40,000,000 shares
authorized; 3,562,238 shares issued and outstanding
(liquidation preference $4,631)........................ 4,631
Common stock, $0.001 par value; 140,000,000 shares
authorized; 67,820,379 shares issued and 65,703,001
shares outstanding..................................... 68
Additional paid-in capital................................ 276,007
Treasury stock, at cost (2,117,378 shares)................ (8,031)
Deferred compensation..................................... (147)
Accumulated other comprehensive loss...................... (53)
Accumulated deficit....................................... (146,850)
--------
Total stockholders' equity........................... 125,625
--------
Total liabilities and stockholders' equity........... $197,756
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Revenue, third parties...................................... $26,516 $22,416
Revenue, related party...................................... 1,320 1,349
------- -------
Total revenue........................................ 27,836 23,765
------- -------
COSTS AND EXPENSES:
Cost of revenue........................................... 4,302 4,129
Cost of revenue from amortization of intangible assets.... 2,057 3,542
Research and development.................................. 7,177 6,986
Selling, general and administrative....................... 13,261 9,711
Amortization of other intangible assets................... 361 957
Restructuring and other charges, net...................... 529 1,041
------- -------
Total costs and expenses............................. 27,687 26,366
------- -------
Income (loss) from operations............................... 149 (2,601)
Other income (expense):
Interest income........................................... 41 54
Interest expense.......................................... (80) (85)
Other income (expense), net............................... 61 (44)
------- -------
Income (loss) before income taxes........................... 171 (2,676)
Provision for income taxes.................................. 95 206
------- -------
Net income (loss)........................................... $ 76 $(2,882)
======= =======
Net income (loss) per share: basic and diluted.............. $ 0.00 $ (0.05)
======= =======
Weighted average common shares outstanding: basic........... 67,689 62,304
======= =======
Weighted average common shares outstanding: diluted......... 77,220 62,304
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 76 $(2,882)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 415 450
Amortization of goodwill and other intangible assets... 2,418 4,499
Accounts receivable allowances......................... 171 1,060
Non-cash portion of restructuring charges.............. -- 113
Deferred compensation.................................. 26 26
Foreign exchange gain.................................. (46) --
Non-cash interest expense.............................. 9 --
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Accounts receivable.................................... (211) (624)
Inventory.............................................. 238 (688)
Prepaid expenses and other current assets.............. 359 (754)
Other assets........................................... (94) 121
Accounts payable....................................... 1,309 1,593
Accrued expenses....................................... (2,019) (175)
Other liabilities...................................... 271 --
Deferred revenue....................................... (63) (2,540)
------- -------
Net cash provided by operating activities.............. 2,859 199
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property and equipment........... (605) (661)
Cash paid for acquisitions, including transaction costs
net of cash received................................... (4,341) (1,162)
------- -------
Net cash used in investing activities.................. (4,946) (1,823)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of note payable................................... (3,273) (55)
Payments of capital lease obligation...................... -- (105)
Payments under deferred payment agreement................. (410) (1,000)
Proceeds from issuance of common stock, net of issuance
costs.................................................. 6,773 --
Proceeds from issuance of common stock under employee
stock compensation plans............................... 531 1,240
------- -------
Net cash provided by financing activities.............. 3,621 80
------- -------
Effects of exchange rate changes on cash and cash
equivalents............................................... (110) 3
------- -------
Net increase (decrease) in cash and cash equivalents........ 1,424 (1,541)
Cash and cash equivalents at beginning of period............ 18,853 14,324
------- -------
Cash and cash equivalents at end of period.................. $20,277 $12,783
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-53
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of ScanSoft,
Inc. ("ScanSoft") have been prepared in accordance with accounting principles
generally accepted in the United States of America. In the opinion of
management, these interim consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position at March 31, 2003 and 2002 and the
results of operations and cash flows for the three months ended March 31, 2003
and 2002. Although ScanSoft believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information normally included in the footnotes prepared in accordance
with generally accepted accounting principles has been condensed or omitted as
permitted by the rules and regulations of the Securities and Exchange
Commission. The accompanying financial statements should be read in conjunction
with the audited financial statements and notes thereto included in this joint
proxy statement/prospectus. The results for the three months ended March 31,
2003 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003, or any future period.
On January 30, 2003, ScanSoft completed the acquisition of the Philips
Speech Processing Telephony and Voice Control business units of Royal Philips
Electronics N.V. ("Philips"), and related intellectual property (the "Philips
acquisition"). The Telephony business unit offers speech-enabled services
including directory assistance, interactive voice response and voice portal
applications for enterprise customers, telephony vendors and carriers. The Voice
Control business unit offers a product portfolio including small footprint
speech recognition engines for embedded applications such as voice-controlled
climate, navigation and entertainment features in automotive vehicles, as well
as voice dialing for mobile phones. The results of operations of the acquired
business have been included in the financial statements of ScanSoft as of
January 30, 2003, the date of acquisition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The most significant estimates and assumptions included in the financial
statements are revenue recognition, including estimating valuation allowances,
specifically sales returns and other allowances, the recoverability of
intangible assets, including goodwill, and valuation allowances for deferred tax
assets. Actual amounts could differ significantly from these estimates.
Certain prior year financial statement amounts have been reclassified to
conform with the current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FOREIGN CURRENCY RISK MANAGEMENT
In certain circumstances, ScanSoft enters into forward exchange contracts
to hedge against foreign currency fluctuations. These contracts are used to
reduce ScanSoft's risk associated with exchange rate movements, as the gains or
losses on these contracts are intended to offset the exchange rate losses or
gains on the underlying exposures. ScanSoft does not engage in foreign currency
speculation. Hedges of underlying exposures are designated and documented at the
inception of the hedge and are evaluated for effectiveness monthly. Forward
exchange contracts hedging firm commitments qualify for hedge accounting when
they are designated as a hedge of the foreign currency exposure and they are
effective in minimizing such exposure. Gains and losses on forward exchange
contracts that qualify for hedge accounting are recognized as other
comprehensive income (loss), along with the associated losses and gains on the
hedged item. As the terms of the forward exchange contract and underlying
exposure are matched generally at
F-54
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
inception, hedging effectiveness is calculated by comparing the change in fair
value of the contract to the change in fair value of the underlying exposure.
Based upon period-end exchange rates, ScanSoft estimates the aggregate contract
value of the forward exchange contracts to be representative of the fair value
of these instruments.
On January 30, 2003, ScanSoft entered into a forward exchange contract to
hedge the foreign currency exposure of its 5 million euro note payable to
Philips. The contract and the note payable each have a term that expires on
December 31, 2003. For the quarter ended March 31, 2003, ScanSoft recorded a net
exchange rate gain of approximately $7,000 in other comprehensive income on the
note payable and associated forward exchange contract.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") issued EITF No.
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF
No. 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
EITF No. 00-21 establishes three principles: revenue should be recognized
separately for separate units of accounting, revenue for a separate unit of
accounting should be recognized only when the arrangement consideration is
reliably measurable and the earnings process is substantially complete, and
consideration should be allocated among the separate units of accounting in an
arrangement based on their fair value. EITF No. 00-21 is effective for all
revenue arrangements entered into in fiscal periods beginning after June 15,
2003, with early adoption permitted. ScanSoft does not expect the adoption of
EITF No. 00-21 to have a material impact on its results of operations or
financial condition.
3. ACCOUNTING FOR STOCK-BASED COMPENSATION
ScanSoft recognizes compensation costs using the intrinsic value-based
method described in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". The following table illustrates the effect on net
income (loss) and basic and diluted net income (loss) per common share as if the
fair value method prescribed in Statement of Financial Accounting Standards No.
123, "Accounting For Stock-Based Compensation", had been applied for ScanSoft's
stock-based compensation and recorded in the consolidated financial statements:
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income (loss) -- as reported............................ $ 76 $(2,882)
Less: Total stock-based employee compensation expense
determined under the fair value-based-method.......... (2,310) (1,594)
------- -------
Net loss -- pro forma....................................... $(2,234) $(4,476)
======= =======
Net income (loss) per share -- as reported: basic and
diluted................................................... $ 0.00 $ (0.05)
Net loss per share -- pro forma: basic and diluted.......... $ (0.03) $ (0.07)
F-55
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORY
Inventory consists of the following (in thousands):
MARCH 31,
2003
---------
Raw materials............................................... $ 26
Finished goods.............................................. 1,341
------
$1,367
======
5. ACQUISITION OF PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
BUSINESS
On January 30, 2003, ScanSoft completed the acquisition of the Philips
Speech Processing Telephony and Voice Control business units of Royal Philips
Electronics N.V. ("Philips"), and related intellectual property. The Telephony
business unit offers speech-enabled services including directory assistance,
interactive voice response and voice portal applications for enterprise
customers, telephony vendors and carriers. The Voice Control business unit
offers a product portfolio including small footprint speech recognition engines
for embedded applications such as voice-controlled climate, navigation and
entertainment features in automotive vehicles, as well as voice dialing for
mobile phones.
The acquisition of the Philips Speech Processing Telephony and Voice
Control business enhances ScanSoft's market share in key markets and gives
ScanSoft additional competitive momentum in its target markets, specifically the
telephony, automotive and embedded markets. In addition, it enhances the
distribution channel adding new reference accounts for both customer
relationships and technology partners. These incremental intangible benefits
attributed to excess purchase consideration resulting in goodwill.
The results of operations of the acquired business have been included in
the financial statements of ScanSoft since the date of acquisition.
Consideration for the acquisition, including transaction costs of $2.1
million, before determination of the purchase price adjustment to be determined
by the parties as described below totaled $39.5 million. The consideration
consisted of 3.1 million euros ($3.4 million) in cash paid at closing, subject
to adjustment in accordance with the provisions of the purchase agreement, as
amended, and a deferred payment of 1.0 million euros in cash due no later than
December 31, 2003, a 5.0 million euro note due December 31, 2003 bearing 5.0%
interest per annum and a $27.5 million three-year, zero-interest subordinated
debenture, convertible at any time at Philips' option into shares of common
stock at $6.00 per share. The fair value of the convertible debenture was
determined to be $27.5 million based on the present value of the expected cash
outflows using an incremental borrowing rate of 12% and the value of the
conversion feature based on the Black-Scholes option pricing calculation using
the following assumptions: the fair value of ScanSoft's common stock of $3.62
per share, the closing price of ScanSoft's common stock on the day the parties
entered into the acquisition agreement, volatility of 100%, risk-free interest
rate of 2.16%, no dividends and an expected term of 3 years. The following
allocation is based on
F-56
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the January 30, 2003 balance sheet of the Philips Speech Processing Telephony
and Voice Control business units:
Total consideration:
Cash...................................................... $ 3,350
Other current liability (1.0 million euro payable)........ 1,080
Note payable.............................................. 5,410
Convertible debenture..................................... 27,520
Transaction costs......................................... 2,100
-------
Total purchase consideration........................... $39,460
=======
Preliminary allocation of the purchase consideration:
Current assets............................................ $ 3,930
Property, plant and equipment............................. 310
Identifiable intangible assets............................ 5,650
Goodwill.................................................. 34,130
-------
Total assets acquired.................................. 44,020
-------
Current liabilities....................................... (4,560)
=======
$39,460
=======
Current assets acquired primarily relate to accounts receivable, and
current liabilities assumed primarily relate to accounts payable and assumed
contractual liabilities related to development work with customers which were
agreed to prior to the acquisition date. ScanSoft also assumed certain
contractual liabilities, which relate to projects for the development of speech
and language databases with the European Union. The fair value of the liability
on these European Union contracts is still being determined based on the
contractual nature of assignability of these contracts. Upon final determination
of the fair value any adjustment to the liability will result in a corresponding
adjustment to goodwill.
The purchase price is subject to adjustment based on a calculation set
forth in the purchase agreement, as amended, which must be agreed upon by the
parties and which may result in an adjustment either to increase or decrease the
total purchase consideration. Upon final determination of the purchase price
adjustment, a corresponding adjustment will be recorded to goodwill. The
following are the identifiable intangible assets acquired and the respective
periods over which the assets will be amortized on a straight-line basis:
AMORTIZATION
AMOUNT PERIOD
-------------- ------------
(IN THOUSANDS)
(IN YEARS)
Patents and core technology................................ $3,990 10
Completed technology....................................... 460 5.5
Customer relationships..................................... 1,030 1.8
Trade names and trademarks................................. 170 5
------ ---
$5,650 9.3
====== ===
The values of the patents and core technology, completed technology,
contractual customer relationships and trade names and trademarks were
determined using the income approach. The income approach requires a projection
of revenues and expenses specifically attributed to the intangible assets. The
F-57
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discounted cash flow ("DCF") method is then applied to the potential income
streams after making necessary adjustments with respect to such factors as the
wasting nature of the identifiable intangible assets and the allowance of a fair
return on the net tangible assets and other intangible assets employed. There
are several variations on the income approach, including the relief-from-royalty
method, the avoided cost method and the lost profits method. The
relief-from-royalty method was used to value the patents, core technology and
trade names and trademarks. The relief-from-royalty method is used to estimate
the cost savings that accrue to the owner of the intangible assets that would
otherwise have to pay royalties or licensee fees on revenues earned through the
use of the asset. The royalty rate used in the analysis is based on an analysis
of empirical, market-derived royalty rates for guideline intangible assets.
Typically, revenue is projected over the expected remaining useful life of
the intangible asset. The market-derived royalty rate is then applied to
estimate the royalty savings. The key assumptions used in valuing the patents
and core technology are as follows: royalty rate 5%, discount rate 16%, tax rate
40% and estimated life of 10 years. The key assumptions used in valuing the
completed product technology are as follows: royalty rate 5%, discount rate 16%,
tax rate 40% and weighted average 5.5 years. The key assumptions used in valuing
the trade names and trademarks are as follows: observed royalty rate 0.25%,
discount rate 15%, tax rate 40% and estimated life of 5 years. The key
assumptions used in valuing the contractual customer relationships are as
follows: tax rate 40% and weighted average life of 1.8 years.
Based on the preliminary purchase price allocation above, ScanSoft
allocated $34.1 million of the purchase consideration to goodwill. All goodwill
and other intangible assets will be deductible for tax purposes.
Under the terms of the purchase agreement, as amended, Philips agreed to
reimburse ScanSoft for the costs, up to 5 million euros, associated with certain
restructuring actions taken through December 31, 2003, primarily headcount and
facilities related charges associated with operations based in Germany. As of
March 31, 2003, ScanSoft entered into severance agreements with a total of 70
employees of Philips resulting in severance costs totaling $1.3 million. Of
these amounts, 34 employees and related severance costs of $1.0 million were
subject to reimbursement by Philips pursuant to the purchase agreement and as
such a related receivable was recorded and remains outstanding at March 31,
2003. The remainder was recorded as part of the purchase price allocation in
accordance with EITF 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination." To the extent that the total reimbursable costs
exceed 5.0 million euros as of or at any time prior to December 31, 2003,
Philips will reimburse ScanSoft for one-third of the excess and ScanSoft will be
responsible for the remaining two-thirds of any excess. To the extent that the
total reimbursable costs are less than 5.0 million euros at December 31, 2003,
Philips will pay to ScanSoft an amount equal to two-thirds of such difference.
Any adjustment will either increase or decrease the total purchase consideration
and a corresponding adjustment will be recorded to goodwill.
The final purchase price, adjusted for the matters described in this Note
5, is expected to be determined no later than December 31, 2003.
F-58
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA RESULTS (UNAUDITED)
The following table reflects unaudited pro forma results of operations of
ScanSoft assuming that the Philips acquisition had occurred on January 1, 2003
and 2002, respectively (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Revenues.................................................... $28,952 $27,187
Net loss.................................................... $ (547) $(5,915)
Net loss per diluted share.................................. $ (0.01) $ (0.09)
The unaudited pro forma results of operations are not necessarily
indicative of the actual results that would have occurred had the transactions
actually taken place at the beginning of these periods.
6. GOODWILL
As noted in Note 5, ScanSoft completed the Philips acquisition on January
30, 2003 adding $34.1 million to goodwill.
7. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following (in thousands):
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
-------- ------------ --------
MARCH 31, 2003
Patents and core technology........................... $54,080 $22,374 $31,706
Completed technology.................................. 29,314 16,354 12,960
Trademarks............................................ 5,671 1,895 3,776
Non-competition agreement............................. 4,048 4,048 --
Acquired favorable lease.............................. 553 553 --
Customer relationships................................ 2,130 1,003 1,127
Other................................................. 200 200 --
------- ------- -------
$95,996 $46,427 $49,569
======= ======= =======
On March 31, 2003, ScanSoft entered into an agreement that grants an
exclusive license to ScanSoft to resell, in certain geographies worldwide,
certain productivity applications. This period of exclusivity of the license
expires after 7 years unless terminated earlier as allowed under the agreement.
Total consideration paid by ScanSoft for the license is $13.0 million and will
be paid as follows: 1) $6.4 million on or before June 30, 2003, 2) $3.3 million
on March 31, 2004 and 3) $3.3 million on March 31, 2005. Based on the net
present value of the deferred payments due in 2004 and 2005, using an interest
rate of 7.0%, ScanSoft recorded $12.3 million as completed technology which will
be amortized to cost of goods sold based on the greater of (a) the ratio of
current gross revenue to total current and future revenues for the product(s) or
(b) the straight-line basis over the period of expected use, seven years. The
difference of $0.7 million, representing the difference between the stated price
and the net present value of the payments, will be charged to interest expense
over the payment period. As of March 31, 2003, payments due on or before March
31, 2004, and the remaining balance due, have been classified as deferred
payment for technology license and other liabilities, long-term respectively.
F-59
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 31, 2003, ScanSoft acquired certain intellectual property assets
related to multimodal speech technology, in exchange for $0.1 million in cash
and the issuance of a warrant valued at $0.1 million (Note 14). The purchase
price was recorded as completed technology and will be amortized over three
years. Aggregate amortization expense was $2.4 million and $4.5 million (of
which $2.1 million and $3.5 million was included in cost of revenue) for the
three-month period ended March 31, 2003 and 2002, respectively. Estimated
amortization expense for the remaining period of fiscal year 2003, the four
succeeding fiscal years and thereafter as of March 31, 2003 is as follows (in
thousands):
SELLING,
COST OF GENERAL AND
YEAR ENDING REVENUE ADMINISTRATIVE TOTAL
----------- ------- -------------- -------
2003................................................. $ 7,577 $1,149 $ 8,726
2004................................................. 9,767 1,044 10,811
2005................................................. 5,366 550 5,916
2006................................................. 4,286 335 4,621
2007................................................. 4,270 293 4,563
Thereafter........................................... 13,400 1,532 14,932
------- ------ -------
Total................................................ $44,666 $4,903 $49,569
======= ====== =======
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
MARCH 31,
2003
---------
Compensation................................................ $ 1,673
Sales and marketing incentives.............................. 2,431
Restructuring............................................... 922
Royalties................................................... 280
Professional fees........................................... 576
Acquisition liabilities..................................... 1,743
Other....................................................... 4,298
-------
$11,923
=======
9. RESTRUCTURING AND OTHER CHARGES
In January 2002, ScanSoft announced, and in March 2002 completed, a
restructuring plan to consolidate facilities, worldwide sales organizations,
research and development teams and other personnel following the December 12,
2001 L&H acquisition. As a result, ScanSoft exited facilities in both North
America and Europe, eliminating 21 employee positions, consisting of 12 in
research and development and 9 in selling, general and administrative functions.
In the first quarter of 2002, ScanSoft recorded a restructuring charge in the
amount of $0.6 million for severance payments to these employees, and a
restructuring charge of $0.4 million for certain termination fees to be incurred
as a result of exiting the facilities, including the write-off of previously
recorded assembled workforce of $0.1 million.
In connection with the Philips acquisition (Note 5), ScanSoft eliminated 25
ScanSoft personnel across all functional areas resulting in approximately $0.5
million in severance related restructuring costs in the three month period ended
March 31, 2003.
F-60
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 2003, the remaining restructuring accrual from the current and
prior restructuring activities amounted to $0.9 million. This balance is
comprised of $0.2 million of lease exit costs resulting from the 2002
restructuring and $0.7 million of employee-related severance costs, of which
$0.4 million are for severance to the former Caere President and CEO. The
severance costs related to the 2003 Philips related restructuring actions will
be paid through June 30, 2003. The lease exit costs and severance due to the
former Caere President and CEO will be paid through January 2004 and March 2005,
respectively.
The following table sets forth the 2003 and 2002 restructuring accrual
activity (in thousands):
LEASE
EMPLOYEE EXIT
RESTRUCTURING AND OTHER CHARGES ACCRUAL RELATED COSTS TOTAL
--------------------------------------- -------- ----- ------
Balance at December 31, 2001............................... $634 $ -- $ 634
Restructuring and other charges -- March 2002.............. 576 465 1,041
Non-cash write-off......................................... -- (113) (113)
Cash payments.............................................. (764) (133) (897)
---- ----- ------
Balance at December 31, 2002............................... $446 $ 219 $ 665
Restructuring charges -- January 2003...................... 529 -- 529
Cash payments.............................................. (222) (50) (272)
---- ----- ------
Balance at March 31, 2003.................................. $753 $ 169 $ 922
==== ===== ======
10. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Basic net income per
share for the three months ended March 31, 2003 includes the assumed conversion
of the Series B Preferred Stock, which participates in dividends with common
stock when and if declared, as well as the weighted average impact of vested
shares of restricted stock. Diluted net income (loss) per share is computed
based on (i) the weighted average number of common shares outstanding, (ii) the
assumed conversion of the Series B Preferred Stock, and (iii) the effect, when
dilutive, of outstanding stock options, the convertible debenture, warrants, and
unvested shares of restricted stock using the treasury stock method.
F-61
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the shares used in the computation of
basic and diluted net income (loss) per share (in thousands):
THREE MONTHS
ENDED
MARCH 31,
---------------
2003 2002
------ ------
Basic net income (loss) per share:
Weighted average number of common shares outstanding...... 64,127 62,304
Assumed conversion of Series B Preferred Stock............ 3,562 --
------ ------
Weighted average common shares: basic....................... 67,689 62,304
Effect of dilutive common equivalent shares:
Stock options.......................................... 5,931 --
Convertible debenture.................................. 3,058 --
Warrants............................................... 458 --
Unvested restricted stock.............................. 84 --
------ ------
Weighted average common shares: diluted..................... 77,220 62,304
====== ======
For the three months ended March 31, 2003, shares used in computing diluted
net income per share exclude 3,834,088 common share equivalents because their
exercise prices were greater than the average market price of ScanSoft common
stock for that period. For the three months ended March 31, 2002, shares used in
computing diluted net loss per share excludes 10,356,614 common share
equivalents. These potential common shares were excluded from the calculation of
diluted net loss per share as their inclusion would have been antidilutive for
all periods presented.
11. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss), net of taxes, was $70,000 and ($2.9)
million for the three months ended March 31, 2003 and 2002, respectively. Total
comprehensive income for the three months ended March 31, 2003, consisted of net
income of $76,000, foreign currency translation adjustments of approximately
($13,000) and approximately $7,000 related to the forward foreign exchange hedge
on the 5 million euro promissory note to Philips (Note 5).
12. DEBT
CREDIT FACILITY
On October 31, 2002, ScanSoft entered into a two year Loan and Security
Agreement (as amended, the "Loan Agreement") with Silicon Valley Bank (the
"Bank") that consisted of a $10 million revolving loan (the "Credit Facility").
Borrowings under the Credit Facility bear interest at the Bank's prime rate plus
0.375% or 0.75%, (5.00% at March 31, 2003) which is determined by ScanSoft's
fixed charge coverage ratio, as defined in the Loan Agreement. The maximum
aggregate amount of borrowings outstanding at any one time is limited to the
lesser of $10.0 million or a borrowing base equal to either 80% or 70% of
eligible accounts receivable, as defined in the Loan Agreement, based on
ScanSoft's fixed charge coverage ratio. As of March 31, 2003, based upon the
calculated borrowing base, available borrowings totaled $10.0 million.
Borrowings under the Loan Agreement cannot exceed the borrowing base and must be
repaid in the event they exceed the calculated borrowing base or upon expiration
of the two-year loan term. Pursuant to the Loan Agreement, ScanSoft is required
to maintain certain financial and non-financial covenants, the most restrictive
of which is a quarterly minimum fixed charge coverage ratio of 1.25 to 1.00.
Borrowings under the Loan Agreement are collateralized by substantially all of
ScanSoft's
F-62
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
personal property, predominantly its accounts receivable, but not its
intellectual property. As of March 31, 2003, there was no outstanding balance
under this Credit Facility and ScanSoft was in compliance with all debt
covenants.
The Loan Agreement also contains a restrictive covenant regarding the
payment or declaring of any dividends on ScanSoft's capital stock during the
term of the agreement (except for dividends payable solely in capital stock)
without the Bank's prior written consent.
NOTES PAYABLE
In connection with the L&H acquisition, ScanSoft issued a $3.5 million
promissory note (the "Note") to Lernout & Hauspie Speech Products, N.V. The Note
had a stated maturity date of December 15, 2004 and bore interest at 9% per
annum. Payments of principal and interest in the amount of $133,000 were due
quarterly commencing on March 15, 2002, for a total of eleven payments. During
the year ended December 31, 2002, four quarterly payments were made in
accordance with the terms and conditions of the promissory note. In connection
with an agreement, entered into by ScanSoft in September 2002 to repurchase
1,461,378 shares of common stock from L&H Holdings USA, Inc. and Lernout &
Hauspie Speech Products N.V. (collectively, L&H) and to register in an
underwritten offering the remaining shares held by L&H, the terms of the Note
were amended to provide for the acceleration of the maturity date of the
outstanding principal and interest to January 1, 2003 if consummation of the
underwritten public offering did not occur by January 1, 2003. ScanSoft did not
complete the offering by January 1, 2003 and, accordingly, the debt became
immediately due and payable. To fulfill this obligation, on January 3, 2003,
ScanSoft paid $3.3 million in full settlement of all of the outstanding
principal and accrued interest under the Note. In connection with the Philips
acquisition on January 30, 2003, ScanSoft issued a 5 million euro promissory
note (the "Philips Note") to Philips. The unsecured Philips Note matures on
December 31, 2003 and bears interest at 5% per annum. Payments of principal and
accrued interest are due at maturity. The Philips Note may be pre-paid by
ScanSoft at any time without penalty. In connection with the issuance of the
Philips Note, ScanSoft entered into a forward foreign exchange contract on
January 31, 2003 to hedge the foreign exchange exposure on the Philips Note. The
amount of the forward foreign exchange contract is equivalent to the principal
amount of the Philips Note, and the duration of the forward contract coincides
with the maturity date of the Philips Note. The foreign exchange hedge on the
Philips Note resulted in a foreign exchange gain of approximately $0.1 million,
which will be recorded in income over the term of the forward contract.
CONVERTIBLE DEBENTURE
On January 30, 2003, ScanSoft issued a $27.5 million three-year,
zero-interest convertible subordinated debenture due January 2006 (the
"Convertible Note") to Philips in connection with the Philips acquisition (Note
5). The Convertible Note is convertible into shares of ScanSoft's common stock
at $6.00 per share at any time until maturity at Philips' option. The conversion
rate may be subject to adjustments from time to time as provided in the
Convertible Note. The Convertible Debenture contains a provision in which all
amounts unpaid at maturity will bear interest at a rate of 3% per quarter until
paid.
The Convertible Note contains restrictive covenants that place restrictions
on the declaration or payment of dividends or distributions (other than
distributions of equity securities of ScanSoft) on, or the redemption or
purchase of, any shares of ScanSoft's capital stock while the Convertible Note
is outstanding. This restriction terminates when one-half or more of the
principal amount of the Convertible Note is converted by Philips into common
stock. The Convertible Note contains a restrictive provision which provides
Philips the right to require ScanSoft to redeem the Convertible Note or any
remaining portion of the principal amount, on the date a "Change in Control"
occurs. The Convertible Note provides that a "Change in Control" is deemed to
have occurred when any person or entity acquires beneficial
F-63
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ownership of shares of capital stock of ScanSoft entitling such person or entity
to exercise 40% or more of the total voting power of all shares of capital stock
of ScanSoft, or ScanSoft sells all or substantially all of its assets, subject
to certain exceptions. The proposed acquisition of SpeechWorks International
Inc. (Note 16) will not result in such a "Change in Control".
13. COMMITMENTS AND CONTINGENCIES
LITIGATION AND OTHER CLAIMS
Like many companies in the software industry, ScanSoft has from time to
time been notified of claims that it may be infringing certain intellectual
property rights of others. Where appropriate these claims have been referred to
counsel, and they are in various stages of evaluation and negotiation or have
been resolved. If it appears necessary or desirable, ScanSoft may seek licenses
for these intellectual property rights. There is no assurance that licenses will
be offered by all claimants, that the terms of any offered licenses will be
acceptable to ScanSoft or that in all cases the dispute will be resolved without
litigation, which may be time consuming and expensive, and may result in
injunctive relief or the payment of damages by ScanSoft.
From time to time, we receive information concerning possible infringement
by third parties of our intellectual property rights, whether developed,
purchased or licensed by us. In response to any such circumstance, we have our
counsel investigate the matter thoroughly and we take all appropriate action to
defend our rights in these matters. On November 27, 2002, AllVoice Computing plc
filed an action against ScanSoft in the United States District Court for the
Southern District of Texas claiming patent infringement. In the lawsuit,
AllVoice alleges that ScanSoft is infringing United States Patent No. 5,799,273
entitled "Automated Proofreading Using Interface Linking Recognized Words to
Their Audio Data While Text Is Being Changed" (the "'273 Patent"). The '273
Patent generally discloses techniques for manipulating audio data associated
with text generated by a speech recognition engine. Although ScanSoft has
several products in the speech recognition technology field, ScanSoft believes
that its products do not infringe the '273 Patent because they do not use the
claimed techniques. Damages are sought in an unspecified amount. ScanSoft filed
an answer on December 23, 2002. ScanSoft believes this claim has no merit, and
intends to defend the action vigorously.
On December 28, 2001, the Massachusetts Institute of Technology and
Electronics For Imaging, Inc. sued ScanSoft in the United States District Court
for the Eastern District of Texas for patent infringement. The patent
infringement claim was filed against more than 200 defendants. In their lawsuit,
MIT and EFI allege that ScanSoft is infringing United States Patent No.
4,500,919 entitled "Color Reproduction System" (the "'919 Patent"). MIT and EFI
allege that the '919 Patent discloses a system for adjusting the colors of a
scanned image on a television screen and outputting the modified image to a
device. ScanSoft has several products that permit a user to adjust the color of
an image on a computer monitor. ScanSoft has asserted that its products do not
infringe the '919 Patent because its products do not contain all elements of the
structure required by the claimed invention and because its products do not
perform all of the steps required by the claimed method. Further, ScanSoft
believes there may be prior art that would render the '919 Patent invalid. The
'919 Patent expired on May 6, 2002. Damages are sought in an unspecified amount.
ScanSoft filed an Answer and Counterclaim on June 28, 2002. ScanSoft believes
this claim has no merit, and intends to defend the action vigorously.
On August 16, 2001, Horst Froessl sued ScanSoft in the United States
District Court for the Northern District of California for patent infringement.
In his lawsuit, Froessl alleges that ScanSoft is infringing United States Patent
No. 4,553,261 entitled "Document and Data Handling and Retrieval System" (the
"'261 Patent"). Froessl alleges that the '261 Patent discloses a system for
receiving and optically scanning documents, converting selected segments of the
digitalized scan data into machine code, and storing and retrieving the
documents and the digitalized and converted segments. Although ScanSoft
F-64
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has several products in the scanning technology field, ScanSoft has asserted
that its products do not infringe the '261 Patent because its products do not
contain all elements of the structure required by the claimed invention and
because its products do not perform all of the steps required by the claimed
method. Further, ScanSoft believes there may be prior art that would render the
'261 Patent invalid. The '261 Patent will expire on May 31, 2003. Damages are
sought in an unspecified amount. ScanSoft filed an Answer and Counterclaim on
September 19, 2001. ScanSoft believes this claim has no merit, and intends to
defend the action vigorously.
ScanSoft believes that the final outcome of these matters will not have a
significant adverse effect on its financial position and results of operations,
and ScanSoft believes it will not be required to expend a significant amount of
resources defending such claims. However, should ScanSoft not prevail in any
such litigation, its operating results and financial position could be adversely
impacted.
GUARANTEES
ScanSoft has entered into agreements to indemnify its directors and
officers to the fullest extent authorized or permitted under applicable law.
These agreements, among other things, provide for the indemnification of its
directors and officers for expenses, judgments, fines, penalties and settlement
amounts incurred by any such person in his or her capacity as a director or
officer of ScanSoft, whether or not such person is acting or serving in any such
capacity at the time any liability or expense is incurred for which
indemnification can be provided under the agreements. ScanSoft has a Director
and Officer insurance policy in effect that reduces its exposure under these
agreements and enables it to recover a portion of any future amounts paid. While
the maximum potential amount of any future payments under these agreements is
uncertain, as a result of its insurance coverage ScanSoft believes the estimated
fair value of these agreements is minimal.
ScanSoft currently includes indemnification provisions in the contracts it
enters with its customers and business partners. Generally, these provisions
require ScanSoft to defend claims arising out of its products' infringement of
third-party intellectual property rights, breach of contractual obligations
and/or unlawful or otherwise culpable conduct on its part. The indemnity
obligations imposed by these provisions generally cover damages, costs and
attorneys' fees arising out of such claims. In most, but not all, cases
ScanSoft's total liability under such provisions is limited to either the value
of the contract or a specified, agreed upon, amount. In some cases its total
liability under such provisions is unlimited. In many, but not all, cases the
term of the indemnity provision is perpetual. Although these provisions are
included in most of its contracts with customers and business partners, as noted
above, ScanSoft is currently defending only four parties pursuant to such
provisions. Each of these four parties is a defendant in a case filed by the
Massachusetts Institute of Technology and Electronics for Imaging, Inc. in the
United States District Court for the Eastern District of Texas in December 2001.
The case, which alleges patent infringement by certain ScanSoft products, is
more fully described above. Although ScanSoft believes this claim has no merit,
ScanSoft cannot predict the outcome of this case or the total additional
indemnity costs it may produce, though it may be required to indemnify one or
more defendants in addition to those it is already indemnifying, and additional
indemnification obligations may arise in other litigations. While the maximum
potential amount of future payments ScanSoft could be required to make under all
the indemnification provisions in its contracts with customers and business
partners is unlimited, it believes that the estimated fair value of these
provisions is minimal due to the low frequency with which these provisions have
been triggered.
F-65
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EQUITY TRANSACTIONS
COMMON STOCK WARRANTS
In connection with the March 31, 2003 acquisition of the certain
intellectual property assets related to multimodal speech technology (Note 7),
ScanSoft issued a warrant expiring October 31, 2005, for the purchase of 78,000
shares of common stock of ScanSoft at an exercise price of $8.10 per share. The
warrant was immediately exercisable and was valued at $0.1 million based upon
the Black-Scholes option pricing model with the following assumptions: expected
volatility of 80%, a risk-free rate of 1.87%, an expected term of 2.5 years, no
dividends and a stock price of $4.57 based on ScanSoft's stock price at the time
of issuance. The purchase price was recorded as completed technology and will be
amortized over three years.
UNDERWRITTEN PUBLIC OFFERING
During the three months ended March 31, 2003, ScanSoft completed an
underwritten public offering of 8,256,906 shares of ScanSoft common stock at
$3.80 per share. Of the total shares sold, 6,184,406 shares were sold on behalf
of Lernout & Hauspie Speech Products N.V. and L&H Holdings USA, Inc. ScanSoft
sold 2,072,500 common shares and received gross proceeds of $7.9 million. After
considering offering costs, the net proceeds amounted to approximately $5.5
million.
15. SEGMENT AND GEOGRAPHIC INFORMATION
ScanSoft operates in a single segment. The following table presents total
revenue information by geographic area and principal product line (in
thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
North America............................................... $20,608 $18,625
Other foreign countries..................................... 7,228 5,140
------- -------
Total..................................................... $27,836 $23,765
======= =======
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Digital Capture............................................. $12,587 $16,370
Speech...................................................... 15,249 7,395
------- -------
Total..................................................... $27,836 $23,765
======= =======
Revenue classification above is based on the country in which the sale
originates or is invoiced. Revenue in other countries predominately relates to
sales to customers in Asia and Europe. Intercompany sales are insignificant as
products sold outside of the United States or Europe are sourced within Europe
or the United States.
A number of ScanSoft's North American OEM customers distribute products
throughout the world but because these customers do not provide the geographic
dispersion of their product sales, ScanSoft recorded the revenue in the North
America category. However, based on an estimate that factors our OEM partners'
geographical revenue mix to our revenue generated from these OEM partners,
international revenue would have represented approximately 33% and 30% of our
consolidated revenue for the quarters ended March 31, 2003 and March 31, 2002,
respectively.
F-66
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUBSEQUENT EVENT
On April 23, 2003, ScanSoft announced it had signed a definitive merger
agreement to acquire SpeechWorks International, Inc. ("SpeechWorks"), a Boston,
Massachusetts-based company that provides speech recognition, text-to-speech and
speaker verification for network and embedded environments, including multimodal
devices with both an audio interface and visual display. Under the terms of the
agreement, ScanSoft will acquire SpeechWorks in a tax-free, stock-for-stock
merger with an equity value at the time of announcement of approximately $132.0
million, net of SpeechWorks' cash balance of $49.0 million as of December 31,
2002. Upon completion of the merger, holders of SpeechWorks common stock will be
entitled to receive 0.860 shares of ScanSoft common stock for each share of
SpeechWorks common stock exchanged in the merger. The acquisition is expected to
be completed in the third quarter of 2003. The agreement may be terminated by
either ScanSoft or SpeechWorks upon certain events occurring or not occurring,
as defined in the agreement. In certain cases, if the agreement is terminated,
ScanSoft may be required to pay SpeechWorks up to $6.5 million.
F-67
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-69
Combined Balance Sheets..................................... F-70
Combined Statements of Operations and Comprehensive Loss.... F-71
Changes in the Net Investment of the Philips Group.......... F-72
Combined Statements of Cash Flows........................... F-73
Notes to the Combined Financial Statements.................. F-74
F-68
INDEPENDENT AUDITORS' REPORT
The Supervisory Board of Royal Philips Electronics N.V.
We have audited the accompanying combined balance sheets of Philips Speech
Processing Telephony and Voice Control (A division of Royal Philips Electronics
N.V.) as of December 31, 2002, and the related combined statements of operations
and comprehensive loss, changes in the net investment of the Philips Group, and
cash flows for each of the years in the two-year period ended December 31, 2002.
These combined financial statements are the responsibility of Philips Speech
Processing Telephony and Voice Control's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Philips Speech
Processing Telephony and Voice Control (A division of Royal Philips Electronics
N.V.) as of December 31, 2002, and the results of its operations and its cash
flows for the two-year period ended December 31, 2002, in conformity with
generally accepted accounting principles in the United States of America.
/s/ KPMG ACCOUNTANTS N.V.
Eindhoven, The Netherlands
June 10, 2003
F-69
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
COMBINED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
ASSETS
CURRENTS ASSETS:
Cash...................................................... 23 7
Accounts receivable, net (Notes 3 and 16)................. 3,036 3,359
Receivables from related parties (Note 13)................ 512 347
Inventory, net (Note 4)................................... 662 291
Deferred income taxes (Notes 9 and 13).................... 25 0
Other current assets (Note 5)............................. 240 216
------ -----
TOTAL CURRENT ASSETS........................................ 4,498 4,220
------ -----
Property, plant and equipment, net (Notes 6 and 15)......... 521 336
Intangible assets, net (Note 7)............................. 184 117
------ -----
TOTAL ASSETS................................................ 5,203 4,673
====== =====
LIABILITIES AND NET INVESTMENT OF THE PHILIPS GROUP
CURRENT LIABILITIES:
Accounts payable.......................................... 850 483
Deferred income........................................... 1,481 572
Payables to related parties (Note 13)..................... 1,541 672
Deferred income tax liability (Notes 9 and 13)............ 17 16
Other accrued liabilities (Note 8)........................ 2,153 2,896
------ -----
TOTAL CURRENT LIABILITIES................................... 6,042 4,639
------ -----
Long-term provisions (Note 10).............................. 269 245
TOTAL LIABILITIES........................................... 6,311 4,884
------ -----
Commitments and contingencies (Note 14)
NET INVESTMENT OF THE PHILIPS GROUP......................... (1,108) (211)
------ -----
TOTAL LIABILITIES AND NET INVESTMENT OF THE PHILIPS GROUP... 5,203 4,673
====== =====
The accompanying notes are an integral part of these combined financial
statements.
F-70
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Revenue:
Revenue, third parties.................................... 15,801 16,127
Revenue, related parties.................................. 2,890 582
TOTAL REVENUE (NOTES 13 AND 15)............................. 18,691 16,709
Cost of sales............................................... 3,288 2,519
GROSS PROFIT................................................ 15,403 14,190
------- -------
Operating expenses:
Selling and marketing..................................... 15,066 12,415
Research and development (Note 13)........................ 13,512 10,421
General and administrative (Note 13)...................... 3,877 3,739
Total operating expenses.................................... 32,455 26,575
OPERATING LOSS.............................................. (17,052) (12,385)
------- -------
Interest revenue, net (Note 13)............................. 2 3
LOSS BEFORE INCOME TAXES.................................... (17,050) (12,382)
------- -------
Income tax benefit (Note 9)................................. 1,364 333
NET LOSS.................................................... (15,686) (12,049)
======= =======
Components of other comprehensive income:
Foreign currency translation adjustments.................. 58 (41)
COMPREHENSIVE LOSS.......................................... (15,628) (12,090)
======= =======
The accompanying notes are an integral part of these combined financial
statements.
F-71
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
CHANGES IN THE NET INVESTMENT OF THE PHILIPS GROUP
NET INVESTMENT OF THE
PHILIPS GROUP
---------------------
(IN THOUSANDS
OF EURO'S)
BALANCE DECEMBER 31, 2000................................... 972
Net cash transfer from Philips.............................. 13,548
Components of comprehensive income:
Net loss.................................................. (15,686)
Foreign currency translation adjustments.................. 58
BALANCE DECEMBER 31, 2001................................... (1,108)
Net cash transfer from Philips.............................. 12,987
Components of comprehensive income:
Net loss.................................................. (12,049)
Foreign currency translation adjustments.................. (41)
BALANCE DECEMBER 31, 2002................................... (211)
The accompanying notes are an integral part of these combined financial
statements
F-72
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Cash flows from operating activities:
Net loss.................................................... (15,686) (12,049)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Deferred taxation......................................... (1,260) 24
Depreciation and amortization............................. 607 438
Change in assets and liabilities:
Accounts receivable, net............................... 1,033 (323)
Related parties, net................................... 2 (704)
Inventory, net......................................... 851 371
Other current assets................................... 207 24
Accounts payable....................................... (69) (367)
Deferred income and other accrued liabilities.......... (30) (166)
Long-term provisions................................... 85 (24)
Effect of exchange rate changes............................. (38) 105
NET CASH USED IN OPERATING ACTIVITIES....................... (14,298) (12,671)
Cash flows from investing activities:
Purchases of property, plant and equipment................ (201) (189)
Effect of exchange rate changes............................. -- 3
NET CASH USED IN INVESTING ACTIVITIES....................... (201) (186)
Cash flows from financing activities:
Net cash transferred from Philips......................... 13,606 12,946
Effect of exchange rate changes............................. 4 (107)
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 13,610 12,839
Effect of exchange rate changes............................. 34 2
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (855) (16)
Cash and cash equivalents, beginning of period.............. 878 23
Cash and cash equivalents, end of period.................... 23 7
Supplementary information:
Cash received from Philips for income taxes............... 9,897 105
Cash received from (paid to) Philips for interest......... (576) 2
The accompanying notes are an integral part of these combined financial
statements
F-73
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
DESCRIPTION OF THE COMPANY
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL (PSP), a division of
Royal Philips Electronics N.V. (Philips and Philips Group) is active in the
field of speech processing technology. Starting from the traditional
tape-recorded dictation Philips in the past two decades has become a global
leader in the field of speech processing, offering a wide portfolio of
state-of-the-art products and technologies. Philips Speech Processing Telephony
is offering speech-enabled services including directory assistance, interactive
voice response and voice portal applications for enterprise customers, telephony
vendors and carriers. Philips Speech Processing Voice Control is operating on
the market for speech-enabled automotive and mobile products. It offers a
product portfolio including small footprint speech recognition engines for
embedded applications like voice controlled climate, navigation and
entertainment features within cars as well as voice dialing within mobile
phones. With presence in Aachen, Germany, Dallas, USA, and Taipei, Taiwan PSP is
able to cover the global market with products supporting more than 40 languages
and that can process a vocabulary of more than one million words.
Royal Philips Electronics N.V., the Netherlands, and ScanSoft, Inc., of
Peabody, MA, USA entered into a purchase agreement in which ScanSoft acquires
the business, employees and intellectual property of Philips Speech Processing
Telephony and Philips Speech Processing Voice Control. The transaction was
consummated on January 30, 2003. See note 17 for additional disclosure of the
transaction.
BASIS OF PRESENTATION
The combined financial statements reflect the financial position, results
of operations, changes in net investment of the Philips Group, and cash flows of
the PSP business unit of Philips as if PSP had been a separate entity for all
periods presented. The combined financial statements have been prepared using
Philips' historical basis for PSP's assets and liabilities and results of
operations, which have been stated in conformity with accounting principles
generally accepted in the United States of America (U.S. GAAP). All significant
intercompany transactions and balances have been eliminated in preparation of
the combined financial statements.
Corporate overheads have been allocated to PSP from Philips at central,
regional and local levels for amounts, including directors remuneration,
marketing, management information systems, accounting and financial reporting,
treasury, human resources, legal, tax and security, based on the net sales of
PSP compared to the consolidated net sales of Philips. Management believes these
allocations are reasonable. However, the costs of these services charged to PSP
are not necessarily indicative of the costs that would have been incurred had
PSP operated as an entity independent of Philips, or as an autonomous public
company, for all periods presented.
PSP purchases components used in the production process, as well as
equipment and supplies under collective purchase agreements and purchase
conditions negotiated by Philips. Management believes that the benefits derived
from such agreements and conditions would unlikely have been obtained had PSP
been a stand-alone company.
The pension and other postretirement benefit costs attributable to PSP have
been based on the charge incurred by individual operations in respect of
specific plans of which employees of PSP are members. For the purposes of
presentation of the combined financial statements, the participation in the
Philips plans has been treated as participation in various multi-employer plans.
The charges included in the combined financial statements reflect the
arrangements of Philips and are therefore not necessarily indicative of the
pension and other postretirement benefit costs had PSP been a stand-alone
company. During the year
F-74
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 2001, PSP has benefited from contribution holidays with
respect to certain over-funded Philips pension plans. During 2002 no
contribution holidays existed anymore. Upon divestment, PSP will not benefit
from any contribution holidays, as the employees will no longer participate in
Philips' plans.
Because in the past PSP was not a separate legal group of companies or a
separate holding company within the Philips Group of companies, the proportion
of share capital and reserves attributable to PSP has been shown in the combined
balance sheets as part of the "Net investment of the Philips Group". For the
purpose of these combined financial statements, interest charge is calculated
based on the average rate of interest for long-term debt paid by Philips and the
average amount of net investment of the Philips Group invested in PSP during the
reporting periods, taking into account the debt-to-equity ratio reported by
Philips during the reporting periods. In addition, PSP has a number of
short-term balances with other Philips Group businesses. These balances arise
from trading transactions and services or other items and have been aggregated
on the combined balance sheets under the headings "Receivables from related
parties" and "Payables to related parties".
Historically, PSP's operations have been included in the combined income
tax returns filed by Philips in each of the countries where PSP is located
(country fiscal unity). Income tax expense in these combined financial
statements has been calculated on an as if separate tax return basis. The
current tax expense is assumed to be settled within the financial period
following the period in which it arises. Tax effects that may arise from PSP's
divestment from the Philips Group have not been reflected in PSP's combined
financial statements.
Other significant features of the PSP divestment from Philips are described
in Note 17.
The financial information included herein is not necessarily indicative of
the combined results of operations, financial position, changes in the net
investment of the Philips Group and cash flows of PSP in the future or what they
would have been for the periods presented had PSP been a separate stand-alone
entity.
REPORTING CURRENCY
The Euro is used as reporting currency. The financial statements of foreign
operations are translated into euros. Assets and liabilities are translated
using the exchange rates on the respective balance sheet dates. Income and
expense items are translated at average rates during the period.
2. SUMMARY OF ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Historically, Philips manages cash and cash equivalents on a centralized
basis. Cash receipts associated with PSP's business are transferred to Philips
on a daily basis and Philips funds PSP's disbursements. These cash transactions
are reflected in the caption "Net investment of the Philips Group". In certain
countries, however, PSP has dedicated bank accounts, operating under periodic
cash pooling with Philips. Furthermore, PSP entities have small amounts of petty
cash.
F-75
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS RECEIVABLE
Accounts receivables are stated at face value, net of allowances for
doubtful accounts.
INVENTORY
Finished goods inventories are valued at the lower of cost, as determined
by the first-in, first-out (FIFO) method, or net realizable value. Provision is
made for obsolescence. Work in process comprises deferred costs on uncompleted
contracts.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
expected economic life of the asset. Costs related to maintenance activities are
expensed in the period in which they are incurred. Following are the expected
useful lives of the assets:
Machines and installations.................................. from 5 to 10 years
Other fixed assets.......................................... from 3 to 5 years
INTANGIBLE ASSETS
Intangible assets consists of acquired intellectual property rights
consisting of computer software for resale, which is being amortized on the
straight-line method over 5 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Through December 31, 2001, PSP evaluated the recoverability of its
long-lived assets in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of". Whenever adverse events or changes in
business climate result in the expected undiscounted future cash flows from the
related asset being less than the carrying value of the asset, an impairment
loss would be recognized for the excess of the carrying value of the assets over
the expected discounted future cash flows.
On January 1, 2002, PSP adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 amends existing
guidance on asset impairment and provides a single accounting model for
long-lived assets to be disposed of SFAS No. 144 also changes the criteria for
classifying an asset as held-for-sale; and broadens the scope of businesses to
be disposed of that qualify for reporting as discontinued operations, and
changes the timing of recognizing losses on such operations. The adoption of
SFAS No. 144 on January 1, 2002 did not have an impact on the Company's combined
financial statements.
INCOME TAXES
Historically, PSP's operations have been included in the combined income
tax returns filed by Philips in each of the countries where PSP is located
(country fiscal unity). Income tax expense in these combined financial
statements has been calculated on an as if separate tax return basis.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
F-76
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets, including assets arising from
loss carry forwards, are recognized if it is more likely than not that the asset
will be realized.
REVENUE RECOGNITION
PSP recognizes revenue in accordance with Statement of Position 97-2,
Software Revenue Recognition, as amended by Statement of Position 98-9, and the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101 Revenue
Recognition in Financial Statements. Revenue from the sale of hardware and
software to end users is recognized upon delivery, provided that no significant
obligations remain, evidence of the arrangement exists, the fees are fixed or
determinable, and collectibility of the related receivable is reasonably
assured.
Revenue from royalties on sales of PSP's products by original equipment
manufacturers to third parties is recognized upon delivery to the third party
when such information is available, or when notified by the reseller that such
royalties are due as a result of a sale, provided that collectibility of the
related receivable is reasonably assured. Revenue from maintenance contracts is
recognized ratably over the contract term.
Revenue from development of custom software is recognized on a completed
contract basis. The Company has applied the completed contract method for
recognizing revenues on contracts involving software and services which
represent significant customization or modification of the software because they
do not have the ability to make reasonably dependable estimates of the extent of
progress to completion. Accordingly, all project costs and progress payments are
deferred until the project is complete. Any anticipated losses are recognized
immediately.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Under SFAS No. 86 "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed ", costs incurred in the research and
development of software products are expensed as incurred until technological
feasibility has been established. Once established, these costs would be
capitalized. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable judgment
by management with respect to certain external factors, including, but not
limited to, anticipated future gross product revenues, estimated economic life
and changes in software and hardware technologies. In the year ended December
31, 2001 and the nine-month period ended September 29, 2002, costs eligible for
capitalization were not material.
PENSION AND OTHER POSTRETIREMENT BENEFITS
PSP accounts for the cost of pension plans and postretirement benefits
other than pensions in accordance with SFAS No. 87, "Employers Accounting for
Pensions" and SFAS No. 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions", respectively. These plans are generally part of pension
and postretirement benefit plans within Philips, and are accounted for by PSP as
multi-employer plans.
STOCK-BASED COMPENSATION
PSP applies SFAS No. 123, "Accounting for Stock-Based Compensation", which
allows companies which have stock-based compensation arrangements with employees
to continue to apply the existing accounting required by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock
F-77
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Issued to Employees", and to provide pro forma disclosure of the accounting
results of applying the fair value method of SFAS No. 123. PSP accounts for
stock-based compensation arrangements (related to Philips stock options granted
to PSP employees) under the intrinsic value method of APB Opinion No. 25. The
following table illustrates the effect on net income if the fair value based
method had been applied to all outstanding and unvested awards in each period.
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Net loss, as reported....................................... (15,686) (12,049)
Deduct: Total share-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects................................ (116) (148)
Pro forma net loss.......................................... (15,802) (12,197)
======= =======
USE OF ESTIMATES
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect reported amounts in the
financial statements and the accompanying notes. While management bases its
assumptions and estimates on the facts and circumstances known at the balance
sheet date, actual results could materially differ from those estimates.
ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No.
143 requires PSP to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or normal use of the assets. PSP would also record
a corresponding asset, which is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
PSP is required to adopt SFAS No. 143 on January 1, 2003. PSP believes that the
adoption of SFAS No. 143 will not have a material impact on its financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145). SFAS No. 145 provides for the rescission of several previously
issued accounting standards, new accounting guidance for the accounting for
certain lease modifications and various technical corrections to existing
pronouncements that are not substantive in nature. SFAS No. 145 will be adopted
on January 1, 2003, except for the provisions relating to the amendment of SFAS
No. 13, "Accounting for Leases", which was adopted as required for transactions
occurring subsequent to May 15, 2002. PSP believes that the adoption of SFAS No.
145 will not have a material impact on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" (SFAS No. 146). SFAS No. 146 addresses significant issues
regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, " Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The scope of
SFAS No. 146 also includes (1) costs related to terminating a contract that is
not a capital lease, and
F-78
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(2) termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. PSP believes that the adoption of SFAS No. 146 will not have a
material impact on its financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock Based
Compensation -- Transition and Disclosure -- an amendment of FASB statement No.
123" ("SFAS 148"). SFAS 148 permits two additional transition methods for
entities that adopt the fair value based method of accounting for stock-based
employee compensation. The Statement also requires new disclosures about the
ramp-up effect of stock-based employee compensation on reported results. The
Statement also requires that those effects be disclosed more prominently by
specifying the form, content, and location of those disclosures. The transition
guidance and annual disclosure provisions of SFAS 148 are effective for fiscal
years ending after December 15, 2002, with earlier application permitted in
certain circumstances. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. PSP has adopted the disclosure requirements as from
2002.
PSP has decided to adopt the fair value recognition of SFAS 123 accounting
"Stock Based Compensation" as from January 1, 2003 prospectively to all employee
awards granted, modified or settled after January 1, 2003.
In November 2002, the Emerging Task-Force issued its consensus on EITF
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") on an
approach to determine whether an entity should divide an arrangement with
multiple deliverables into separate units of accounting. According to the EITF
in an arrangement with multiple deliverables, the delivered item(s) should be
considered a separate unit of accounting if all of the following criteria are
met: (1) The delivered item(s) has value to the customer on a standalone basis,
(2) There is objective and reliable evidence of the fair value of the
undelivered item(s), (3) If the arrangement includes a general right of return,
delivery or performance of the undelivered item(s) is considered probable and
substantially in the control of the vendor. If all the conditions above are met
and there is objective and reliable evidence of fair value for all units of
accounting in an arrangement, the arrangement consideration should be allocated
to the separate units of accounting based on their relative fair values.
However, there may be cases in which there is objective and reliable evidence of
the fair value(s) of the undelivered item(s) in an arrangement, but no such
evidence for one or more of the delivered items. In those cases, the residual
method should be used to allocate the arrangement consideration. The guidance in
this Issue is effective for revenue arrangements entered into in fiscal
beginning after June 15, 2003. Alternatively, entities may elect to report the
change in accounting as a cumulative-effect adjustment in accordance with
Opinion 20. If so elected, disclosure should be made in periods subsequent to
the date of initial application of this consensus of the amount of recognized
revenue that was previously included in the cumulative effect adjustment. PSP
believes that the adoption of EITF 00-21 will not have a significant impact on
the combined financial statements.
F-79
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Trade accounts receivable................................... 4,503 5,055
Allowance for doubtful accounts............................. (1,467) (1,696)
------ ------
Total accounts receivable, net.............................. 3,036 3,359
====== ======
4. INVENTORY
Inventory consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Work in process............................................. 606 69
Finished goods.............................................. 225 257
Allowance for obsolescence.................................. (169) (35)
---- ---
Total inventory, net........................................ 662 291
==== ===
5. OTHER CURRENT ASSETS
Other current assets consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Royalties receivable........................................ 22 0
Prepaid expenses and sundry receivables..................... 218 216
--- ---
Total Other current assets.................................. 240 216
=== ===
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Machines and installations.................................. 1,374 1,155
Other fixed assets.......................................... 3,730 3,389
Accumulated depreciation.................................... (4,583) (4,208)
------ ------
Total property, plant and equipment, net.................... 521 336
====== ======
F-80
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INTANGIBLE ASSETS
Intangible assets consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Computer software for resale, gross......................... 230 194
Accumulated amortisation.................................... (46) (77)
--- ---
Intangible asset, net....................................... 184 117
=== ===
Amortization of computer software costs was E 46 thousand and E 31 thousand
for the year ended December 31, 2001 and the year ended December 31, 2002,
respectively. The estimated amortisation expense for the next three years is
E 39 thousand per year.
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Salaries and wages, holiday allowance, year-end payment..... 1,245 1,113
Accrued holiday rights...................................... 335 242
Obligation towards former stock holders..................... 196 165
Accrued sales tax........................................... 56 139
Accrued commercial costs.................................... 83 348
Accrued R&D costs........................................... 0 156
Customer deposit............................................ 0 330
Others...................................................... 238 403
----- -----
Total other accrued liabilities............................. 2,153 2,896
===== =====
9. INCOME TAXES
Historically, PSP's operations have been included in the combined income
tax returns filed by Philips in each of the countries where PSP is located
(country fiscal unity). The income tax expense reported and the determination of
deferred tax assets to be realized in PSP's combined financial statements is
based on an as if separate tax return basis.
F-81
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the principal reasons for the difference
between the effective income tax rate and statutory income tax rate in the
Netherlands:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN PERCENTAGES)
Statutory income tax rate in the Netherlands................ 35% 35%
Foreign rate differentials.................................. 4% 4%
Change in valuation allowance............................... -31% -35%
Others...................................................... 0% -1%
Effective income tax rate................................... 8% 3%
The income tax expense is as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Income (loss) before income taxes:
The Netherlands........................................... 0 0
Foreign................................................... (17,050) (12,382)
Income tax benefit (expense):
Current taxes
The Netherlands........................................... 0 0
Foreign................................................... 105 357
Deferred taxes
The Netherlands........................................... 0 0
Foreign................................................... 1,259 (24)
Income tax benefit.......................................... 1,364 333
F-82
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The sources of differences between the financial accounting and tax basis
of PSP's assets and liabilities that give rise to the net deferred tax assets
are as follows:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Deferred tax assets:
Doubtful accounts......................................... 84 66
Accrued compensation...................................... 131 288
Taxes other than income taxes............................. 84 10
Jubilee provision......................................... 19 25
Others.................................................... 174 168
Property, plant and equipment............................. 110 78
Net operating losses...................................... 29,436 32,941
------- -------
TOTAL GROSS DEFERRED TAX ASSETS............................. 30,038 33,576
------- -------
Valuation allowance......................................... (29,978) (33,546)
NET DEFERRED TAX ASSETS..................................... 60 30
Deferred tax liabilities:
Fixed assets.............................................. 27 21
Accruals.................................................. 17 18
Others.................................................... 8 7
------- -------
TOTAL GROSS DEFERRED LIABILITIES............................ 52 46
======= =======
NET DEFERRED TAX ASSETS (LIABILITIES)....................... 8 (16)
Based upon an as if separate tax return basis, as at December 31, 2002 PSP
has incurred E 22.8 million of operating loss carry forwards expiring at various
dates through 2022 and E 59.3 million of operating loss carry forwards with no
expiration date.
The valuation allowance for deferred tax assets as of December 31, 2001 and
December 31, 2002 was E 30.0 million and E 33.5 million, respectively. The net
change in total valuation allowance for the year ended December 31, 2001 and the
year ended December 31, 2002 was an increase of E 4.1 million and E 3.5 million,
respectively. In assessing the realizability of deferred tax assets, PSP
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. PSP considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that PSP will realize the benefits of those
deductible differences for which a valuation allowance has not been recorded.
F-83
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM PROVISIONS
Long-term provisions consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Provision for pensions...................................... 199 162
Provision for jubilee benefit obligations................... 70 83
--- ---
Total long-term provisions.................................. 269 245
=== ===
11. PENSION AND OTHER POST RETIREMENT COSTS
Employees of PSP participate in various defined benefit and defined
contribution pension plans of the Philips Group. For the purposes of the
preparation of these combined financial statements, PSP's participation in the
Philips plans has been treated as participation in various multi-employer plans.
Accordingly, the charges included in the combined financial statements may not
be indicative of the pension and other post retirement costs had PSP been a
stand alone entity.
Pension premium charged for the year ended December 31, 2001 and the year
ended December 31, 2002 were E 86 thousand and E 114 thousand, respectively.
In addition to receiving pension benefits, PSP employees in certain
countries participate in other postretirement benefit plans of the Philips
Group. These other postretirement benefits under SFAS No. 106 are recorded at
the country central level and charged out to the various local entities as part
of human resource overhead (surcharge on salaries paid). The charge to PSP is
approximately E 13 thousand and E 48 thousand for the year ended December 31,
2001 and the year ended December 31, 2002, respectively.
12. EQUITY INCENTIVE PLANS
EXISTING PHILIPS INCENTIVE PLANS
Philips has granted stock options on its ordinary shares to members of
PSP's management and certain key employees under either a Euro (EUR) denominated
plan or a United States Dollar (USD) denominated plan. Under Philips' plans,
options are granted with an exercise price equal to the fair market value of the
underlying ordinary shares on the date of grant. Options are subject to vesting
periods typically of three years and expirations of five or ten years. A limited
number of options have also been granted under variable plans, subject to
achievement of certain financial objectives during multi-year performance
cycles. Exercise of all options is restricted by Philips' rules on insider
trading.
STOCK-BASED COMPENSATION
Pro forma net income information, as required by SFAS No. 123, has been
determined as if PSP had accounted for employee share options granted to PSP's
employees by Philips under SFAS No. 123's fair value method. The pro forma
amounts below are not necessarily representative of the effects of share-based
awards on future net income because the plans eventually adopted by PSP after
divestment from Philips may differ from Philips share options plans. Accordingly
future grants of employee stock options to PSP's employees may not be comparable
to awards made to employees while PSP was a part of Philips.
F-84
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(EUR -- DENOMINATED)
Risk-free interest rate..................................... 4.66% 4.70%
Expected dividend yield..................................... 1.2% 1.2%
Expected option life........................................ 5 yrs.... 5 yrs.
Expected stock price volatility............................. 49% 53%
(USD -- DENOMINATED)
Risk-free interest rate..................................... 4.77% 4.65%
Expected dividend yield..................................... 1.2% 1.2%
Expected option life........................................ 5 yrs.... 5 yrs.
Expected stock price volatility............................. 49% 49%
The assumptions were used for these calculations only and do not
necessarily represent an indication of management's expectations of future
development.
The following table summarizes information about the number of Philips
share options granted to PSP's employees, those outstanding at December 31, 2001
and December 31, 2002 and changes during the period:
Fixed option plans:
DECEMBER 31, 2001 DECEMBER 31, 2002
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE SHARES PRICE
------- ---------------- ------ ----------------
(IN EUR) (IN EUR)
Options outstanding, beginning of period..... 3,200 43.18 9,325 33.77
Options granted.............................. 6,125 28.85 6,336 34.78
Options exercised............................
Options forfeited............................ (3,107) 32.74
Options outstanding, end of period........... 9,325 33.77 12,554 34.53
Weighted average fair value of options
granted during the year in EUR............. 14.75 14.90
(IN USD) (IN USD)
Options outstanding, beginning of period..... 24,500 40.61 16,700 29.57
Options granted.............................. 11,950 25.68 8,892 30.70
Options exercised............................
Options forfeited............................ (19,750) 40.90 (4,750) 39.08
Options outstanding, end of period........... 16,700 29.57 20,842 27.90
Weighted average fair value of options
granted during the year in USD............. 11.90 13.01
F-85
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Variable option plans:
DECEMBER 31, 2001 DECEMBER 31, 2002
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE SHARES PRICE
------- ---------------- ------ ----------------
(IN EUR) (IN EUR)
Options outstanding, beginning of period..... 3,200 43.18 9,325 33.77
Options granted.............................. 6,125 28.85
Options exercised............................
Options forfeited............................ (2,675) 32.41
Options outstanding, end of period........... 9,325 33.77 6,650 34.31
Weighted average fair value of options
granted during the year in EUR............. 14.75
(IN USD) (IN USD)
Options outstanding, beginning of period..... 22,500 42.00 14,700 30.20
Options granted.............................. 11,950 25.68
Options exercised............................
Options forfeited............................ (19,750) 40.90 (1,750) 43.04
Options outstanding, end of period........... 14,700 30.20 12,950 28.48
Weighted average fair value of options
granted during the year in USD............. 11.90
The following table summarizes information about stock options outstanding
at December 31, 2002:
Fixed option plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------------
NUMBER WEIGHTED AVERAGE
OUTSTANDING AT REMAINING NUMBER EXERCISABLE
DECEMBER 31, EXERCISE PRICE CONTRACTUAL LIFE AT DECEMBER 31, WEIGHTED PRICE
YEAR OF GRANT 2002 PER SHARE (YEARS) 2002 PER SHARE
------------- -------------- -------------- ---------------- ------------------ --------------
(price in EUR) (price in EUR)
2000................. 2,500 42.90 7.79 -- --
2001................. 4,150 29.14 8.29 -- --
2002................. 5,904 34.78 9.29 -- --
(price in USD) (price in USD)
1999................. 2,000 24.96 6.5 2,000 24.96
2000................. 3,000 36.65-43.05 7.46 -- --
2001................. 9,950 25.68 8.29 -- --
2002................. 5,892 30.70 9.29 -- --
TOTAL................ 33,396 2,000
F-86
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Variable option plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------------
NUMBER WEIGHTED AVERAGE
OUTSTANDING AT REMAINING NUMBER EXERCISABLE
DECEMBER 31, EXERCISE PRICE CONTRACTUAL LIFE AT DECEMBER 31, WEIGHTED PRICE
2002 PER SHARE (YEARS) 2002 PER SHARE
-------------- -------------- ---------------- ------------------ --------------
(price in EUR) (price in EUR)
2000................. 2,500 42.90 7.79 -- --
2001................. 4,150 29.14 8.29 -- --
(price in USD) (price in USD)
2000................. 3,000 36.65 - 43.05 7.46 -- --
2001................. 9,950 25.68 8.29 -- --
TOTAL................ 19,600
13. TRANSACTIONS WITH RELATED PARTIES
PSP sells products to and purchases certain products and services from
Philips in the normal course of business. Transactions between PSP and Philips
are effected at prices that are intended to reflect the market value of the
products and services involved. The following table summarizes transactions
between PSP and Philips:
DECEMBER 31, DECEMBER 31,
IN THOUSANDS OF EURO'S 2001 2002
---------------------- ------------ ------------
STATEMENT OF OPERATIONS:
Sales to Philips group...................................... 2,890 582
Interest revenue............................................ 2 3
Corporate overhead allocation............................... 308 212
Corporate Research.......................................... 3,058 1,958
DECEMBER 31, DECEMBER 31,
IN THOUSANDS OF EURO'S 2001 2002
---------------------- ------------ ------------
BALANCE SHEET:
Income taxes receivable (included in Receivables from
related parties).......................................... 105 259
Trade accounts receivable from Philips Group................ 512 347
Trade accounts payable to Philips Group..................... 1,541 672
Deferred income taxes....................................... 8 (16)
Interest revenue in these combined financial statements is calculated based
on the average rate of interest for long-term debt paid by Philips and the
average amount of net investment of the Philips Group invested in PSP during the
reporting periods, taking into account the debt-to-equity ratio reported by
Philips during the reporting periods.
Income tax expense has been calculated on an as if separate tax return
basis. Tax effects that may arise from PSP's divestment from the Philips Group
have not been reflected in PSP's combined financial statements.
Corporate overheads have been allocated to PSP from Philips at central,
regional and local levels for amounts including, but not limited to, directors
remuneration, marketing, management information systems, accounting and
financial reporting, treasury, human resources, legal, tax and security, based
on
F-87
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the net sales of PSP compared to the consolidated net sales of Philips.
Management believes these allocations are reasonable. However, the costs of
these services charged to PSP are not necessarily indicative of the costs that
would have been incurred had PSP operated as an entity independent of Philips.
Philips Corporate Research is contracted by PSP to perform certain research
and development projects; the projects are determined on a yearly basis. The fee
charged is reported under Research & Development expenses.
14. COMMITMENTS AND CONTINGENCIES
PSP is potentially subject to lawsuits, claims and proceedings, which arise
in the ordinary course of business. There are no such matters pending that PSP
expects to be material in relation to its business, financial condition or
results of operations.
RENT AGREEMENTS
PSP has entered into certain short-term contracts to rent office and
warehouse facilities. The rent charged to income amounted to E 1,112 thousand
and E 1,013 thousand for the year ended December 31, 2001 and the year ended
December 31, 2002 respectively, of which E 181 thousand and E 284 thousand
respectively relates to charges from Philips based on square meters occupied.
The table below presents the amounts of rent payable under the present
contracts for the upcoming periods.
RENT
IN THOUSANDS OF EURO'S AMOUNT
---------------------- -----------
Year 2003................................................... 779
Year 2004................................................... 531
Year 2005................................................... 531
Year 2006................................................... 133
Year 2007 and later......................................... 0
15. GEOGRAPHICAL INFORMATION
PSP operates and derives its revenue from all major regions in the world.
The geographical location of property, plant and equipment and the geographical
origin of revenues are as follows:
AMERICAS EUROPE ASIA PACIFIC TOTAL
-------- ------ ------------ ------
December 31, 2001
Net sales..................................... 7,883 9,446 1,362 18,691
Property, plant and equipment, net............ 129 378 14 521
December 31, 2002
Net sales..................................... 8,424 7,907 378 16,709
Property, plant and equipment, net............ 48 284 4 336
F-88
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONCENTRATION OF RISKS AND FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK
Credit risk represents the risk that a loss would be recognized at the
reporting date if counter parties failed completely to perform as contracted.
Financial instruments which potentially subject PSP to a concentration of credit
risk consist principally of accounts receivable. Management believes it has
adequately provided for the collection risk in PSP's trade accounts receivable
by recording an allowance for doubtful accounts which reduces such amounts to
their net realizable value.
Due to the project nature of the speech processing business, PSP derives a
substantial portion of its revenues from a limited number of customers. In the
year 2001 and the year 2002, two and three customers, respectively accounted for
more than 10% of revenues each, and in the aggregate for 28% and 45% of
revenues, respectively.
FINANCIAL INSTRUMENTS
PSP's earnings, cash flows, and financial position are exposed to foreign
currency risk from foreign currency denominated receivables, payables,
forecasted transactions, as well as net investments in certain foreign
operations. These items are denominated in various foreign currencies, including
mainly the U.S. Dollar.
PSP periodically assesses its foreign currency exchange risk exposure. As
USA customers are invoiced from Dallas, USA, in US Dollars and European
customers are invoiced from Aachen, Germany, in Euro the currency risk exposure
is very limited. Accordingly, PSP does not enter into any hedging activities or
purchase derivative instruments.
During 2001, PSP recorded a net foreign currency transaction profit of E 23
thousand and during the year 2002, a loss was recorded of E 16 thousand, which
is included in cost of sales.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The carrying values of accounts receivable and accounts payable approximate
fair value because of the short maturity of these instruments.
17. PSP DIVESTMENT
On October 7, 2002, Royal Philips Electronics N.V. and ScanSoft, Inc.
signed a purchase agreement for the transfer of PSP's business, employees,
assets and liabilities to ScanSoft. The transaction was consummated on January
30, 2003.
To provide for an orderly transfer and transition of PSP from Philips to
ScanSoft, various ancillary agreements were executed that cover a wide range of
matters, including but not limited to:
- the transfer by Philips to ScanSoft of the business, employees, assets
and liabilities associated with PSP's business (Purchase Agreement, Local
Asset Transfer Agreements);
- the transfer or license by Philips to ScanSoft of certain intellectual
property rights (Technology Transfer and License Agreement, Trademark
Transfer and License Agreement);
- the provision by Philips of certain corporate and local human resource
management, finance and accounting, housing, information technology and
other services to ScanSoft (Transition Services Agreement).
F-89
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK INCENTIVE PLANS
The Philips stock options granted to the PSP employees were not converted
into options for shares of ScanSoft. Upon closing, PSP employees with
outstanding exercisable options had a limited period of time to exercise these
options and all unvested options were cancelled. In addition, ScanSoft has
assumed no obligation towards the beneficiaries or towards Philips with respect
to these outstanding Philips' stock options.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In most countries PSP's employees have pension entitlements as part of
their benefit packages, and as it is common practice that in offering
transferring employees equivalent benefit packages, this equivalence also
extends to pension rights. In fact there exists a compulsory European Directive
obliging member states to implement legislation in each EC country to the effect
that in case of transfer of a business, all pension entitlements transfer with
the transferred employees. In the Netherlands, this law has become effective on
July 1, 2002.
In some countries, the pension entitlements are part of a state scheme; in
many countries, however, the entitlements are specifically related to Philips,
and require a per country approach on how to deal with pension rights going
forward and the treatment of accrued rights in the past. There are legal
requirements which dictate a transfer of pension liabilities, but also if there
is not a strict legal requirement, in many cases taking into account the
justified interest of employees will be a precondition for a smooth transition
process in terms of consultation with works council and unions.
Pension entitlement for PSP's employees may be funded by way of a separate
pension fund, with an insurance company or by way of a book reserve system.
In case a book reserve system was used by Philips in a country, the pension
liabilities transferred to ScanSoft and Philips included a provision in the
local balance sheet which was equal to the actuarial present value of pension
rights accrued up to the effective date as calculated under the relevant local
book reserve system concerned.
In case of a dedicated Philips pension fund, transferred employees either
received a premium free policy or a collective transfer of liabilities and
assets under the terms and rules set by the pertaining pension fund took place.
F-90
FINANCIAL STATEMENTS OF
THE SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS
OF LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
F-91
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ScanSoft, Inc.:
We have audited the accompanying statement of assets and liabilities of the
Speech and Language Technologies operations of Lernout & Hauspie Speech Products
N.V. (the "Business" as defined in Note 1) as of September 30, 2001 and the
related statement of revenue and direct operating expenses for the nine months
ended September 30, 2001 (herein referred to as the "financial statements").
These financial statements are the responsibility of the management of ScanSoft,
Inc. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 and are not intended to be a complete
presentation of the Business' results of operations and financial position.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities as of September 30, 2001
and the revenue and direct operating expenses (as described in Note 1 to the
financial statements) for the nine months ended September 30, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ PricewaterhouseCoopers LLP
September 6, 2002
Boston, Massachusetts
F-92
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2001
(IN THOUSANDS)
ASSETS
Accounts receivable, net of allowance for doubtful accounts
of $767................................................... $ 7,703
Inventory................................................... 138
Prepaid expenses and other current assets................... 126
Property and equipment, net................................. 4,160
Intangible assets, net of accumulated amortization of
$1,734.................................................... 8,448
-------
Total assets.............................................. $20,575
=======
LIABILITIES AND PARENT COMPANY INVESTMENT
Accounts payable............................................ 4,694
Accrued liabilities......................................... 4,383
-------
Total liabilities......................................... 9,077
Commitments and contingencies (Note 7)
Parent company investment................................... 11,498
-------
Total liabilities and parent company investment........... $20,575
=======
The accompanying notes are an integral part of these financial statements.
F-93
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
STATEMENT OF REVENUE AND DIRECT OPERATING EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
Revenue..................................................... $ 34,173
Direct operating expenses:
Cost of revenue........................................... 4,439
Cost of revenue from amortization of intangible assets.... 1,734
Research and development.................................. 28,440
Selling, general and administrative....................... 32,742
--------
Total direct operating expenses........................ 67,355
--------
Excess of direct operating expenses over revenue............ $(33,182)
========
The accompanying notes are an integral part of these financial statements.
F-94
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS OF
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
General. The accompanying financial statements have been prepared pursuant
to the transaction described below and present the assets and liabilities and
the revenue and direct operating expenses of the Speech and Language
Technologies operations of Lernout & Hauspie Speech Products N.V. ("L&H"),
hereinafter defined as the "Business" or "SLT." SLT was a provider of speech and
language software, which included the RealSpeak text-to-speech technology,
Dragon speech recognition software and other speech and voice-related
technologies aimed at the telecommunications, automotive and mobile device
markets. L&H did not maintain SLT as a separate business unit, but rather
operated the Business within Lernout & Hauspie Speech Products N.V. and several
of its subsidiaries, the most significant of which was L&H Holdings USA. In
November 2000, Lernout & Hauspie Speech Products N.V. and L&H Holdings USA, Inc.
filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court
for the District of Delaware. L&H NV also filed a bankruptcy proceeding in
Icper, Belgium. In order to facilitate the sale of its assets in connection with
the bankruptcy proceedings, L&H segregated the SLT operations into eight speech
and language technology asset groups.
On December 7, 2001, ScanSoft, Inc. ("ScanSoft") entered into an Asset
Purchase Agreement (the "Purchase Agreement") to acquire certain assets and
intellectual property and assume certain liabilities of the Speech and Language
Technologies operations of L&H. The acquisition was conducted in a closed
auction proceeding and approved by the United States bankruptcy court on
December 11, 2001. The acquisition was completed on December 12, 2001.
Pursuant to the Purchase Agreement, ScanSoft acquired three of the eight
asset groups of SLT: Dragon Naturally Speaking ("DNS"), Text to Speech ("TTS")
and Automated Speech Recognition ("ASR"), which represented the majority of the
revenue-generating assets of SLT. The net assets acquired by ScanSoft consisted
of (1) patents, trademarks, trade names and products associated with the
acquired speech and language technology assets of L&H; (2) customer contracts
and relationships and certain obligations associated with such contracts; (3)
rights to accounts receivable related to the customer contracts acquired; and
(4) certain inventory, fixed assets and other liabilities. ScanSoft also hired
223 employees of the research and development, sales and marketing and general
and administrative organizations of SLT. ScanSoft paid total consideration of
$41.3 million as follows: $10.0 million in cash, 7.4 million shares of ScanSoft
common stock valued at $27.8 million (based on the average of the closing share
price of the common stock 3 days before and after the proposed acquisition was
announced) and a 9% promissory note in the principal amount of $3.5 million to
be repaid in installments of $0.1 million of principal and interest quarterly
commencing on March 15, 2002. All remaining principal and interest on the note
is due and payable on December 15, 2004.
On August 13, 2002, the U.S. Bankruptcy Court for the District of Delaware
approved, without objection, ScanSoft's agreement with representatives of L&H
Holdings USA and Lernout & Hauspie Speech Products N.V. to repurchase shares of
ScanSoft common stock worth $7.0 million at a share price equal to the average
of the closing price for the 20 trading days beginning August 14, 2002, but no
less than $4.79 per share. In addition, ScanSoft agreed to issue up to 300,000
shares of common stock to the holders of approximately six million shares
remaining in the event that Scansoft does not offer the remaining shares in a
public offering by February 15, 2003, and 100,000 shares of common stock if
ScanSoft has not registered the remaining shares by February 15, 2003.
Basis of Presentation. As described above, L&H did not operate SLT as a
separate business unit, therefore, complete financial statements historically
were not prepared for SLT. The accompanying financial statements were derived
from the historical accounting records of L&H in order to present the statement
of assets and liabilities as of September 30, 2001, and the statement of revenue
and direct operating expenses for the nine months ended September 30, 2001, in
accordance with accounting
F-95
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS OF
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
principles generally accepted in the United States of America. As noted above,
the three asset groups acquired by ScanSoft represented the majority of the
revenue-generating assets of SLT. Accordingly, the statement of assets and
liabilities and the statement of revenue and direct operating expenses reflect
all of the eight technology asset groups. All other assets, liabilities,
revenues, and operating expenses of L&H were excluded from the financial
statements, as they were not directly attributable to SLT.
Direct operating expenses are comprised primarily of employee-related
expenses, including employee salaries and benefits, and other direct costs
related to the operations of the Business such as cost of revenue, advertising,
depreciation and amortization. Direct operating expenses also include other
operating expenses, including facilities and related costs, which were allocated
to the Business based on the number of employees dedicated to the Business.
Additionally, the Business relied on L&H for certain administrative, management
and other support services, and the related expenses were also allocated to the
Business based on the number of employees dedicated to the Business. Management
believes the method used to allocate the direct operating expenses and other
infrastructure and support costs is reasonable. L&H did not segregate indirect
corporate expenses and interest income (expense); accordingly these items are
not included in the financial statements of the Business. The statement of
assets and liabilities includes liabilities which existed at the time of
bankruptcy filing. No adjustment to reflect the ultimate settlement of these
liabilities subsequent to September 30, 2001 has been reflected in these
financial statements. The financial statements are therefore stated at
historical cost.
The financial statements were prepared to substantially comply with the
rules and regulations of the Securities and Exchange Commission for business
combinations and are not intended to be a complete presentation of the Business'
financial position, results of operations and cash flows. The historical net
assets and historical revenue and direct operating expenses of the Business
could differ from those that would have resulted had the Business operated
autonomously or as an entity independent of L&H. Furthermore, the financial
statements reflect all of the operations of the Business; however, as described
above, ScanSoft did not acquire all of the net assets of SLT, did not retain a
significant number of personnel directly related to historical operations of the
Business, and did not continue to operate the facilities previously used by the
Business. Consequently, the historical operating results may not be indicative
of the results of operations of the Business in the future.
As described above, L&H did not maintain SLT as a separate business unit.
More specifically, SLT was defined by L&H during 2001 in connection with
bankruptcy proceedings. Since L&H did not have a policy of allocating certain
assets and liabilities and income and expense balances to the Business, such
amounts, as described above, have not been included in the financial statements.
Consequently, a full balance sheet, statement of operations and stockholders'
equity are impractical to prepare. Furthermore, a statement of cash flows is not
presented because the Business did not maintain a cash balance and was dependent
upon L&H for financing the cash flows of the operations.
In accordance with Rule 3-06 of Regulation S-X, the statement of revenue
and direct operating expenses is presented for the nine months ended September
30, 2001 in satisfaction of the requirement for one year of audited financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue was derived primarily from the sale of software products to
end-users through distribution partners and value added resellers (VARs),
royalty revenues from OEM partners, and license fees from direct sales of
products to end-users.
F-96
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS OF
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SLT applied the provisions of Statement of Position 97-2 "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products. In addition, SLT applied
the provisions of Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements."
SLT sold software products to distributors and resellers who in turn sold
the products to retailers and VARs. Title and risk-of-loss passed to the
distributor upon shipment, at which time payment was generally due. Revenue from
sales of products to distributors and resellers was recognized (i) upon shipment
by the distributor or reseller to the VAR or (ii) upon shipment by the retailer
to end-users of the products. Agreements with distributors and resellers
provided for rights of return which, in the case of VARs, generally lapsed upon
shipment to the VARs, and, in the case of sales to retailers, upon shipment to
end-users. Provisions for product returns were recorded as a reduction of
revenue.
From late 2000 to mid-2001, SLT changed the distribution channel of its
retail products from traditional distributors and resellers to republishers.
Republishers had sole responsibility for the marketing, manufacturing and
distribution of SLT's products to retailers. Under the republishing
arrangements, SLT earned a royalty based on the sale price of its products by
republishers to retailers, as reported by republishers. Republishing
arrangements generated proportionately lower revenue than did traditional
distribution channels since the seller received a royalty in lieu of the full
sales price. Similarly, the direct costs, primarily manufacturing and marketing,
were proportionately lower under republisher agreements than under agreements
with traditional distributors and resellers.
SLT entered into royalty-bearing agreements with original equipment
manufacturers (OEMs) and recognized revenue for royalty fees based on actual
royalties earned and reported.
Revenue from the direct sales of licenses of SLT's software products to
end-users was recognized upon delivery, provided that no significant obligations
remained, evidence of the arrangement existed, the fees were fixed or
determinable, and collectibility was reasonably assured.
For arrangements with multiple elements (e.g., undelivered maintenance and
support bundled with perpetual licenses), SLT allocated revenue to the delivered
elements of the arrangement using the residual value method, deferring revenue
for undelivered elements based on evidence of the fair value of those
undelivered elements, which was specific to SLT. The vendor specific objective
evidence of fair values for the ongoing maintenance and support obligations was
based upon substantive renewal rates stated in the contractual arrangements.
Maintenance and support revenue, which was not significant to the results of
operations, was recognized ratably over the service period.
SLT also entered into fixed-fee contracts for software and related
services, which included significant customization or modification of the
software. As a result, SLT recognized revenue on the percentage-of-completion
basis of accounting. Under the percentage-of-completion basis of accounting,
revenue was recognized as the work progressed in amounts estimated to equal the
actual progress on the contract. In applying this method, SLT measured each
project's percentage-of-completion by the ratio of labor hours incurred to date
to the estimated total labor hours for the project. Losses on contracts were
recorded in the period they are determined, and the related obligations to
perform the remaining services were included in accrued liabilities. For
contracts in which SLT was unable to reasonably estimate the cost to complete
the contract, SLT recognized revenue upon completion of the contract.
INVENTORY
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market value. At September 30, 2001, inventory consisted
primarily of finished goods.
F-97
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS OF
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major improvements are
capitalized, while expenditures for maintenance, repairs, and minor improvements
are charged to expense. When assets are retired or otherwise disposed of, the
assets and related accumulated depreciation and amortization are eliminated from
the accounts and any resulting gain or loss is reflected in results of
operations. Depreciation was computed using the straight-line method over the
estimated useful lives of the assets for computer equipment, software,
furniture, fixtures and office equipment. Leasehold improvements are depreciated
over the term of the lease.
INTANGIBLE ASSETS
Intangible assets represent the original fair value of intangible assets
resulting from prior business or asset acquisitions, adjusted for impairment
charges to reduce the carrying value to its fair value at the time of the
impairment charge. Intangible assets were amortized using the straight-line
method over their estimated useful lives of 5 years. Amortization expense
amounted to $1.7 million for the nine months ended September 30, 2001. This
amount is included in cost of revenue.
IMPAIRMENT OF LONG-LIVED ASSETS
The recoverability of long-lived assets is evaluated upon indication of
possible impairment by measuring the carrying value of the assets against the
related undiscounted future cash flows. When an evaluation indicates that the
future undiscounted cash flows are not sufficient to recover the carrying value
of the asset, the asset is adjusted to its estimated fair value by recording an
impairment charge based on the excess of the carrying value of the assets over
the discounted estimated cash flows.
RESEARCH AND DEVELOPMENT
Research and development costs were expensed as incurred.
FOREIGN CURRENCY TRANSLATION
The functional currencies for the Business were the U.S. Dollar and the
Euro as determined by the location of the operation. The financial information
recorded in the Euro was translated to U.S. dollars using the average exchange
rate for the nine months ended September 30, 2001. Translation gains and losses
were recorded as non-operating expense and therefore are not included in the
statement of revenues and direct operating expenses.
INCOME TAXES
No provision for income taxes was provided in the accompanying statement of
revenue and direct operating expenses because, on a separate return basis, the
business would have generated a taxable loss. No tax benefit resulting from such
taxable loss was recorded due to the uncertainty of realizing such tax benefit.
There are no net deferred tax assets reflected in the accompanying
statement of assets and liabilities because, on a separate return basis, a full
valuation allowance would have been recorded due to the uncertainty of
realization of the net assets.
F-98
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS OF
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
SLT sold its software products and services to channel partners or
customers located mainly in North America, Europe, and Asia-Pacific. SLT did not
require collateral from its customers. For the nine months ended September 30,
2001, no customer accounted for more than 10% of revenue. At September 30, 2001,
two customers accounted for 21% and 17% of net accounts receivable,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2001 (in
thousands):
USEFUL LIVES
IN YEARS
------------
Computer equipment and software............................. 3 $ 19,108
Furniture, fixtures and office equipment.................... 5-7 5,633
Leasehold improvements...................................... 6 2,724
--------
27,465
Accumulated depreciation.................................... (23,305)
--------
$ 4,160
========
Depreciation expense associated with property and equipment was $5.1
million for the nine months ended September 30, 2001.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable at September 30, 2001 include $3.7 million of liabilities
that existed prior to the bankruptcy filings during 2000.
Accrued liabilities were comprised of the following at September 30, 2001
(in thousands):
Accrued employee compensation and benefits.................. $2,546
Obligations to perform services under customer development
contracts................................................. 1,283
Accrued expenses............................................ 554
------
Total accrued liabilities.............................. $4,383
======
5. INTERCOMPANY COST ALLOCATIONS AND PARENT COMPANY INVESTMENT
Certain costs are allocated to the Business by the Parent, primarily
related to certain facilities, infrastructure and support services. The
estimated costs of such services have been allocated to the financial statements
of the Business based on employee headcount of the Business proportionate to the
headcount of the Parent. Management believes these allocations are reasonable.
See Note 1.
F-99
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS OF
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Business obtained financing for its day-to-day operations from L&H (the
"Parent"). Parent company investment represents these investments made by the
Parent. Interest expense associated with the Parent's general corporate debt has
not been included in the financial statements because amounts were neither
charged nor allocated to the Business.
6. EMPLOYEE BENEFIT PLANS
Employee benefit costs included in direct operating expenses comprise the
cost of medical, dental, life insurance and other benefit costs. For U.S.
employees, employee benefit costs included employer contributions to a
retirement savings plan under Section 401(k) of the Internal Revenue Service,
which covered substantially all U.S. employees who met minimum age and service
requirements. Employer contributions represented a match of 50% of contributions
made by employees through payroll deductions in amounts allowed up to 3% of an
employee's salary. The employer contribution was capped at 50% of the statutory
maximums. The 401(k) employer contribution associated with the SLT employees for
the nine months ended September 30, 2001 was approximately $150,000.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Operating leases for facilities were entered into by L&H. The Business'
operations were conducted from several of these facilities which also supported
other operations of L&H. Rent expense allocated to the Business was
approximately $3.0 million for the nine months ended September 30, 2001.
COMMITMENTS AND CONTINGENCIES
L&H entered into arrangements with third-parties under which L&H granted
rights to the manufacturing, marketing and distribution of certain products of
the Business. Under certain of these agreements, L&H granted rights to future
products. As a result of the bankruptcy proceedings, and more specifically the
transfer to ScanSoft of the rights to the same products and technologies,
certain of these third parties claimed that L&H breached their respective
contracts. Subsequent to the acquisition of the Business by ScanSoft, L&H,
ScanSoft and certain of these third parties entered into settlement agreements
which required payments by each of the parties. The total amount due to the
third parties amounted to approximately $2.2 million, of which L&H was obligated
for approximately $0.7 million. No amounts have been recorded in the historical
financial statements of the Business at September 30, 2001 because the financial
obligation arose in connection with the acquisition by ScanSoft on December 12,
2001.
L&H established a Key Employee Retention Plan ("KERP") in order to retain
certain employees during 2001. Under the KERP, L&H was obligated to make
payments to employees, including SLT employees, only upon termination of
employment due to the acquisition by a third party of the assets of L&H. The
maximum KERP obligation related to SLT employees totaled $3.0 million at
September 30, 2001.
F-100
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS OF
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SEGMENT INFORMATION
SLT operated in one segment. The revenue and related cost of revenue SLT
attributed to geographic areas (based on the location in which the sale was
invoiced) was as follows for the nine months ended September 30, 2001 (in
thousands):
NORTH
AMERICA EUROPE TOTAL
------- ------ -------
Revenue.................................................. $25,105 $9,068 $34,173
Cost of revenue.......................................... 3,315 1,124 4,439
Cost of revenue from amortization of intangible assets... -- 1,734 1,734
Property and equipment, net.............................. 3,135 1,025 4,160
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations and
No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS 142 addresses financial
accounting and reporting for acquired goodwill and other intangible assets,
including how goodwill and other intangible assets should be accounted for after
they have been initially recognized. In addition, SFAS 142 includes provisions
for the reclassification of certain existing recognized intangible assets, such
as acquired workforce, into goodwill. SFAS 142 provides that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
be tested at least annually for impairment; intangible assets with finite useful
lives will continue to be amortized over their useful lives. SFAS 142 also
provides specific guidance for testing goodwill for impairment. The statement is
effective for acquisitions that are completed after June 30, 2002 and for
existing acquisitions on January 1, 2002. The statement would not have had a
significant impact on the Business' financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"). SFAS 144 superseded SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and provides a
single accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. The statement would not have had a
significant impact on the Business' financial position or results of operations.
In November 2001, the Emerging Issues Task Force ("EITF"), a committee of
the FASB, reached a consensus on EITF Issue 01-9, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)("EITF 01-9"). EITF 01-9 presumes that consideration from a vendor to a
customer or reseller of the vendor's products is a reduction of the selling
prices of the vendor's products and, therefore, should be characterized as a
reduction of revenue when recognized in the vendor's income statement and could
lead to negative revenue under certain circumstances. Revenue reduction is
required unless consideration relates to a separate identifiable benefit and the
benefit's fair value can be established, in which case such amounts may be
recorded as operating expenses. EITF 01-9 would not have had a significant
impact on the Business' results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS No. 146"). This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for
F-101
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS OF
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) ("EITF 94-3"). SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. EITF 94-3 allowed for an
exit cost liability to be recognized at the date of an entity's commitment to an
exit plan. SFAS 146 also requires that liabilities recorded in connection with
exit plans be initially measured at fair value. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The statement would not have had a significant impact on the Business'
financial position or results of operations.
F-102
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
SCANSOFT, INC.
SPIDERMAN ACQUISITION CORPORATION
AND
SPEECHWORKS INTERNATIONAL, INC.
DATED AS OF
APRIL 23, 2003
A-1
TABLE OF CONTENTS
PAGE
----
ARTICLE I
THE MERGER................................................................. A-6
1.1 The Merger.................................................. A-6
1.2 Effective Time; Closing..................................... A-6
1.3 Effect of the Merger........................................ A-6
1.4 Certificate of Incorporation and Bylaws..................... A-6
1.5 Directors and Officers...................................... A-6
1.6 Effect on Capital Stock..................................... A-6
1.7 Surrender of Certificates................................... A-7
1.8 No Further Ownership Rights in the Company Common Stock..... A-9
1.9 Lost, Stolen or Destroyed Certificates...................... A-9
1.10 Tax Consequences............................................ A-10
1.11 Further Action.............................................. A-10
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................. A-10
2.1 Organization; Standing and Power; Charter Documents;
Subsidiaries................................................ A-10
2.2 Capital Structure........................................... A-11
2.3 Authority; Non-Contravention; Necessary Consents............ A-12
2.4 SEC Filings; Financial Statements........................... A-13
2.5 Absence of Certain Changes or Events........................ A-14
2.6 Taxes....................................................... A-15
2.7 Intellectual Property....................................... A-16
2.8 Compliance; Permits......................................... A-17
2.9 Litigation.................................................. A-18
2.10 Brokers' and Finders' Fees; Fees and Expenses............... A-18
2.11 Transactions with Affiliates................................ A-18
2.12 Employee Benefit Plans...................................... A-18
2.13 Title to Properties......................................... A-21
2.14 Environmental Matters....................................... A-22
2.15 Contracts................................................... A-22
2.16 Disclosure.................................................. A-24
2.17 Board Approval.............................................. A-24
2.18 Fairness Opinion............................................ A-24
2.19 Takeover Statutes........................................... A-24
2.20 Non-Competition Agreements.................................. A-24
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.................... A-25
3.1 Organization; Standing and Power; Charter Documents;
Subsidiaries................................................ A-25
3.2 Capital Structure........................................... A-25
3.3 Authority; Non-Contravention; Necessary Consents............ A-26
3.4 SEC Filings; Financial Statements........................... A-27
3.5 Absence of Certain Changes or Events........................ A-28
A-2
PAGE
----
3.6 Taxes....................................................... A-29
3.7 Intellectual Property....................................... A-30
3.8 Compliance; Permits......................................... A-31
3.9 Litigation.................................................. A-31
3.10 Brokers' and Finders' Fees.................................. A-31
3.11 Transactions with Affiliates................................ A-31
3.12 Parent Employee Benefit Plans............................... A-31
3.13 Title to Properties......................................... A-34
3.14 Environmental Matters....................................... A-35
3.15 Contracts................................................... A-35
3.16 Disclosure.................................................. A-37
3.17 Board Approval.............................................. A-37
3.18 Fairness Opinion............................................ A-37
3.19 Rights Plan................................................. A-37
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME........................................ A-37
4.1 Conduct of Business by the Company.......................... A-37
4.2 Conduct of Business by Parent............................... A-40
ARTICLE V
ADDITIONAL AGREEMENTS...................................................... A-41
5.1 Prospectus/Proxy Statement; Registration Statement.......... A-41
5.2 Meetings of Stockholders; Board Recommendation.............. A-42
5.3 Acquisition Proposals....................................... A-43
5.4 Confidentiality; Access to Information; No Modification of
Representations, Warranties or Covenants.................... A-46
5.5 Public Disclosure........................................... A-46
5.6 Regulatory Filings; Reasonable Efforts...................... A-46
5.7 Notification of Certain Matters............................. A-48
5.8 Third-Party Consents........................................ A-48
5.9 Equity Awards and Employee Benefits; Company Warrants....... A-49
5.10 Form S-8.................................................... A-50
5.11 Indemnification............................................. A-50
5.12 Nasdaq Listing.............................................. A-51
5.13 Company Affiliates; Restrictive Legend...................... A-51
5.14 Treatment as Reorganization................................. A-51
5.15 Section 16 Matters.......................................... A-51
5.16 Merger Sub Compliance....................................... A-51
5.17 Board of Directors.......................................... A-51
5.18 Comfort Letter.............................................. A-51
5.19 Agreements with Respect to Salary........................... A-52
A-3
PAGE
----
ARTICLE VI
CONDITIONS TO THE MERGER................................................... A-52
6.1 Conditions to the Obligations of Each Party to Effect the
Merger...................................................... A-52
6.2 Additional Conditions to the Obligations of the Company..... A-53
6.3 Additional Conditions to the Obligations of Parent and
Merger Sub.................................................. A-53
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER.......................................... A-54
7.1 Termination................................................. A-54
7.2 Notice of Termination; Effect of Termination................ A-56
7.3 Fees and Expenses........................................... A-56
7.4 Amendment................................................... A-57
7.5 Extension; Waiver........................................... A-57
ARTICLE VIII
GENERAL PROVISIONS......................................................... A-58
8.1 Non-Survival of Representations and Warranties.............. A-58
8.2 Notices..................................................... A-58
8.3 Interpretation.............................................. A-59
8.4 Counterparts................................................ A-59
8.5 Entire Agreement; Third-Party Beneficiaries................. A-59
8.6 Severability................................................ A-60
8.7 Other Remedies; Specific Performance........................ A-60
8.8 Governing Law............................................... A-60
8.9 Rules of Construction....................................... A-60
8.10 Assignment.................................................. A-60
8.11 Waiver of Jury Trial........................................ A-60
A-4
EXECUTION COPY
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made and
entered into as of April 23, 2003, by and among ScanSoft, Inc., a Delaware
corporation ("PARENT"), Spiderman Acquisition Corporation, a Delaware
corporation and direct wholly-owned subsidiary of Parent ("MERGER SUB"), and
SpeechWorks International, Inc., a Delaware corporation (the "COMPANY").
RECITALS
A. The respective Boards of Directors of Parent, Merger Sub and the
Company have deemed it advisable and in the best interests of their respective
corporations and stockholders that Parent and the Company consummate the
business combination and other transactions provided for herein in order to
advance their respective long-term strategic business interests.
B. The respective Boards of Directors of Parent, Merger Sub and the
Company have approved, in accordance with applicable provisions of the laws of
the state of Delaware ("DELAWARE LAW"), this Agreement and the transactions
contemplated hereby, including the Merger (as defined in Section 1.1).
C. The Board of Directors of Parent has resolved to recommend to its
stockholders approval of the issuance of shares of Parent Common Stock (as
defined in Section 1.6(a)) in connection with the Merger (the "STOCK ISSUANCE").
D. The Board of Directors of the Company has resolved to recommend to its
stockholders approval and adoption of this Agreement and approval of the Merger.
E. Concurrent with the execution and delivery of this Agreement, and as a
material inducement for Parent to consummate the Merger, Parent and the Chief
Executive Officer of the Company are entering into an employment agreement and
an employee proprietary information, inventions and non-competition agreement.
F. Concurrent with the execution and delivery of this Agreement, and as a
material inducement for Parent to consummate the Merger, certain employees of
the Company (other than employees set forth in Section 2.20 of the Company
Disclosure Letter (as defined herein)) shall continue to be subject to non-
competition agreements, each of which shall be effective as of the Effective
Time.
G. Concurrent with the execution and delivery of this Agreement, and as a
material inducement for Parent to consummate the Merger, certain stockholders
who are executive officers and directors of the Company are executing and
delivering voting agreements and irrevocable proxies (the "COMPANY VOTING
AGREEMENTS"), substantially in the form attached hereto as Exhibit A-1, to
Parent.
H. Concurrent with the execution and delivery of this Agreement, and as a
material inducement for the Company to consummate the Merger, certain
stockholders who are executive officers and directors of Parent are executing
and delivering voting agreements and irrevocable proxies (the "PARENT VOTING
AGREEMENTS"), substantially in the form attached hereto as Exhibit A-2, to the
Company.
I. For United States federal income tax purposes, the parties intend that
the Merger qualify as a reorganization under the provisions of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "CODE"), and the parties
intend, by executing this Agreement, to adopt a plan of reorganization within
the meaning of Treasury Regulations Sections 1.368-2(g) and 1.368-3.
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NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law, Merger Sub shall be merged with and into
the Company (the "MERGER"), the separate corporate existence of Merger Sub shall
cease and the Company shall continue as the surviving corporation. The Company,
as the surviving corporation after the Merger, is hereinafter sometimes referred
to as the "SURVIVING CORPORATION."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law (the "CERTIFICATE OF
MERGER") (the time of such filing with the Secretary of State of the State of
Delaware (or such later time as may be agreed in writing by the Company and
Parent and specified in the Certificate of Merger) being the "EFFECTIVE TIME")
as soon as practicable on or after the Closing Date (as defined below). The
closing of the Merger (the "CLOSING") shall take place at the offices of Hale
and Dorr LLP, located at 60 State Street, Boston, Massachusetts 02109, at a time
and date to be specified by the parties, which shall be not later than the fifth
business day after the satisfaction or waiver of the conditions set forth in
Article VI, or at such other time, date and location as the parties hereto agree
in writing (the "CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of Delaware
Law.
1.4 Certificate of Incorporation and Bylaws. At the Effective Time, the
Certificate of Incorporation of the Company shall be amended in its entirety in
the form attached hereto as Exhibit 1.4 and as so amended shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended in accordance with Delaware Law and as provided in such Certificate of
Incorporation. At the Effective Time, the Bylaws of the Company shall be amended
and restated in their entirety to be identical to the Bylaws of Merger Sub, as
in effect immediately prior to the Effective Time, until thereafter amended in
accordance with Delaware Law and as provided in such Bylaws.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of the Company immediately prior to the Effective Time, until their
respective successors are duly appointed.
1.6 Effect on Capital Stock. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any action
on the part of Parent, Merger Sub, the Company or the holders of any shares of
capital stock of the Company, the following shall occur:
(a) Company Common Stock. Each share of the Common Stock, par value
$0.001 per share, of the Company ("COMPANY COMMON STOCK") issued and
outstanding immediately prior to the Effective Time, other than any shares
of the Company Common Stock to be canceled pursuant to Section 1.6(c), will
be canceled and extinguished and automatically converted (subject to
Section 1.6(f)) into the right to receive 0.860 of a validly issued, fully
paid and nonassessable share (the "EXCHANGE RATIO") of the Common Stock,
par value $0.001 per share, of Parent ("PARENT COMMON STOCK") upon
surrender of the certificate representing such share of the Company Common
Stock in the manner provided in Section 1.7 (or in the case of a lost,
stolen or destroyed certificate, upon delivery of an affidavit (and bond,
if required) in the manner provided in Section 1.9).
(b) Company Restricted Stock. If any shares of Common Stock are
unvested or are subject to a repurchase option, risk of forfeiture or other
condition under any applicable restricted stock purchase
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agreement or other agreement with the Company ("COMPANY RESTRICTED STOCK")
as of the Effective Time, then the shares of Parent Common Stock issued in
exchange for such shares of the Company Restricted Stock will also be
unvested and subject to the same repurchase option, risk of forfeiture or
other condition, and the certificates representing such shares of Parent
Common Stock may accordingly be marked with appropriate legends. The
Company shall take all action that may be necessary to ensure that, from
and after the Effective Time, the Surviving Corporation is entitled to
exercise any such repurchase option or other right set forth in any such
restricted stock purchase agreement or other agreement.
(c) Cancellation of Treasury and Parent Owned Stock. Each share of
the Company Common Stock held by the Company or Parent or any direct or
indirect wholly-owned Subsidiary of the Company or of Parent immediately
prior to the Effective Time shall be canceled and extinguished without any
conversion thereof.
(d) Capital Stock of Merger Sub. Each share of common stock, par
value $0.001, of Merger Sub (the "MERGER SUB COMMON STOCK") issued and
outstanding immediately prior to the Effective Time shall be converted into
one validly issued, fully paid and nonassessable share of common stock, par
value $0.001 per share, of the Surviving Corporation.
(e) Company Options; Employee Stock Purchase Plan; Company
Warrants. At the Effective Time, all Company Options (as defined in
Section 2.2(b)) shall be treated in accordance with Section 5.9(a). Rights
outstanding under the Company's 2000 Employee Stock Purchase Plan (the
"COMPANY PURCHASE PLAN") shall be treated as set forth in Section 5.9(b).
All warrants to purchase shares of Company Common Stock set forth on
Schedule 2.2(d) of the Company Disclosure Letter ("COMPANY WARRANTS") shall
be treated as set forth in Section 5.9(e).
(f) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued by virtue of the Merger, but in lieu thereof each holder of
shares of Company Common Stock who would otherwise be entitled to a
fraction of a share of Parent Common Stock (after aggregating all
fractional shares of Parent Common Stock that otherwise would be received
by such holder) shall, upon surrender of such holder's Certificate(s) (as
defined in Section 1.7(c)), receive from Parent an amount of cash (rounded
to the nearest whole cent), without interest, equal to the product of: (i)
such fraction, multiplied by (ii) the average closing price of one share of
Parent Common Stock for the ten (10) most recent trading days that Parent
Common Stock has traded ending on the trading day one day prior to the
Effective Time, as reported on The Nasdaq Stock Market, Inc. ("Nasdaq").
(g) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect fully the appropriate effect of (i) any stock split,
reverse stock split, stock dividend (including any dividend or distribution
of securities convertible into Parent Common Stock or Company Common
Stock), reorganization, recapitalization, reclassification or other like
change with respect to Parent Common Stock or Company Common Stock having a
record date on or after the date hereof and prior to the Effective Time;
and (ii) any change during the period between April 22, 2003 and the
Closing Date in the number of issued and outstanding shares of Company
Common Stock set forth in Section 2.2(a) other than as a result of the
exercise of (A) options or warrants issued and outstanding as of April 22,
2003 or (B) purchase rights of participants in the Company Purchase Plan
for up to the aggregate number of shares of Company Common Stock authorized
and available for issuance thereunder on April 22, 2003, and as may be
increased pursuant to Section 4.1(b)(xiii) hereof or (C) options issuable
to Allowable New Hires (as defined in Section 4.1(b)(xviii)).
1.7 Surrender of Certificates.
(a) Exchange Agent. Parent shall designate a bank or trust company
reasonably satisfactory to the Company to act as the exchange agent (the
"EXCHANGE AGENT") in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall enter into an agreement with the Exchange Agent effective as of the
Effective Time, reasonably satisfactory to the
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Company, which shall provide that as of the Effective Time Parent shall deposit
with the Exchange Agent for exchange in accordance with this Article I, the
shares of Parent Common Stock issuable pursuant to Section 1.6(a) in exchange
for outstanding shares of the Company Common Stock. In addition, Parent shall
deposit with, and make available as necessary from time to time after the
Effective Time as needed, cash in an amount sufficient for payment in lieu of
fractional shares pursuant to Section 1.6(f) and any dividends or distributions
which holders of shares of Company Common Stock may be entitled pursuant to
Section 1.7(d). Any cash and Parent Common Stock deposited with the Exchange
Agent shall hereinafter be referred to as the "EXCHANGE FUND."
(c) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record (as of the Effective
Time) of a certificate or certificates (the "CERTIFICATES") which immediately
prior to the Effective Time represented outstanding shares of the Company Common
Stock whose shares were converted into the right to receive shares of Parent
Common Stock pursuant to Section 1.6(a), cash in lieu of any fractional shares
pursuant to Section 1.6(f) and any dividends or other distributions pursuant to
Section 1.7(d): (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Parent may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing whole shares of Parent Common Stock, cash
in lieu of any fractional shares pursuant to Section 1.6(f) and any dividends or
other distributions pursuant to Section 1.7(d). Upon surrender of Certificates
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by Parent, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto and such other
documents as may reasonably be required by the Exchange Agent, the holder of
such Certificates shall be entitled to receive in exchange therefor the number
of whole shares of Parent Common Stock (after taking into account all
Certificates surrendered by such holder) to which such holder is entitled
pursuant to Section 1.6(a), payment in lieu of fractional shares which such
holder has the right to receive pursuant to Section 1.6(f) and any dividends or
distributions payable pursuant to Section 1.7(d), and the Certificates so
surrendered shall forthwith be canceled. Until so surrendered, outstanding
Certificates will be deemed from and after the Effective Time, for all corporate
purposes, to evidence the right to receive the number of whole shares of Parent
Common Stock provided for herein and an amount in cash in lieu of the issuance
of any fractional shares in accordance with Section 1.6(f) and any dividends or
distributions payable pursuant to Section 1.7(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date hereof with respect to
Parent Common Stock with a record date after the Effective Time and no payment
in lieu of fractional shares pursuant to Section 1.6(f) will be paid to the
holders of any unsurrendered Certificates with respect to the shares of Parent
Common Stock entitled to thereby until the holders of record of such
Certificates shall surrender such Certificates. Subject to applicable law,
following surrender of any such Certificates, the Exchange Agent shall deliver
to the record holders thereof, without interest (i) promptly after such
surrender, the number of whole shares of Parent Common Stock issued in exchange
therefor along with payment in lieu of fractional shares pursuant to Section
1.6(f) and the amount of any such dividends or other distributions with a record
date after the Effective Time and theretofore paid with respect to such whole
shares of Parent Common Stock and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time and a payment date subsequent to such surrender payable with
respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If shares of Parent Common Stock are to be
issued in a name other than that in which the Certificates surrendered in
exchange therefor are registered, it will be a condition of the issuance thereof
that the Certificates so surrendered will be properly endorsed and otherwise in
proper form for transfer and that the Persons (as defined in Section 8.3(c))
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other Taxes (as defined in Section 2.6) required by reason of
the issuance of shares of Parent Common Stock in any name other than that of the
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registered holder of the Certificates surrendered, or established to the
satisfaction of Parent or any agent designated by it that such Tax has been paid
or is not payable.
(f) Required Withholding. Each of the Exchange Agent, Parent and the
Surviving Corporation shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable pursuant to this Agreement to any
holder or former holder of the Company Common Stock such amounts as may be
required to be deducted or withheld therefrom under the Code or under any
provision of state, local or foreign Tax law or under any other applicable Legal
Requirement (as defined in Section 2.2(d)). To the extent such amounts are so
deducted or withheld, the amount of such consideration shall be treated for all
purposes under this Agreement as having been paid to the Person to whom such
consideration would otherwise have been paid.
(g) No Liability. Notwithstanding anything to the contrary in this Section
1.7 and to the extent permitted by applicable law, neither the Exchange Agent,
the Surviving Corporation nor any party hereto shall be liable to a holder of
shares of Parent Common Stock or Company Common Stock for any amount properly
paid to, or for any such shares (or dividends or distributions with respect
thereto) delivered to, a public official pursuant to any applicable abandoned
property, escheat or similar law.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund as directed by Parent on a daily basis; provided
that no such investment or loss thereon shall affect the amounts payable to the
Company stockholders pursuant to this Article I. Any interest and other income
resulting from such investment shall become a part of the Exchange Fund, and any
amounts in excess of the amounts payable to the Company stockholders pursuant to
this Article I shall promptly be paid to Parent.
(i) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Certificates six (6) months after the
Effective Time shall, at the request of the Surviving Corporation, be delivered
to the Surviving Corporation or otherwise on the instruction of the Surviving
Corporation, and any holders of the Certificates who have not surrendered such
Certificates in compliance with this Section 1.7 shall after such delivery to
Surviving Corporation look only to the Surviving Corporation for the shares of
Parent Common Stock pursuant to Section 1.6(a), cash in lieu of any fractional
shares pursuant to Section 1.6(f) and any dividends or other distributions
pursuant to Section 1.7(d) with respect to the shares of the Company Common
Stock formerly represented thereby. To the extent permitted under applicable
law, any such portion of the Exchange Fund remaining unclaimed by holders of
shares of Company Common Stock immediately prior to such time as such amounts
would otherwise escheat to or become property of any Governmental Entity (as
defined in Section 2.3(c)) shall become the property of Parent free and clear of
any claims or interest of any Person previously entitled thereto.
1.8 No Further Ownership Rights in the Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof (including any cash paid in
respect thereof pursuant to Section 1.6(f) and 1.7(d)) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of
Company Common Stock, and there shall be no further registration of transfers on
the records of the Surviving Corporation of shares of Company Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Parent Common
Stock, cash for fractional shares, if any, as may be required pursuant to
Section 1.6(f) and any dividends or distributions payable pursuant to Section
1.7(d); provided, however, that Parent may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificates to deliver a bond in such sum as it may reasonably direct
as indemnity against any claim that
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may be made against Parent, the Company or the Exchange Agent with respect to
the Certificates alleged to have been lost, stolen or destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368(a) of
the Code. The parties hereto adopt this Agreement as a plan of reorganization
within the meaning of Treasury Regulations Sections 1.368-2(g) and 1.368-3(a).
1.11 Further Action. At and after the Effective Time, the officers and
directors of Parent and the Surviving Corporation will be authorized to execute
and deliver, in the name and on behalf of the Company and Merger Sub, any deeds,
bills of sale, assignments or assurances and to take and do, in the name and on
behalf of the Company and Merger Sub, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets acquired or to be acquired by the Surviving Corporation as a result of,
or in connection with, the Merger.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub, subject to
the exceptions specifically disclosed in writing in the disclosure letter
supplied by Company to Parent dated as of the date hereof and certified by a
duly authorized executive officer of Company (the "COMPANY DISCLOSURE LETTER"),
including to the extent further qualified by the applicable provisions of
Section 8.3(a), as follows:
2.1 Organization; Standing and Power; Charter Documents; Subsidiaries.
(a) Organization; Standing and Power. The Company and each of its
Subsidiaries (as defined below) (i) is a corporation or other organization duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization, (ii) has the requisite power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted, and (iii) is duly qualified or licensed and in
good standing to do business in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary, other than in such jurisdictions where the failure to so
qualify or to be in good standing, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect (as defined in Section
8.3(b)) on the Company. For purposes of this Agreement, "SUBSIDIARY," when used
with respect to any party, shall mean any corporation or other organization,
whether incorporated or unincorporated, at least a majority of the securities or
other interests of which having by their terms ordinary voting power to elect a
majority of the Board of Directors or others performing similar functions with
respect to such corporation or other organization is directly or indirectly
owned or controlled by such party or by any one or more of its Subsidiaries, or
by such party and one or more of its Subsidiaries.
(b) Charter Documents. The Company has delivered or made available to
Parent: (i) a true and correct copy of the Certificate of Incorporation
(including any Certificate of Designations) and Bylaws of the Company, each as
amended to date (collectively, the "COMPANY CHARTER DOCUMENTS") and (ii) the
certificate of incorporation and bylaws, or like organizational documents
(collectively, "SUBSIDIARY CHARTER DOCUMENTS"), of each of its Subsidiaries, and
each such instrument is in full force and effect. The Company is not in
violation of any of the provisions of the Company Charter Documents and each
Subsidiary is not in violation of its respective Subsidiary Charter Documents.
(c) Subsidiaries. Section 2.1(c) of the Company Disclosure Letter sets
forth each Subsidiary of the Company. All the outstanding shares of capital
stock of, or other equity or voting interests in, each such Subsidiary have been
validly issued and are fully paid and nonassessable and are owned by the
Company, a wholly-owned Subsidiary of the Company, or the Company and another
wholly-owned Subsidiary of the Company, free and clear of all pledges, claims,
liens, charges, encumbrances, options and security interests of any kind or
nature whatsoever (collectively, "LIENS"), including any restriction on the
right to vote, sell
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or otherwise dispose of such capital stock or other ownership interests, except
for restrictions imposed by applicable securities laws, except as would not
reasonably be expected to have a Material Adverse Effect on the Company or a
Material Adverse Effect on such Subsidiary. Other than the Subsidiaries of the
Company, neither the Company nor any of its Subsidiaries owns any capital stock
of, or other equity or voting interests of any nature in, or any interest
convertible, exchangeable or exercisable for, capital stock of, or other equity
or voting interests of any nature in, any other Person.
2.2 Capital Structure.
(a) Capital Stock. The authorized capital stock of Company consists of:
(i) 100,000,000 shares of Company Common Stock, par value $0.001 per share and
(ii) 10,000,000 shares of preferred stock, par value $0.001 per share (the
"COMPANY PREFERRED STOCK"). At the close of business on April 22, 2003: (i)
33,903,543 shares of Company Common Stock were issued and outstanding, excluding
shares of Company Common Stock held by the Company in its treasury, (ii) no
shares of Company Common Stock were issued and held by the Company in its
treasury, and (iii) no shares of Company Preferred Stock were issued and
outstanding, and on the date hereof there has been no change to the number of
shares of Company Common Stock issued and outstanding set forth in clause (i)
other than pursuant to the exercise of Company Options. No shares of Company
Common Stock are owned or held by any Subsidiary of the Company. All of the
outstanding shares of capital stock of Company are, and all shares of capital
stock of Company which may be issued as contemplated or permitted by this
Agreement will be, when issued, duly authorized and validly issued, fully paid
and nonassessable and not subject to any preemptive rights. Section 2.2(a) of
the Company Disclosure Letter sets forth each a list of each holder of Company
Restricted Stock and (a) the name of the holder of such Company Restricted
Stock, (b) the number of shares of Company Restricted Stock held by such holder,
(c) the repurchase price of such Company Restricted Stock, (d) the date on which
such Company Restricted Stock was purchased or granted, (e) the applicable
vesting schedule pursuant to which the Company's right of repurchase or
forfeiture lapses and (f) the extent to which such Company right of repurchase
or forfeiture has lapsed as of April 22, 2003. Upon consummation of the Merger,
(A) the shares of Parent Common Stock issued in exchange for any shares of
Company Restricted Stock will, without any further act of Parent, Merger Sub,
the Company or any other Person, become subject to the restrictions, conditions
and other provisions contained in the contract relating to such Company
Restricted Stock and (B) Parent will automatically succeed to and become
entitled to exercise the Company's rights and remedies under any such contract
without modification. There are no commitments or agreements of any character to
which the Company is bound obligating Company to waive (in whole or in part) its
right of repurchase or forfeiture with respect to any Company Restricted Stock
as a result of the Merger (whether alone or upon the occurrence of any
additional or subsequent events).
(b) Stock Options. As of April 22, 2003: (i) an aggregate of 8,002,424
shares of Company Common Stock are subject to issuance pursuant to outstanding
options to purchase Company Common Stock ("COMPANY OPTIONS") under the Company's
Amended and Restated 1995 Stock Option Plan and the Company's 2000 Employee,
Director and Consultant Stock Plan or otherwise (the "COMPANY STOCK PLANS"), and
(ii) 32 shares of Company Common Stock are reserved for future issuance under
the Company Purchase Plan. Section 2.2(b) of the Company Disclosure Letter sets
forth a list of each outstanding Company Option issued other than pursuant to
the Company Purchase Plan, and (a) the particular Company Stock Plan (if any)
pursuant to which such Company Option was granted, (b) the name of the holder of
such Company Option, (c) the number of shares of Company Common Stock subject to
such outstanding Company Option, (d) the exercise price of such Company Option,
(e) the date on which such Company Option was granted, (e) the applicable
vesting schedule, and the extent to which such Company Option is vested and
exercisable as of April 11, 2003, and (f) the date on which such Company Option
expires; and since April 11, 2003 there have been no changes in the information
provided pursuant to clauses (a) through (f) except changes resulting from the
vesting or exercise of Company Options in accordance with the terms of the
applicable Company Stock Plan and option agreement. All shares of Company Common
Stock subject to issuance under the Company Stock Plans and the Company Purchase
Plan, upon issuance in accordance with the terms and conditions specified in
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the instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. Except as otherwise set forth in
Section 2.2(b) of the Company Disclosure Letter, there are no commitments or
agreements of any character to which the Company is bound obligating the Company
to accelerate the vesting of any Company Option or Common Restricted Stock as a
result of the Merger (whether alone or upon the occurrence of any additional or
subsequent events). There are no outstanding or authorized stock appreciation,
phantom stock, profit participation or other similar rights with respect to the
Company.
(c) Voting Debt. No bonds, debentures, notes or other indebtedness of the
Company or any of its Subsidiaries (i) having the right to vote on any matters
on which stockholders may vote (or which is convertible into, or exchangeable
for, securities having such right) or (ii) the value of which is any way based
upon or derived from capital or voting stock of the Company, is issued or
outstanding as of the date hereof (collectively, "VOTING DEBT").
(d) Other Securities. Except as otherwise set forth in Section 2.2(d) of
the Company Disclosure Letter, as of the date hereof, there are no securities,
options, warrants, calls, rights, contracts, commitments, agreements,
instruments, arrangements, understandings, obligations or undertakings of any
kind to which the Company or any of its Subsidiaries is a party or by which any
of them is bound obligating Company or any of its Subsidiaries to (including on
a deferred basis) issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock, Voting Debt or other voting securities
of Company or any of its Subsidiaries, or obligating the Company or any of its
Subsidiaries to issue, grant, extend or enter into any such security, option,
warrant, call, right, contract, commitment, agreement, instrument, arrangement,
understanding, obligation or undertaking. All outstanding shares of Company
Common Stock, all outstanding Company Options, and all outstanding shares of
capital stock of each Subsidiary of Company have been issued and granted in
compliance in all material respects with (i) all applicable securities laws and
all other applicable Legal Requirements (as defined below) and (ii) all
requirements set forth in applicable material Contracts. Except for shares of
Company Restricted Stock, there are not any outstanding Contracts of the Company
or any of its Subsidiaries to (i) repurchase, redeem or otherwise acquire any
shares of capital stock of, or other equity or voting interests in, the Company
or any of its Subsidiaries or (ii) dispose of any shares of the capital stock
of, or other equity or voting interests in, any of its Subsidiaries. Except as
otherwise set forth in Section 2.2(d) of the Company Disclosure Letter, the
Company is not a party to any voting agreement with respect to shares of the
capital stock of, or other equity or voting interests in, the Company or any of
its Subsidiaries and, to the knowledge of the Company, other than the Company
Voting Agreements and the irrevocable proxies granted pursuant to the Company
Voting Agreements, there are no irrevocable proxies and no voting agreements,
voting trusts, rights plans, anti-takeover plans or registration rights
agreements with respect to any shares of the capital stock of, or other equity
or voting interests in, the Company or any of its Subsidiaries. For purposes of
this Agreement, "CONTRACT" shall mean any written, oral or other agreement,
contract, subcontract, settlement agreement, lease, binding understanding,
instrument, note, option, warranty, purchase order, license, sublicense,
insurance policy, benefit plan or legally binding commitment or undertaking of
any nature, as in effect as of the date hereof or as may hereinafter be in
effect. For purposes of this Agreement, "LEGAL REQUIREMENTS" shall mean any
federal, state, local, municipal, foreign or other law, statute, constitution,
principle of common law, resolution, ordinance, code, order, edict, decree,
rule, regulation, ruling or requirement issued, enacted, adopted, promulgated,
implemented or otherwise put into effect by or under the authority of any
Governmental Entity.
2.3 Authority; Non-Contravention; Necessary Consents.
(a) Authority. The Company has all requisite corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby has been duly authorized by all necessary
corporate action on the part of the Company and no other corporate proceedings
on the part of the Company are necessary to authorize the execution and delivery
of this Agreement or to consummate the Merger and the other transactions
contemplated hereby, subject only to the approval and adoption of this Agreement
and the approval of the Merger by the Company's stockholders and the filing of
the
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Certificate of Merger pursuant to Delaware Law. The affirmative vote of the
holders of a majority of the outstanding shares of Company Common Stock to
approve and adopt this Agreement and approve the Merger is the only vote of the
holders of any class or series of Company capital stock necessary to approve and
adopt this Agreement, approve the Merger and consummate the Merger and the other
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Company and, assuming due execution and delivery by Parent and
Merger Sub, constitutes the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
(b) Non-Contravention. The execution and delivery of this Agreement by the
Company does not, and performance of this Agreement by the Company and the
consummation of the Merger and the transactions contemplated hereby will not:
(i) conflict with or violate the Company Charter Documents or any Subsidiary
Charter Documents of any Subsidiary of the Company, (ii) subject to obtaining
the approval and adoption of this Agreement and the approval of the Merger by
the Company's stockholders as contemplated in Section 5.2 and compliance with
the requirements set forth in Section 2.3(c), conflict with or violate any
material Legal Requirement applicable to the Company or any of its Subsidiaries
or by which the Company or any of its Subsidiaries or any of their respective
properties is bound or affected, or (iii) result in any breach of or constitute
a default (or an event that with notice or lapse of time or both would become a
default) under, or materially impair the Company's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a Lien on any of the properties or assets of the Company or any of
its Subsidiaries pursuant to, any Company Material Contract (as defined in
Section 2.15). Section 2.3(b) of the Company Disclosure Letter lists all
consents, waivers and approvals under any of the Company's or any of its
Subsidiaries' Contracts required to be obtained in connection with the
consummation of the transactions contemplated hereby, which, if individually or
in the aggregate are not obtained, would result in a material loss of benefits
to the Company, Parent or the Surviving Corporation as a result of the Merger.
(c) Necessary Consents. No consent, approval, order or authorization of,
or registration, declaration or filing with any supranational, national, state,
municipal, local or foreign government, any instrumentality, subdivision, court,
administrative agency or commission or other governmental authority or
instrumentality, or any quasi-governmental or private body exercising any
regulatory, taxing, importing or other governmental or quasi-governmental
authority (a "GOVERNMENTAL ENTITY") is required to be obtained or made by the
Company in connection with the execution and delivery of this Agreement or the
consummation of the Merger and other transactions contemplated hereby, except
for: (i) the filing of the Certificate of Merger with the Secretary of State of
the State of Delaware and appropriate documents with the relevant authorities of
other states in which the Company and/or Parent are qualified to do business,
(ii) the filing of the Prospectus/Proxy Statement (as defined in Section 2.16)
with the SEC in accordance with the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT") and the effectiveness of the Registration Statement (as
defined in Section 2.16), (iii) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable federal, foreign and state securities (or related) laws and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT"), (iv) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable state securities or
"blue sky" laws and the securities laws of any foreign country, and (v) such
other consents, authorizations, filings, approvals and registrations which if
not obtained or made would not be material to the Company or Parent or
materially adversely affect the ability of the parties hereto to consummate the
Merger within the time frame in which the Merger would otherwise be consummated
in the absence of the need for such consent, approval, order, authorization,
registration, declaration or filings. The consents, approvals, orders,
authorizations, registrations, declarations and filings set forth in (i) through
(iv) are referred to herein as the "NECESSARY CONSENTS."
2.4 SEC Filings; Financial Statements.
(a) SEC Filings. The Company has filed all required registration
statements, prospectuses, reports, schedules, forms, statements and other
documents (including exhibits and all other information incorporated by
reference) required to be filed by it with the SEC since January 1, 2002. The
Company
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has made available to Parent all such registration statements, prospectuses,
reports, schedules, forms, statements and other documents in the form filed with
the SEC. All such required registration statements, prospectuses, reports,
schedules, forms, statements and other documents (including those that the
Company may file subsequent to the date hereof until the Effective Time) are
referred to herein as the "COMPANY SEC REPORTS." As of their respective dates,
the Company SEC Reports (i) were prepared in accordance and complied in all
material respects with the requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), or the Exchange Act, as the case may be, and the
rules and regulations of the SEC thereunder applicable to such Company SEC
Reports and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. None of the Company's Subsidiaries is required to file any
forms, reports or other documents with the SEC.
(b) Financial Statements. Each of the consolidated financial statements
(including, in each case, any related notes thereto) contained in the Company
SEC Reports (the "COMPANY FINANCIALS"), including each Company SEC Report filed
after the date hereof until the Closing: (i) complied as to form in all material
respects with the published rules and regulations of the SEC with respect
thereto, (ii) was prepared in accordance with United States generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited interim financial statements, as may be permitted by the SEC
on Form 10-Q, 8-K or any successor form under the Exchange Act), and (iii)
fairly presented in all material respects the consolidated financial position of
the Company and its consolidated Subsidiaries as at the respective dates thereof
and the consolidated results of the Company operations and cash flows for the
periods indicated. The balance sheet of the Company contained in the Company SEC
Reports as of December 31, 2002 is hereinafter referred to as the "COMPANY
BALANCE SHEET." Except as disclosed in the Company Financials, since the date of
the Company Balance Sheet, neither Company nor any of its Subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise) of a nature required to
be disclosed on a consolidated balance sheet or in the related notes to the
consolidated financial statement prepared in accordance with GAAP which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of the Company and its Subsidiaries taken as a
whole, other than liabilities incurred (i) in the ordinary course of business
consistent with past practices or (ii) in connection with the performance by the
Company of its obligations under this Agreement and the transactions
contemplated herein.
2.5 Absence of Certain Changes or Events. Since the date of the Company
Balance Sheet through the date hereof each of the Company and its Subsidiaries
has conducted its respective business only in the ordinary course of business
consistent with past practice and there has not been: (i) any Material Adverse
Effect on the Company, (ii) any declaration, setting aside or payment of any
dividend on, or other distribution (whether in cash, stock or property) in
respect of, any of the Company's or any of its Subsidiaries' capital stock, or
any purchase, redemption or other acquisition by the Company or any of its
Subsidiaries of any of the Company's capital stock or any other securities of
the Company or its Subsidiaries or any options, warrants, calls or rights to
acquire any such shares or other securities except for repurchases from Company
Employees or independent contractors following their termination pursuant to the
terms of their pre-existing stock option or purchase agreements, (iii) any
split, combination or reclassification of any of the Company's or any of its
Subsidiaries' capital stock, (iv) any granting by the Company or any of its
Subsidiaries of any increase in compensation or fringe benefits, except for
increases of cash compensation (other than to directors or executive officers of
the Company) in the ordinary course of business consistent with past practice,
or any payment by the Company or any of its Subsidiaries of any bonus, except
for bonuses (other than to directors or executive officers of the Company) made
in the ordinary course of business consistent with past practice, or any
granting by the Company or any of its Subsidiaries of any increase in severance
or termination pay or any entry by the Company or any of its Subsidiaries into,
or material modification or amendment of, any currently effective employment,
severance, termination or indemnification agreement or any agreement the
benefits of which are contingent
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or the terms of which are materially altered upon the occurrence of a
transaction involving the Company of the nature contemplated hereby, (v) entry
by the Company or any of its Subsidiaries into any licensing or other agreement
with regard to the acquisition or disposition of any material Intellectual
Property (as defined in Section 2.7(h)) other than licenses, distribution
agreements, advertising agreements, sponsorship agreements, or merchant program
agreements entered into in the ordinary course of business consistent with past
practice, (vi) any amendment or consent with respect to any Company Material
Contract in effect since the date of the Company Balance Sheet other than
statements of work or similar amendments to such Company Material Contracts in
the ordinary course of business consistent with past practice, (vii) any
material change by the Company in its accounting methods, principles or
practices, except as required by concurrent changes in GAAP or by the SEC,
(viii) any material revaluation by the Company of any of its assets, including,
without limitation, writing down the value of capitalized inventory or writing
off notes or accounts receivable other than in the ordinary course of business
consistent with past practice, (ix) any communication from Nasdaq with respect
to the delisting of the Company Common Stock, (x) any cancellation by the
Company or any of its Subsidiaries of any debts or waiver of any claims or
rights of material value, (xi) any sale, transfer or other disposition outside
of the ordinary course of business of any properties or assets (real, personal
or mixed, tangible or intangible) by the Company or any of its Subsidiaries, or
(xii) any agreement, whether in writing or otherwise, to take any action
described in this section by the Company or any of its Subsidiaries.
2.6 Taxes.
(a) Definition. For the purposes of this Agreement, the term "TAX" or,
collectively, "TAXES" shall mean any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities in the nature of taxes, including taxes based upon or measured by
gross receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts.
(b) Tax Returns and Audits.
(i) The Company and each of its Subsidiaries have prepared and timely filed
all required federal, state, local and foreign returns, estimates, information
statements and reports and any amendments thereto ("TAX RETURNS") relating to
any and all Taxes concerning or attributable to the Company, its Subsidiaries or
their respective operations and such Tax Returns are true and correct and have
been completed in accordance with applicable law.
(ii) The Company and each of its Subsidiaries have timely paid to the
appropriate Taxing authority all Taxes and any other amounts required to be paid
or withheld.
(iii) Neither the Company nor any of its Subsidiaries has been delinquent
in the payment of any Tax, nor is there any Tax deficiency outstanding, assessed
or proposed against the Company or any of its Subsidiaries, nor has the Company
or any of its Subsidiaries executed any waiver of any statute of limitations on
or extending the period for the assessment or collection of any Tax.
(iv) No audit or other examination of any Tax Return of the Company or any
of its Subsidiaries is presently in progress, nor has the Company or any of its
Subsidiaries been notified of any request for such an audit or other
examination.
(v) Neither the Company nor any of its Subsidiaries has any liabilities for
unpaid Taxes which have not been accrued or reserved on the Company Balance
Sheet in accordance with GAAP, and neither the Company nor any of its
Subsidiaries has incurred any liability for Taxes since the date of the Company
Balance Sheet other than in the ordinary course of business.
(vi) The Company has made available to Parent or its legal counsel, copies
of all Tax Returns for the Company and each of its Subsidiaries filed for all
periods since inception.
(vii) There are no Liens on the assets of the Company or any of its
Subsidiaries relating to or attributable to Taxes, other than Liens for Taxes
not yet due and payable. There is no basis for the
A-15
assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien for Taxes on the assets of the Company or
any of its Subsidiaries.
(viii) None of the assets of the Company or any of its Subsidiaries is
treated as "tax-exempt use property," within the meaning of Section 168(h) of
the Code.
(ix) Neither the Company nor any of its Subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by the Company or any of its Subsidiaries.
(x) Neither the Company nor any of its Subsidiaries is, nor has been at any
time, a "United States Real Property Holding Corporation" within the meaning of
Section 897(c)(2) of the Code.
(xi) No adjustment relating to any Tax Return filed by the Company or any
of its Subsidiaries has been proposed formally or, to the knowledge of the
Company or any of its Subsidiaries, informally by any tax authority to the
Company, any of its Subsidiaries or any representative thereof.
(xii) Neither the Company nor any of its Subsidiaries has (a) ever been a
member of an affiliated group (within the meaning of Code sec. 1504(a)) filing a
consolidated federal income Tax Return (other than a group the common parent of
which was Company), (b) ever been a party to any Tax sharing, indemnification or
allocation agreement, nor does the Company or any of its Subsidiaries owe any
amount under any such agreement, (c) any liability for the Taxes of any person
(other than Company or any of its Subsidiaries) under Treas. Reg. sec. 1.1502-6
(or any similar provision of state, local or foreign law), as a transferee or
successor, by contract, or otherwise and (d) ever been a party to any joint
venture, partnership or other agreement that could be treated as a partnership
for Tax purposes.
(xiii) Neither the Company nor any of its Subsidiaries has constituted
either a "distributing corporation" or a "controlled corporation" in a
distribution of stock intended to qualify for tax-free treatment under Section
355 of the Code (x) in the two years prior to the date of this Agreement or (y)
in a distribution which could otherwise constitute part of a "plan" or "series
of related transactions" (within the meaning of Section 355(e) of the Code) in
conjunction with the Merger.
2.7 Intellectual Property. Except as set forth in Section 2.7 of the
Company Disclosure Letter:
(a) To the knowledge of the Company the operation of the business of
the Company and each of its Subsidiaries, including their products and
services, does not infringe or misappropriate in any material respect the
Intellectual Property (defined below) of any third party or constitute
unfair competition or unfair trade practices under the laws of any
jurisdiction. The Company and its Subsidiaries own or possess sufficient
rights to all material Intellectual Property used in their businesses and
all Intellectual Property necessary for the operation of their businesses.
(b) As of the date hereof and, except as will not have a Material
Adverse Effect on or after the Closing Date, neither Company nor any of its
Subsidiaries have received or will have received any written notice from
any third party, and, to the knowledge of Company, there is and will be no
other assertion or pending threat from any third party, that the operation
of the business of Company or any of its Subsidiaries, or any of their
products or services, infringes or misappropriates the Intellectual
Property of any third party or constitutes unfair competition or unfair
trade practices under the laws of any jurisdiction. As of the date hereof
and, except as will not have a Material Adverse Effect, on the Closing
Date, neither Company nor any its Subsidiaries have brought or will have
brought, or have been or will have been, a party to any suits, arbitrations
or other adversarial proceedings with respect to a third party's
Intellectual Property that remain unresolved.
(c) To the knowledge of the Company, as of the date hereof, no person
is infringing or misappropriating any material Intellectual Property owned
or exclusively licensed by the Company or any of its Subsidiaries. Neither
the Company nor any its Subsidiaries have brought or have been a party to
any suits, arbitrations or other adversarial proceedings with respect to
their Intellectual Property against any third party that remain unresolved.
A-16
(d) The Company and its Subsidiaries are not subject to any judgment,
order, writ, injunction or decree of any court or any Federal, state,
local, foreign or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any arbitrator, which
restricts or impairs the use of any of their Intellectual Property. The
Intellectual Property owned or exclusively licensed by the Company is free
and clear of any Liens.
(e) The Company and each of its Subsidiaries are in material
compliance with, and have not materially breached any term of any
contracts, licenses or other agreements in which the Company and its
Subsidiaries have granted or received any Intellectual Property ("COMPANY
IP AGREEMENTS"). To the knowledge of the Company, all third parties to such
Company IP Agreements are in compliance in all material respects with, and
have not materially breached, any of their terms.
(f) The Merger will not result in the termination or breach of any
Company IP Agreements, or any material loss or change in the rights or
obligations of the Company or its Subsidiaries or any third party to such
Company IP Agreements. The Merger will not result in the obligation for the
Company or its Subsidiaries to pay any consideration, royalties or other
amounts to any third party in excess of those amounts otherwise owed by the
Company or its Subsidiaries immediately prior to the Merger.
(g) The Merger will not result in: (i) Parent or its Subsidiaries
(other than Merger Sub, but only to the extent existing prior to the
Merger) being bound by any material non-compete, material exclusivity
obligation or other material restriction on the operation of any business
of the Company or its Subsidiaries, including any of their products or
services, or (ii) Parent or its Subsidiaries (other than Merger Sub, but
only to the extent existing prior to the Merger) granting to any third
party any rights or licenses to any material Intellectual Property of
Parent or any affiliate of Parent (including without limitation a covenant
not to sue) pursuant to any agreements or obligations of the Company or its
Subsidiaries.
(h) "INTELLECTUAL PROPERTY" shall mean any or all of the following and
all rights in, arising out of, or associated therewith: (a) all United
States, international and foreign patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (b) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data and customer lists, and
all documentation relating to any of the foregoing; (c) all copyrights,
copyrights registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (d) all mask works, mask work
registrations and applications therefor, and any equivalent or similar
rights in semiconductor masks, layouts, architectures or topology; (e)
domain names, uniform resource locators, and other names and locators
associated with the Internet, (f) all computer software, including all
source code, object code, firmware, development tools, files, records and
data, and all media on which any of the foregoing is recorded; (g) all
industrial designs and any registrations and applications therefor
throughout the world; (h) all trade names, logos, common law trademarks and
service marks, trademark and service mark registrations and applications
therefor throughout the world; (i) all databases and data collections and
all rights therein throughout the world; (j) all moral and economic rights
of authors and inventors, however denominated, throughout the world, and
(k) any similar or equivalent rights to any of the foregoing anywhere in
the world.
2.8 Compliance; Permits.
(a) Compliance. Neither the Company nor any of its Subsidiaries is, in any
material respect, in conflict with, or in default or in violation of any Legal
Requirement applicable to the Company or any of its Subsidiaries or by which the
Company or any of its Subsidiaries or any of their respective businesses or
properties is, or the Company believes is reasonably likely to be, bound or
affected, except, in each case, or in the aggregate, for conflicts, violations
and defaults that would not have a Material Adverse Effect on the Company. As of
the date hereof, no investigation or review by any Governmental Entity is
pending or, to the knowledge of the Company, has been threatened in a writing
delivered to the Company or any of its Subsidiaries, against the Company or any
of its Subsidiaries other than as contemplated by this Agreement. There is no
judgment, injunction, order or decree binding upon the Company or any of its
A-17
Subsidiaries which has or would reasonably be expected to have the effect of
prohibiting or impairing any business practice of the Company or any of its
Subsidiaries, any acquisition of property by the Company or any of its
Subsidiaries or the conduct of business by the Company and its Subsidiaries as
currently conducted, except as would not have a Material Adverse Effect on the
Company.
(b) Permits. The Company and its Subsidiaries hold, to the extent legally
required, all permits, licenses, variances, clearances, consents, commissions,
franchises, exemptions, orders, authorizations and approvals from Governmental
Entities ("PERMITS") that are required for the operation of the business of the
Company (collectively, "COMPANY PERMITS"), except where the failure to hold such
Permits would not have a Material Adverse Effect on the Company. As of the date
hereof, no suspension or cancellation of any of the Company Permits is pending
or, to the knowledge of the Company, threatened. The Company and its
Subsidiaries are in compliance in all material respects with the terms of the
Company Permits.
2.9 Litigation. As of the date hereof and, except as will not have a
Material Adverse Effect on or after the Closing Date, there are and will be no
claims, suits, actions or proceedings pending or, to the knowledge of the
Company, threatened against the Company or any of its Subsidiaries, before any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator.
2.10 Brokers' and Finders' Fees; Fees and Expenses. Except for fees
payable to Morgan Stanley & Co. Incorporated pursuant to an engagement letter
dated October 15, 2002, a copy of which has been provided to Parent, the Company
has not incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby, and the
Company has not entered into any indemnification agreement or arrangement with
any Person in connection with this Agreement and the transactions contemplated
hereby. An itemized good faith estimate of the fees and expenses of any
accountant, broker, financial advisor, consultant, legal counsel or other Person
retained by the Company in connection with this Agreement or the transactions
contemplated hereby incurred or to be incurred by the Company in connection with
this Agreement and the transactions contemplated hereby (including any agreement
or understanding with respect to such agreement or understanding, whether
written or oral) is set forth in Section 2.10 of the Company Disclosure Letter,
and all such fees are, and shall be, reasonable and customary in nature.
2.11 Transactions with Affiliates. Except as set forth in the Company SEC
Reports, since the date of the Company's last proxy statement filed with the
SEC, no event has occurred as of the date hereof that would be required to be
reported by the Company pursuant to Item 404 of Regulation S-K promulgated by
the SEC. Section 2.11 of the Company Disclosure Letter identifies each Person
who is an "affiliate" (as that term is used in Rule 145 promulgated under the
Securities Act) of the Company as of the date hereof.
2.12 Employee Benefit Plans.
(a) Schedule. Except with respect to plans such as workers' compensation
which are required by law, Section 2.12(a) of the Company Disclosure Letter
contains an accurate and complete list of (i) each plan, program, policy,
practice, contract, agreement or other arrangement providing for compensation,
severance, termination pay, deferred compensation, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether written or unwritten or otherwise, funded or unfunded,
including without limitation, each "employee benefit plan," within the meaning
of Section 3(3) of ERISA which is or has been, within the past three years,
maintained, contributed to, or required to be contributed to, by the Company or
any Subsidiary of the Company or any other person or entity under common control
with the Company or any Subsidiaries within the meaning of Section 414(b), (c),
(m) or (o) of the Code and the regulations issued thereunder (each a "COMPANY
ERISA AFFILIATE") for the benefit of any current or former or retired employee,
consultant or director of the Company or any Company ERISA Affiliate (each a
"COMPANY EMPLOYEE"), or with respect to which the Company or any Company ERISA
Affiliate has or may have any liability or obligation (collectively, the
"COMPANY EMPLOYEE PLANS"), and (ii) each employment, severance or consulting
agreement between the Company or any Company ERISA Affiliate and any Company
Employee (each a "COMPANY
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EMPLOYEE AGREEMENT"), except to the extent a Company Employee Agreement provides
for "at-will" employment and does not provide for severance payments or
benefits. Neither the Company nor any Company ERISA Affiliate has any plan or
commitment to establish any new Company Employee Plan or Company Employee
Agreement, to modify any Company Employee Plan or Company Employee Agreement
(except to the extent required by law or to conform any such Company Employee
Plan or Company Employee Agreement to the requirements of any applicable law, in
each case as previously disclosed to Parent in writing, or as required by this
Agreement), or to adopt or enter into any Company Employee Plan or Company
Employee Agreement, except, in each case, or in the aggregate, as would not
result in material liability to the Company or its Subsidiaries.
(b) Documents. The Company has provided or made available to Parent
correct and complete copies of: (i) all documents embodying each Company
Employee Plan and each Company Employee Agreement including (without limitation)
all amendments thereto and all related trust documents, administrative service
agreements, group annuity contracts, group insurance contracts, and policies
pertaining to fiduciary liability insurance covering the fiduciaries for each
Company Employee Plan; (ii) the most recent annual actuarial valuations, if any,
prepared for each Company Employee Plan; (iii) the three (3) most recent annual
reports (Form Series 5500 and all schedules and financial statements attached
thereto), if any, required under ERISA or the Code in connection with each
Company Employee Plan; (iv) if the Company Employee Plan is funded, the most
recent annual and periodic accounting of Company Employee Plan assets; (v) the
most recent summary plan description together with the summary(ies) of material
modifications thereto, if any, required under ERISA with respect to each Company
Employee Plan; (vi) all IRS determination, opinion, notification and advisory
letters; (vii) all material correspondence to or from any governmental agency in
the past three years relating to any Company Employee Plan; (viii)
discrimination tests for each Company Employee Plan for the last plan year
ending prior to the Closing Date, to the extent applicable; (ix) all
prospectuses prepared in connection with each Company Employee Plan; and (x)
visa and work permit information with respect to the current Company Employees;
provided that the Company may limit any information under this Section 2.12 as
required by law, treaty rule or regulation of any Governmental Entity applicable
to the Company or its Subsidiaries to restrict or prohibit access to such
information.
(c) Employee Plan Compliance. The Company and its Company ERISA Affiliates
have performed in all material respects all obligations required to be performed
by them under, are not in material default or violation of, and have no
knowledge of any default or violation by any other party to, each Company
Employee Plan, and each Company Employee Plan has been established and
maintained in all material respects in accordance with its terms and in material
compliance with all applicable laws, statutes, orders, rules and regulations,
including but not limited to ERISA or the Code. Except as set forth in Section
2.12(c) of the Company Disclosure Letter, any Company Employee Plan intended to
be qualified under Section 401(a) of the Code and each trust intended to qualify
under Section 501(a) of the Code has either applied for, prior to the expiration
of the requisite period under applicable Treasury Regulations or IRS
pronouncements, or obtained a favorable determination, notification, advisory
and/or opinion letter, as applicable, as to its qualified status from the IRS or
still has a remaining period of time under applicable Treasury Regulations or
IRS pronouncements in which to apply for such letter and to make any amendments
necessary to obtain a favorable determination. For each Company Employee Plan
that is intended to be qualified under Section 401(a) of the Code there has been
no event, condition or circumstance that has adversely affected or is, in any
material respect, likely to adversely affect such qualified status. Except, in
each case, or in the aggregate, as would not result in material liability to the
Company or its Subsidiaries: (i) no "prohibited transaction," within the meaning
of Section 4975 of the Code or Sections 406 and 407 of ERISA, and not otherwise
exempt under Section 408 of ERISA, has occurred with respect to any Company
Employee Plan; (ii) neither the Company nor any Company ERISA Affiliate is
subject to any penalty or tax with respect to any Company Employee Plan under
Section 502(i) of ERISA or Sections 4975 through 4980 of the Code; and (iii) the
Company and each Company ERISA Affiliate have timely made all contributions and
other payments required by and due under the terms of each Company Employee
Plan. There are no actions, suits or claims pending, or, to the knowledge of the
Company, threatened or reasonably anticipated (other than routine claims for
benefits)
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against any Company Employee Plan or against the assets of any Company Employee
Plan. Except to the extent limited by applicable law, each Company Employee Plan
can be amended, terminated or otherwise discontinued after the Effective Time in
accordance with its terms, without material liability to Parent, Company or any
of its Company ERISA Affiliates (other than ordinary administration expenses).
There are no audits, inquiries or proceedings pending or, to the knowledge of
the Company or any Company ERISA Affiliates, threatened by the IRS or the
Department of Labor ("DOL"), or any other Governmental Entity with respect to
any Company Employee Plan.
(d) No Pension or Welfare Plans. Neither the Company nor any Company ERISA
Affiliate has ever maintained, established, sponsored, participated in, or
contributed to, any (i) Company Employee Plan which is an "employee pension
benefit plan," within the meaning of Section 3(2) of ERISA ("PENSION PLAN") and
is subject to Title IV of ERISA or Section 412 of the Code, (ii) Pension Plan
which is a "multiemployer plan," as defined in Section 3(37) of ERISA, (iii)
"multiple employer plan" as defined in ERISA or the Code, or (iv) a "funded
welfare plan" within the meaning of Section 419 of the Code. No Company Employee
Plan provides health benefits that are not fully insured through an insurance
contract except as set forth in Section 2.12(d) of the Company Disclosure
Letter.
(e) No Post-Employment Obligations. Except as set forth in Section 2.12(e)
of the Company Disclosure Letter, no Company Employee Plan currently provides,
or reflects or represents any liability to provide post-termination or retiree
welfare benefits to any person for any reason, except as may be required by
COBRA or other applicable statute, and neither the Company nor any Company ERISA
Affiliate has any liability to provide post-termination or retiree welfare
benefits to any person or ever represented, promised or contracted (other than
in written form) to any Employee (either individually or to Employees as a
group) or any other person that such Employee(s) or other person would be
provided with post-termination or retiree welfare benefits, except to the extent
required by statute. As used in this Agreement, "COBRA"shall mean the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended and as
codified in Section 4980B of the Code and Section 601 et. seq. of ERISA.
(f) Health Care Compliance. Neither the Company nor any Company ERISA
Affiliate has, prior to the Effective Time and in any material respect, violated
any of the health care continuation requirements of COBRA, the requirements of
the Family Medical Leave Act of 1993, as amended, the requirements of the Health
Insurance Portability and Accountability Act of 1996, the requirements of the
Women's Health and Cancer Rights Act of 1998, the requirements of the Newborns'
and Mothers' Health Protection Act of 1996, or any amendment to each such act,
or any similar provisions of state law applicable to its Employees.
(g) Executive Loans. Neither the Company nor any Company ERISA Affiliate
has violated Section 402 of Sarbanes-Oxley Act of 2002 and the execution of this
Agreement and the consummation of the transactions contemplated hereby will not,
to the knowledge of the Company, cause such a violation.
(h) Effect of Transaction.
(i) Except as set forth in Section 2.12(h)(i) of the Company Disclosure
Letter, the execution of this Agreement and the consummation of the transactions
contemplated hereby will not (either alone or upon the occurrence of an
individual's termination of employment within one year prior to or three years
following the transactions contemplated hereby), constitute an event under any
Company Employee Plan, Company Employee Agreement, trust or loan that will or
may result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(ii) Except as set forth in Section 2.12(h)(ii) of the Company Disclosure
Letter, no payment or benefit which will or may be made by the Company or its
Company ERISA Affiliates with respect to any Employee will be characterized as a
"parachute payment," within the meaning of Section 280G(b)(2) of the Code. There
is no contract, agreement, plan or arrangement to which Company or any of its
Company ERISA Affiliates is a party or by which it is bound to compensate any
Employee for excise taxes paid pursuant to Section 4999 of the Code.
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(i) Employment Matters. The Company: (i) is in compliance in all material
respects with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Employees; and
(ii) is not liable for any payment to any trust or other fund governed by or
maintained by or on behalf of any governmental authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for Employees (other than routine payments to be made in the normal
course of business and consistent with past practice). There are no claims or
actions against the Company under any worker's compensation policy or long-term
disability policy except as set forth in Section 2.12(i) of the Company
Disclosure Letter. Neither the Company nor any Company ERISA Affiliate has or
reasonably anticipates any direct or indirect material liability with respect to
any misclassification of any person as an independent contractor rather than as
an employee, or with respect to any employee leased from another employer.
(j) Labor. No work stoppage or labor strike against the Company or any
Company ERISA Affiliate is pending, threatened or reasonably anticipated. The
Company does not know of any activities or proceedings of any labor union to
organize any Employees. Except as set forth in Section 2.12(j) of the Company
Disclosure Letter, there are no actions, suits, claims, labor disputes or
grievances pending, or, to the knowledge of the Company, threatened or
reasonably anticipated relating to any labor, safety or discrimination matters
involving any Employee, including, without limitation, charges of unfair labor
practices or discrimination complaints, which, if adversely determined, would,
individually or in the aggregate, result in any material liability to the
Company. Neither the Company nor any of its subsidiaries has engaged in any
unfair labor practices within the meaning of the National Labor Relations Act.
Except as set forth in Section 2.12(j) of the Company Disclosure Letter, the
Company is not presently, nor has it been in the past, a party to, or bound by,
any collective bargaining agreement or union contract with respect to Employees
and no collective bargaining agreement is being negotiated with respect to
Employees. Neither the Company nor any of its Subsidiaries have incurred any
material liability or material obligation under the Worker Adjustment and
Retraining Notification Act or any similar state or local law which remains
unsatisfied.
(k) International Employee Plan. Each Company Employee Plan that has been
adopted or maintained by the Company or any Company ERISA Affiliate, whether
informally or formally, or with respect to which the Company or any Company
ERISA Affiliate will or may have any liability, for the benefit of Employees who
perform services outside the United States (each a "COMPANY INTERNATIONAL
EMPLOYEE PLAN") has been established, maintained and administered in material
compliance with its terms and conditions and with the requirements prescribed by
any and all statutory or regulatory laws that are applicable to such Company
International Employee Plan. Furthermore, no Company International Employee Plan
has unfunded liabilities, that as of the Effective Time, will not be offset by
insurance or fully accrued. Except as required by law, no condition exists that
would prevent the Company or Parent from terminating or amending any Company
International Employee Plan at any time for any reason without liability to the
Company or its Company ERISA Affiliates (other than ordinary administration
expenses or routine claims for benefits).
2.13 Title to Properties.
(a) Properties. Neither Company nor any of its Subsidiaries owns any real
property. Section 2.13 of the Company Disclosure Letter sets forth a list of all
real property currently leased by the Company or any of its Subsidiaries, the
name of the lessor, the date of the lease and each amendment thereto. All such
current leases are in full force and effect, are valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing material default or material event of default (or event
which with notice or lapse of time, or both, would constitute a material
default).
(b) Valid Title. The Company and each of its Subsidiaries has good and
valid title to, or, in the case of leased properties and assets, valid leasehold
interests in, all of its tangible properties and assets, real, personal and
mixed, used or held for use in its business, free and clear of any Liens except
for Liens imposed by law in respect of obligations not yet due which are owed in
respect of taxes, except for such
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Liens which are not material in character, amount or extent, and which do not
materially detract from the value, or materially interfere with the present use,
of the property subject thereto or affected thereby.
2.14 Environmental Matters.
(a) Hazardous Material. Except as would not result in a Material Adverse
Effect on the Company or its Subsidiaries, no underground storage tanks and no
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including PCBs, asbestos,
petroleum, urea-formaldehyde and all substances listed as hazardous substances
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to
the United States Resource Conservation and Recovery Act of 1976, as amended,
and the regulations promulgated pursuant to said laws, but excluding office and
janitorial supplies, (a "HAZARDOUS MATERIAL") are present, as a result of the
actions of the Company or any of its Subsidiaries or any affiliate of the
Company, or, to the knowledge of the Company, as a result of any actions of any
third party or otherwise, in, on or under any property, including the land and
the improvements, ground water and surface water thereof, that the Company or
any of its Subsidiaries has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as would not result in a
Material Adverse Effect on the Company: (i) neither the Company nor any of its
Subsidiaries has transported, stored, used, manufactured, disposed of, released
or exposed its employees or others to Hazardous Materials in violation of any
law in effect on or before the Closing Date and (ii) neither the Company nor any
of its Subsidiaries has disposed of, transported, sold, used, released, exposed
its employees or others to or manufactured any product containing a Hazardous
Material (collectively, "HAZARDOUS MATERIALS ACTIVITIES") in violation of any
rule, regulation, treaty or statute promulgated by any Governmental Entity in
effect prior to or as of the date hereof to prohibit, regulate or control
Hazardous Materials or any Hazardous Material Activity.
2.15 Contracts.
(a) Material Contracts. For purposes of this Agreement, "COMPANY MATERIAL
CONTRACT" shall mean:
(i) any "material contracts" (as such term is defined in Item
601(b)(10) of Regulation S-K of the SEC) with respect to the Company and
its Subsidiaries;
(ii) any employment or consulting Contract with any executive officer
or other employee of the Company or member of the Company's Board of
Directors earning an annual salary in excess of the lowest annual base
salary reported in the Company's most recent annual report on Form 10-K or
definitive proxy statement for any of the Company's "named executive
officers," as such term is defined in Item 402(a)(3) of Regulation S-K of
the SEC, other than those that are terminable by the Company or any of its
Subsidiaries on no more than thirty (30) days notice without liability or
financial obligation to the Company;
(iii) any Contract or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(iv) any agreement of indemnification or any guaranty other than any
agreement of indemnification entered into in connection with the sale or
license of services or hardware or software products in the ordinary course
of business;
(v) any Contract containing any covenant (A) limiting in any respect
the right of the Company or any of its Subsidiaries to engage in any line
of business, to make use of any Intellectual Property or compete with any
Person in any line of business or to compete with any person, (B) granting
any exclusive rights, or (C) otherwise prohibiting or limiting the right of
the Company and its
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Subsidiaries to sell, distribute or manufacture any products or services or
to purchase or otherwise obtain any software, components, parts or
subassemblies;
(vi) any Contract relating to the disposition or acquisition by the
Company or any of its Subsidiaries after the date of this Agreement of a
material amount of assets not in the ordinary course of business or
pursuant to which the Company or any of its Subsidiaries has any material
ownership interest in any other Person or other business enterprise other
than the Company's Subsidiaries;
(vii) any dealer, distributor, joint marketing or development
agreement, under which the Company or any of its Subsidiaries have
continuing obligations or costs in excess of $100,000 per year, to jointly
market any product, technology or service, and which may not be canceled
without penalty upon notice of ninety (90) days or less; or any agreement
pursuant to which the Company or any of its Subsidiaries have continuing
obligations to jointly develop any Intellectual Property that will not be
owned, in whole or in part, by the Company or any of its Subsidiaries;
(viii) any Contract to provide source code to any third party for any
product or technology that is material to the Company and its Subsidiaries
taken as a whole;
(ix) any Contract (A) containing any support or maintenance obligation
on the part of the Company or any of its Subsidiaries outside of the
ordinary course of business consistent with past practice or (B) containing
any service obligation or cost on the part of the Company or any of its
Subsidiaries in excess of $100,000, other than those obligations that are
terminable by the Company or any of its Subsidiaries on no more than thirty
(30) days notice without liability or financial obligation to the Company
or its Subsidiaries;
(x) any Contract to license any third party to manufacture or
reproduce any of the Company's products, services or technology or any
Contract to sell or distribute any of the Company's products, services or
technology, except (A) agreements with distributors or sales
representatives in the ordinary course of business consistent with past
practice, or (B) agreements allowing internal backup copies made or to be
made by end-user customers in the ordinary course of business consistent
with past practice;
(xi) any mortgages, indentures, guarantees, loans or credit
agreements, security agreements or other Contracts relating to the
borrowing of money or extension of credit, other than accounts receivables
and payables in the ordinary course of business;
(xii) (A) any settlement agreement entered into within five (5) years
prior to the date of this Agreement relating to Intellectual Property, and
(B) any settlement agreement not relating to Intellectual Property entered
into within two (2) years prior to the date of this Agreement, other than
(I) releases immaterial in nature or amount entered into with former
employees or independent contractors of the Company in the ordinary course
of business consistent with past practice in connection with the routine
cessation of such employee's or independent contractor's employment with
the Company or (II) settlement agreements for cash only (which has been
paid) and does not exceed $20,000 as to such settlement;
(xiii) any other agreement, contract or commitment that has a value of
$250,000 or more in any individual case not described in clauses (i)
through (xii) above;
(xiv) any Company IP Agreement; or
(xv) any Contract, or group of Contracts with a Person (or group of
affiliated Persons), the termination or breach of which would be reasonably
expected to have a material adverse effect on any material division or
business unit or other material operating group of product or service
offerings of the Company or otherwise have a Material Adverse Effect on the
Company.
(b) Schedule. Section 2.15(b) of the Company Disclosure Letter sets forth
a list of all Company Material Contracts to which the Company or any of its
Subsidiaries is a party or is bound by as of the date hereof which are described
in Sections 2.15(a)(i) through 2.15(a)(xiii) and 2.15(a)(xv) hereof.
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(c) No Breach. All Company Material Contracts are valid and in full force
and effect except to the extent they have previously expired in accordance with
their terms or if the failure to be in full force and effect, individually or in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect on the Company. Neither the Company nor any of its Subsidiaries has
violated any provision of, or committed or failed to perform any act which, with
or without notice, lapse of time or both would constitute a default under the
provisions of, any Company Material Contract, except in each case for those
violations and defaults which, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on the Company. To the
knowledge of the Company, neither the Company nor any of its Subsidiaries are in
breach of any material provision of a Company Material Contract.
2.16 Disclosure. None of the information supplied or to be supplied by or
on behalf of the Company for inclusion or incorporation by reference in the
registration statement on Form S-4 (or similar successor form) to be filed with
the SEC by Parent in connection with the issuance of Parent Common Stock
pursuant to the Merger (including amendments or supplements thereto) (the
"REGISTRATION STATEMENT") will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. None of the information
supplied or to be supplied by or on behalf of the Company for inclusion or
incorporation by reference in the Prospectus/Proxy Statement to be filed with
the SEC as part of the Registration Statement (the "PROSPECTUS/PROXY
STATEMENT"), will, at the time the Prospectus/ Proxy Statement is mailed to the
stockholders of the Company, at the time of the Company Stockholders' Meeting
(as defined in Section 5.2(a)) or as of the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. The
Prospectus/Proxy Statement will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations promulgated by
the SEC thereunder. Notwithstanding the foregoing, no representation or warranty
is made by the Company with respect to statements made or incorporated by
reference therein about Parent supplied by Parent for inclusion or incorporation
by reference in the Registration Statement or the Prospectus/Proxy Statement.
2.17 Board Approval. The Board of Directors of the Company has, by
resolutions duly adopted by unanimous vote at a meeting of all Directors duly
called and held and not subsequently rescinded or modified in any way (the
"COMPANY BOARD APPROVAL") (i) determined that the Merger is fair to, and in the
best interests of, the Company and its stockholders and declared this Agreement
and the Merger to be advisable, (ii) approved this Agreement and the
transactions contemplated thereby, including the Merger, and (iii) recommended
that the stockholders of the Company approve and adopt this Agreement and
approve the Merger and directed that such matter be submitted to the Company's
stockholders at the Company Stockholders' Meeting.
2.18 Fairness Opinion. The Company's Board of Directors has received a
written opinion from Morgan Stanley & Co. Incorporated, dated as of April 23,
2003, in customary form to the effect that, as of such date, the Exchange Ratio
is fair, from a financial point of view, to the Company stockholders, and has
delivered to Parent a copy of such opinion.
2.19 Takeover Statutes. The Board of Directors of the Company has taken
all actions so that the restrictions contained in Section 203 of the Delaware
General Corporation Law applicable to a "business combination" (as defined in
such Section 203), and any other similar Legal Requirement, will not apply to
Parent during the pendency of this Agreement, including the execution, delivery
or performance of this Agreement and the consummation of the Merger and the
other transactions contemplated hereby.
2.20 Non-Competition Agreements. Except as set forth in Section 2.20 of
the Company Disclosure Letter, each Company Employee has entered into a
non-competition agreement with the Company (the "NON-COMPETITION AGREEMENTS").
Each Non-Competition Agreement is in substantially the form of one of the three
standard form agreements provided to Parent, is enforceable by the Company on
the date hereof (except as otherwise limited by applicable law or public policy)
and shall be enforceable by each of
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the Company and Parent immediately following the Merger to the full extent
enforceable by the Company immediately prior to the Merger.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by Parent and Merger Sub to the Company dated as of the date hereof and
certified by a duly authorized executive officer of each of Parent and Merger
Sub (the "PARENT DISCLOSURE LETTER"), including to the extent further qualified
by the applicable provisions of Section 8.3(a), as follows:
3.1 Organization; Standing and Power; Charter Documents; Subsidiaries.
(a) Organization; Standing and Power. Parent and each of its Subsidiaries
(i) is a corporation or other organization duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization, (ii) has the requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted and
(iii) is duly qualified or licensed and in good standing to do business in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to so qualify or to be in good standing,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect on Parent.
(b) Charter Documents. Parent has delivered or made available to the
Company (i) a true and correct copy of the Certificate of Incorporation
(including any Certificate of Designations) and Bylaws of Parent, each as
amended to date (collectively, the "PARENT CHARTER DOCUMENTS") and (ii) the
Subsidiary Charter Documents of each of its Significant Subsidiaries (as defined
in Rule 1.02 of Regulation of S-X of the SEC), and each such instrument is in
full force and effect. Parent is not in violation of any of the provisions of
the Parent Charter Documents and each Significant Subsidiary of Parent is not in
violation of its respective Subsidiary Charter Documents.
(c) Subsidiaries. Exhibit 21 to Parent's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002 includes all the Subsidiaries of Parent
which are Significant Subsidiaries. All the outstanding shares of capital stock
of, or other equity or voting interests in, each such Significant Subsidiary
have been validly issued and are fully paid and nonassessable and are owned by
Parent, a wholly-owned Subsidiary of Parent, or Parent and another wholly-owned
Subsidiary of Parent, free and clear of all Liens, including any restriction on
the right to vote, sell or otherwise dispose of such capital stock or other
ownership interests, except for restrictions imposed by applicable securities
laws, except as would not reasonably be expected to have a Material Adverse
Effect on Parent or a Material Adverse Effect on such Subsidiary. Other than the
Subsidiaries of Parent, neither Parent nor any of its Subsidiaries owns any
capital stock of, or other equity or voting interests of any nature in, or any
interest convertible, exchangeable or exercisable for, capital stock of, or
other equity or voting interests of any nature in, any other Person.
3.2 Capital Structure.
(a) Capital Stock. The authorized capital stock of Parent consists of: (i)
140,000,000 shares of Parent Common Stock, par value $0.001 per share and (ii)
40,000,000 shares of preferred stock, par value $0.001 per share, of which
100,000 shares have been designated as Series A Preferred Stock (the "PARENT
SERIES A PREFERRED STOCK"), all of which will be reserved for issuance upon
exercise of preferred stock purchase rights (the "PARENT RIGHTS") issuable
pursuant to the Preferred Shares Rights Agreement dated as of October 23, 1996
by and between Parent and U.S. Stock Transfer Corporation (the "PARENT RIGHTS
AGREEMENT"), a true and complete copy of which is filed as Exhibit 1 to the
Company's Registration Statement on Form 8-A filed with the Commission on
October 31, 1996, and of which 15,000,000 shares have been designated as Series
B Preferred Stock (the "PARENT SERIES B PREFERRED STOCK," and together
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with the Parent Series A Preferred Stock, the "PARENT PREFERRED STOCK"). At the
close of business on April 22, 2003: (i) 65,722,922 shares of Parent Common
Stock were issued and outstanding, excluding shares of Parent Common Stock held
by Parent in its treasury, (ii) 2,117,378 shares of Parent Common Stock were
issued and held by Parent in its treasury, (iii) no shares of Parent Series A
Preferred Stock were issued and outstanding and (iv) 3,562,238 shares of Parent
Series B Preferred Stock were issued and outstanding, and on the date hereof
there has been no change to the number of shares of Parent Common Stock issued
and outstanding set forth in clause (i) other than pursuant to the exercise of
Parent Options. No shares of Parent Common Stock are owned or held by any
Subsidiary of Parent. All of the outstanding shares of capital stock of Parent
are, and all shares of capital stock of Parent which may be issued as
contemplated or permitted by this Agreement will be, when issued, duly
authorized and validly issued, fully paid and nonassessable and not subject to
any preemptive rights.
(b) Stock Options. As of April 22, 2003: (i) an aggregate of 16,223,144
shares of Parent Common Stock are subject to issuance pursuant to outstanding
options to purchase Parent Common Stock ("PARENT OPTIONS") under the stock
option, stock award, stock appreciation or phantom stock plans of Parent (the
"PARENT STOCK OPTION PLANS"), and (ii) 2,158,264 shares of Parent Common Stock
are reserved for future issuance under the Parent Stock Option Plans. All shares
of Parent Common Stock subject to issuance under the Parent Stock Option Plans,
upon issuance in accordance with the terms and conditions specified in the
instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. Except as otherwise set forth in
Section 3.2 of the Parent Disclosure Letter, there are no commitments or
agreements of any character to which Parent is bound obligating Parent to
accelerate the vesting of any Parent Option as a result of the Merger (whether
alone or upon the occurrence of any additional or subsequent events). There are
no outstanding or authorized stock appreciation, phantom stock, profit
participation or other similar rights with respect to Parent.
(c) Voting Debt. No Voting Debt of Parent is issued or outstanding as of
the date hereof.
(d) Other Securities. Except as otherwise set forth in Section 3.2 of the
Parent Disclosure Letter, as of the date hereof, there are no securities,
options, warrants, calls, rights, contracts, commitments, agreements,
instruments, arrangements, understandings, obligations or undertakings of any
kind to which Parent or any of its Subsidiaries is a party or by which any of
them is bound obligating Parent or any of its Subsidiaries to (including on a
deferred basis) issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock, Voting Debt or other voting securities
of Parent or any of its Subsidiaries, or obligating Parent or any of its
Subsidiaries to issue, grant, extend or enter into any such security, option,
warrant, call, right, contract, commitment, agreement, instrument, arrangement,
understanding, obligation or undertaking. All outstanding shares of Parent
Common Stock, all outstanding Parent Options, and all outstanding shares of
capital stock of each Subsidiary of Parent have been issued and granted in
compliance in all material respects with (i) all applicable securities laws and
all other applicable Legal Requirements and (ii) all requirements set forth in
applicable material Contracts.
(e) Merger Sub Capital Stock. The authorized capital stock of Merger Sub
consists of 1,000 shares of common stock, par value $0.001 per share, of which
1,000 shares are issued and outstanding. Parent is the sole stockholder of
Merger Sub and is the legal and beneficial owner of all 1,000 issued and
outstanding shares. Merger Sub was formed by counsel to Parent at the direction
of Parent on April 21, 2003, solely for purposes of effecting the Merger and the
other transactions contemplated hereby. Except as contemplated by this
Agreement, Merger Sub does not hold, nor has it held, any material assets or
incurred any material liabilities nor has Merger Sub carried on any business
activities other than in connection with the Merger and the transactions
contemplated by this Agreement. All of the outstanding shares of capital stock
of Merger Sub have been duly authorized and validly issued, and are fully paid
and nonassessable and not subject to any preemptive rights.
3.3 Authority; Non-Contravention; Necessary Consents.
(a) Authority. Each of Parent and Merger Sub has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
A-26
authorized by all necessary corporate action on the part of Parent and Merger
Sub and no other corporate proceedings on the part of Parent or Merger Sub are
necessary to authorize the execution and delivery of this Agreement or to
consummate the Merger and the other transactions contemplated hereby, subject
only to (i) the approval of the Stock Issuance by the Parent's stockholders as
required under the rules of Nasdaq, and (ii) the approval and adoption of this
Agreement and the approval of the Merger by Parent as Merger Sub's sole
stockholder and the filing of the Certificate of Merger pursuant to Delaware
Law. This Agreement has been duly executed and delivered by Parent and Merger
Sub and, assuming due execution and delivery by the Company, constitutes the
valid and binding obligation of Parent, enforceable against Parent and Merger
Sub in accordance with its terms.
(b) Non-Contravention. The execution and delivery of this Agreement by
Parent and Merger Sub does not, and performance of this Agreement by Parent and
the consummation of the Merger and the transactions contemplated hereby will
not: (i) conflict with or violate the Parent Charter Documents, the certificate
of incorporation or bylaws of Merger Sub or any other Subsidiary Charter
Documents of any Subsidiary of Parent, (ii) subject to compliance with the
requirements set forth in Section 3.3(c), conflict with or violate any material
Legal Requirement applicable to Parent, Merger Sub or any of Parent's other
Subsidiaries or by which Parent, Merger Sub or any of Parent's other
Subsidiaries or any of their respective properties is bound or affected, or
(iii) result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or materially
impair Parent's rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien on any of the properties or
assets of Parent or any of its Subsidiaries pursuant to, any Parent Material
Contract (as defined in Section 3.15). Section 3.3(b) of the Parent Disclosure
Letter lists all consents, waivers and approvals under any of Parent's or any of
its Subsidiaries' Contracts required to be obtained in connection with the
consummation of the transactions contemplated hereby, which, if individually or
in the aggregate are not obtained, would result in a material loss of benefits
to the Company, Parent or the Surviving Corporation as a result of the Merger.
(c) Necessary Consents. No consent, approval, order or authorization of,
or registration, declaration or filing with any Governmental Entity is required
to be obtained or made by Parent in connection with the execution and delivery
of this Agreement or the consummation of the Merger and other transactions
contemplated hereby, except for (i) the Necessary Consents and (ii) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not be material to Parent, Merger Sub or the Company or
materially adversely affect the ability of the parties hereto to consummate the
Merger within the time frame in which the Merger would otherwise be consummated
in the absence of the need for such consent, approval, order, authorization,
registration, declaration or filings.
3.4 SEC Filings; Financial Statements.
(a) SEC Filings. Parent has filed all required registration statements,
prospectuses, reports, schedules, forms, statements and other documents
(including exhibits and all other information incorporated by reference)
required to be filed by it with the SEC since January 1, 2002. Parent has made
available to the Company all such registration statements, prospectuses,
reports, schedules, forms, statements and other documents in the form filed with
the SEC. All such required registration statements, prospectuses, reports,
schedules, forms, statements and other documents (including those that Parent
may file subsequent to the date hereof until the Effective Time) are referred to
herein as the "PARENT SEC REPORTS." As of their respective dates, the Parent SEC
Reports (i) were prepared in accordance and complied in all material respects
with the requirements of the Securities Act, or the Exchange Act, as the case
may be, and the rules and regulations of the SEC thereunder applicable to such
Parent SEC Reports and (ii) did not at the time they were filed (or if amended
or superseded by a filing prior to the date of this Agreement then on the date
of such filing) contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. None of Parent's Subsidiaries is required to file any
forms, reports or other documents with the SEC.
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(b) Financial Statements. Each of the consolidated financial statements
(including, in each case, any related notes thereto) contained in the Parent SEC
Reports (the "PARENT FINANCIALS"), including each Parent SEC Report filed after
the date hereof until the Closing: (i) complied as to form in all material
respects with the published rules and regulations of the SEC with respect
thereto, (ii) was prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes thereto
or, in the case of unaudited interim financial statements, as may be permitted
by the SEC on Form 10-Q, 8-K or any successor form under the Exchange Act), and
(iii) fairly presented in all material respects the consolidated financial
position of Parent and its consolidated Subsidiaries as at the respective dates
thereof and the consolidated results of Parent's operations and cash flows for
the periods indicated. The balance sheet of Parent contained in the Parent SEC
Reports as of December 31, 2002 is hereinafter referred to as the "PARENT
BALANCE SHEET." Except as disclosed in the Parent Financials, since the date of
the Parent Balance Sheet, neither Parent nor any of its Subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise) of a nature required to
be disclosed on a consolidated balance sheet or in the related notes to the
consolidated financial statement prepared in accordance with GAAP which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of Parent and its Subsidiaries taken as a
whole, other than liabilities incurred (i) in the ordinary course of business
consistent with past practices or (ii) in connection with the performance by the
Parent or any of its Subsidiaries of their respective obligations under this
Agreement and the transactions contemplated herein.
3.5 Absence of Certain Changes or Events. Except as otherwise set forth in
Section 3.5 of the Parent Disclosure Letter, since the date of the Parent
Balance Sheet through the date hereof Parent has conducted its business only in
the ordinary course of business consistent with past practice and there has not
been: (i) any Material Adverse Effect on Parent, (ii) any declaration, setting
aside or payment of any dividend on, or other distribution (whether in cash,
stock or property) in respect of, any of Parent's or any of its Subsidiaries'
capital stock, or any purchase, redemption or other acquisition by Parent or any
of its Subsidiaries of any of Parent's capital stock or any other securities of
Parent or its Subsidiaries or any options, warrants, calls or rights to acquire
any such shares or other securities except for repurchases from Employees or
independent contractors following their termination pursuant to the terms of
their pre-existing stock option or purchase agreements, (iii) any split,
combination or reclassification of any of Parent's or any of its Subsidiaries'
capital stock, (iv) any granting by Parent or any of its Subsidiaries of any
increase in compensation or fringe benefits, except for increases of cash
compensation (other than to directors or executive officers of Parent) in the
ordinary course of business consistent with past practice, or any payment by
Parent or any of its Subsidiaries of any bonus, except for bonuses (other than
to directors or executive officers of Parent) made in the ordinary course of
business consistent with past practice, or any granting by Parent or any of its
Subsidiaries of any increase in severance or termination pay or any entry by
Parent or any of its Subsidiaries into, or material modification or amendment
of, any currently effective employment, severance, termination or
indemnification agreement or any agreement the benefits of which are contingent
or the terms of which are materially altered upon the occurrence of a
transaction involving Parent of the nature contemplated hereby, (v) entry by
Parent or any of its Subsidiaries into any licensing or other agreement with
regard to the disposition of any material Intellectual Property (as defined in
Section 2.7(h)) other than licenses, distribution agreements, advertising
agreements, sponsorship agreements or merchant program agreements entered into
in the ordinary course of business consistent with past practice, (vi) any
amendment or consent with respect to any Parent Material Contract in effect
since the date of the Parent Balance Sheet other than statements of work or
similar amendments to such Company Material Contracts in the ordinary course of
business consistent with past practice, (vii) any material change by Parent in
its accounting methods, principles or practices, except as required by
concurrent changes in GAAP or by the SEC, (viii) any material revaluation by
Parent of any of its assets, including, without limitation, writing down the
value of capitalized inventory or writing off notes or accounts receivable other
than in the ordinary course of business consistent with past practice, (ix) any
communication from Nasdaq with respect to the delisting of the Parent Common
Stock, (x) any cancellation by Parent or any of its Subsidiaries of any debts or
waiver of any claims or rights of material value, (xi) any sale, transfer or
other disposition outside of the ordinary course of business of any
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properties or assets (real, personal or mixed, tangible or intangible) by Parent
or any of its Subsidiaries, or (xii) any agreement, whether in writing or
otherwise, to take any action described in this section by Parent or any of its
Subsidiaries.
3.6 Taxes.
(a) Tax Returns and Audits. Except as otherwise set forth in Section
3.6(a) of the Parent Disclosure Letter:
(i) Parent and each of its Subsidiaries have prepared and timely filed
all required Tax Returns relating to any and all Taxes concerning or
attributable to Parent, its Subsidiaries or their respective operations and
such Tax Returns are true and correct and have been completed in accordance
with applicable law.
(ii) Parent and each of its Subsidiaries have timely paid to the
appropriate Taxing authority all Taxes and any other amounts required to be
paid or withheld.
(iii) Neither Parent nor any of its Subsidiaries has been delinquent
in the payment of any Tax, nor is there any Tax deficiency outstanding,
assessed or proposed against Parent or any of its Subsidiaries, nor has
Parent or any of its Subsidiaries executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of
any Tax.
(iv) No audit or other examination of any Tax Return of Parent or any
of its Subsidiaries is presently in progress, nor has Parent or any of its
Subsidiaries been notified of any request for such an audit or other
examination.
(v) Neither Parent nor any of its Subsidiaries has any liabilities for
unpaid Taxes which have not been accrued or reserved on the Parent Balance
Sheet in accordance with GAAP, and neither Parent nor any of its
Subsidiaries has incurred any liability for Taxes since the date of the
Parent Balance Sheet other than in the ordinary course of business.
(vi) Parent has made available to the Company or its legal counsel,
copies of all Tax Returns for Parent and each of its Subsidiaries filed for
all periods since inception.
(vii) There are no Liens on the assets of Parent or any of its
Subsidiaries relating to or attributable to Taxes, other than Liens for
Taxes not yet due and payable. There is no basis for the assertion of any
claim relating or attributable to Taxes which, if adversely determined,
would result in any Lien for Taxes on the assets of Parent or any of its
Subsidiaries.
(viii) None of the assets of Parent or any of its Subsidiaries is
treated as "tax-exempt use property," within the meaning of Section 168(h)
of the Code.
(ix) Neither Parent nor any of its Subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as defined in Section 341(f)(4) of the Code) owned by Parent or any of its
Subsidiaries.
(x) Neither Parent nor any of its Subsidiaries is, nor has been at any
time, a "United States Real Property Holding Corporation" within the
meaning of Section 897(c)(2) of the Code.
(xi) No adjustment relating to any Tax Return filed by Parent or any
of its Subsidiaries has been proposed formally or, to the knowledge of
Parent or any of its Subsidiaries, informally by any tax authority to
Parent, any of its Subsidiaries or any representative thereof.
(xii) Neither Parent nor any of its Subsidiaries has (a) ever been a
member of an affiliated group (within the meaning of Code sec. 1504(a))
filing a consolidated federal income Tax Return (other than a group the
common parent of which was Parent), (b) ever been a party to any Tax
sharing, indemnification or allocation agreement, nor does Parent or any of
its Subsidiaries owe any amount under any such agreement, (c) any liability
for the Taxes of any person (other than Parent or any of its Subsidiaries)
under Treas. Reg. sec. 1.1502-6 (or any similar provision of state, local
or
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foreign law), as a transferee or successor, by contract, or otherwise and
(d) ever been a party to any joint venture, partnership or other agreement
that could be treated as a partnership for Tax purposes.
(xiii) Neither Parent nor any of its Subsidiaries has constituted
either a "distributing corporation" or a "controlled corporation" in a
distribution of stock intended to qualify for tax-free treatment under
Section 355 of the Code (x) in the two years prior to the date of this
Agreement or (y) in a distribution which could otherwise constitute part of
a "plan" or "series of related transactions" (within the meaning of Section
355(e) of the Code) in conjunction with the Merger.
3.7 Intellectual Property. Except as set forth in Section 3.7 of the
Parent Disclosure Letter:
(a) To the knowledge of Parent the operation of the business of Parent
and each of its Subsidiaries, including their products and services, does
not infringe or misappropriate in any material respect the Intellectual
Property of any third party or constitute unfair competition or unfair
trade practices under the laws of any jurisdiction. Parent and its
Subsidiaries own or possess sufficient rights to all material Intellectual
Property used in their businesses and all Intellectual Property necessary
for the operation of their businesses.
(b) As of the date hereof and, except as will not have a Material
Adverse Effect on or after the Closing Date, neither Parent nor any of its
Subsidiaries have received or will have received any written notice from
any third party, and, to the knowledge of Parent, there is and will be no
other assertion or pending threat from any third party, that the operation
of the business of Parent or any of its Subsidiaries, or any of their
products or services, infringes or misappropriates the Intellectual
Property of any third party or constitutes unfair competition or unfair
trade practices under the laws of any jurisdiction. As of the date hereof
and, except as will not have a Material Adverse Effect, on the Closing
Date, neither Parent nor any its Subsidiaries have brought or will have
brought, or have been or will have been, a party to any suits, arbitrations
or other adversarial proceedings with respect to a third party's
Intellectual Property that remain unresolved.
(c) To the knowledge of Parent, as of the date hereof, no person is
infringing or misappropriating any material Intellectual Property owned or
exclusively licensed by Parent or any of its Subsidiaries. Neither Parent
nor any its Subsidiaries have brought or have been a party to any suits,
arbitrations or other adversarial proceedings with respect to their
Intellectual Property against any third party that remain unresolved.
(d) Parent and its Subsidiaries are not subject to any judgment,
order, writ, injunction or decree of any court or any Federal, state,
local, foreign or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any arbitrator, which
restricts or impairs the use of any of their Intellectual Property. The
Intellectual Property owned or exclusively licensed by Parent is free and
clear of any Liens.
(e) Parent and each of its Subsidiaries are in material compliance
with, and have not materially breached any term of any contracts, licenses
or other agreements in which Parent and its Subsidiaries have granted or
received any Intellectual Property ("PARENT IP AGREEMENTS"). To the
knowledge of Parent, all third parties to such Parent IP Agreements are in
compliance in all material respects with, and have not materially breached,
any of their terms.
(f) The Merger will not result in the termination or breach of any
Parent IP Agreements, or any material loss or change in the rights or
obligations of Parent or its Subsidiaries or any third party to such Parent
IP Agreements. The Merger will not result in the obligation for Parent or
its Subsidiaries to pay any consideration, royalties or other amounts to
any third party in excess of those amounts otherwise owed by Parent or its
Subsidiaries immediately prior to the Merger.
(g) The Merger will not result in: (i) the Company being bound by any
material non-compete, material exclusivity obligation or other material
restriction on the operation of any business of Parent or its Subsidiaries,
including any of their products or services, or (ii) the Company granting
to any third party any rights or licenses to any material Intellectual
Property of the Company or any affiliate
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of the Company (including without limitation a covenant not to sue)
pursuant to any agreements or obligations of Parent or its Subsidiaries.
3.8 Compliance; Permits.
(a) Compliance. Neither Parent nor any of its Subsidiaries is, in any
material respect, in conflict with, or in default or in violation of any Legal
Requirement applicable to Parent or any of its Subsidiaries or by which Parent
or any of its Subsidiaries or any of their respective businesses or properties
is, or Parent believes is reasonably likely to be, bound or affected, except, in
each case, or in the aggregate, for conflicts, violations and defaults that
would not have a Material Adverse Effect on Parent. Except as otherwise set
forth in Section 3.8 of the Parent Disclosure Letter, as of the date hereof, no
investigation or review by any Governmental Entity is pending or, to the
knowledge of Parent, has been threatened in a writing delivered to Parent or any
of its Subsidiaries, against Parent or any of its Subsidiaries other than as
contemplated by this Agreement. There is no judgment, injunction, order or
decree binding upon Parent or any of its Subsidiaries which has or would
reasonably be expected to have the effect of prohibiting or impairing any
business practice of Parent or any of its Subsidiaries, any acquisition of
property by Parent or any of its Subsidiaries or the conduct of business by
Parent and its Subsidiaries as currently conducted, except as would not have a
Material Adverse Effect on Parent.
(b) Permits. Parent and its Subsidiaries hold, to the extent legally
required, all Permits that are required for the operation of the business of
Parent (collectively, "PARENT PERMITS"), except where the failure to hold such
Permits would not have a Material Adverse Effect on Parent. As of the date
hereof, no suspension or cancellation of any of the Parent Permits is pending
or, to the knowledge of Parent, threatened. Parent and its Subsidiaries are in
compliance in all material respects with the terms of the Parent Permits.
3.9 Litigation. Except as otherwise set forth in Section 3.9 of the Parent
Disclosure Letter, as of the date hereof and, except as will not have a Material
Adverse Effect on or after the Closing Date, there are and will be no claims,
suits, actions or proceedings pending or, to the knowledge of Parent, threatened
against Parent or any of its Subsidiaries, before any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator.
3.10 Brokers' and Finders' Fees. Except for fees payable to Evercore
Partners pursuant to an engagement letter dated March 20, 2003, a copy of which
has been provided to the Company, Parent has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby, and Parent has not entered into any
indemnification agreement or arrangement with any Person in connection with this
Agreement and the transactions contemplated hereby. An itemized good faith
estimate of the fees and expenses of any accountant, broker, financial advisor,
consultant, legal counsel or other Person retained by Parent in connection with
this Agreement or the transactions contemplated hereby incurred or to be
incurred by Parent in connection with this Agreement and the transactions
contemplated hereby (including any agreement or understanding with respect to
such agreement or understanding, whether written or oral) is set forth in
Section 3.10 of the Parent Disclosure Letter, and all such fees are, and shall
be, reasonable and customary in nature.
3.11 Transactions with Affiliates. Except as set forth in the Parent SEC
Reports, since the date of Parent's last proxy statement filed with the SEC, no
event has occurred as of the date hereof that would be required to be reported
by the Company pursuant to Item 404 of Regulation S-K promulgated by the SEC.
Section 3.11 of the Parent Disclosure Letter identifies each Person who is an
"affiliate" (as that term is used in Rule 145 promulgated under the Securities
Act) of Parent as of the date hereof.
3.12 Parent Employee Benefit Plans.
(a) Schedule. Except with respect to plans such as workers' compensation
which are required by law, Section 3.12(a) of the Parent Disclosure Letter
contains an accurate and complete list of (i) each plan, program, policy,
practice, contract, agreement or other arrangement providing for compensation,
severance, termination pay, deferred compensation, performance awards, stock or
stock-related awards,
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fringe benefits or other employee benefits or remuneration of any kind, whether
written or unwritten or otherwise, funded or unfunded, including without
limitation, each "employee benefit plan," within the meaning of Section 3(3) of
ERISA which is or has been, within the past three years, maintained, contributed
to, or required to be contributed to, by Parent or any Subsidiary of Parent or
any other person or entity under common control with Parent or any Subsidiaries
within the meaning of Section 414(b), (c), (m) or (o) of the Code and the
regulations issued thereunder (each a "PARENT ERISA AFFILIATE") for the benefit
of any current or former or retired employee, consultant or director of Parent
or any Parent ERISA Affiliate (each a "PARENT EMPLOYEE"), or with respect to
which Parent or any Parent ERISA Affiliate has or may have any liability or
obligation (collectively, the "PARENT EMPLOYEE PLANS"), and (ii) each
employment, severance or consulting agreement between Parent or any Parent ERISA
Affiliate and any Parent Employee (each a "PARENT EMPLOYEE AGREEMENT"), except
to the extent a Parent Employee Agreement provides for "at-will" employment and
does not provide for severance payments or benefits. Neither the Company nor any
Parent ERISA Affiliate has any plan or commitment to establish any new Parent
Employee Plan or Parent Employee Agreement, to modify any Parent Employee Plan
or Parent Employee Agreement (except to the extent required by law or to conform
any such Parent Employee Plan or Parent Employee Agreement to the requirements
of any applicable law, in each case as previously disclosed to the Company in
writing, or as required by this Agreement), or to adopt or enter into any Parent
Employee Plan or Parent Employee Agreement, except, in each case, or in the
aggregate, as would not result in material liability to Parent or its
Subsidiaries.
(b) Documents. Parent has provided or made available to the Company
correct and complete copies of: (i) all documents embodying each Parent Employee
Plan and each Parent Employee Agreement including (without limitation) all
amendments thereto and all related trust documents, administrative service
agreements, group annuity contracts, group insurance contracts, and policies
pertaining to fiduciary liability insurance covering the fiduciaries for each
Parent Employee Plan; (ii) the most recent annual actuarial valuations, if any,
prepared for each Parent Employee Plan; (iii) the three (3) most recent annual
reports (Form Series 5500 and all schedules and financial statements attached
thereto), if any, required under ERISA or the Code in connection with each
Parent Employee Plan; (iv) if the Parent Employee Plan is funded, the most
recent annual and periodic accounting of Parent Employee Plan assets; (v) the
most recent summary plan description together with the summary(ies) of material
modifications thereto, if any, required under ERISA with respect to each Parent
Employee Plan; (vi) all IRS determination, opinion, notification and advisory
letters; (vii) all material correspondence to or from any governmental agency in
the past three years relating to any Parent Employee Plan; (viii) discrimination
tests for each Parent Employee Plan for the last plan year ending prior to the
Closing Date, to the extent applicable; (ix) all prospectuses prepared in
connection with each Parent Employee Plan; and (x) visa and work permit
information with respect to the current Parent Employees; provided that Parent
may limit any information under this Section 3.12 as required by law, treaty
rule or regulation of any Governmental Entity applicable to Parent or its
Subsidiaries to restrict or prohibit access to such information.
(c) Parent Employee Plan Compliance. Parent and its Parent ERISA
Affiliates have performed in all material respects all obligations required to
be performed by them under, are not in material default or violation of, and
have no knowledge of any default or violation by any other party to, each Parent
Employee Plan, and each Parent Employee Plan has been established and maintained
in all material respects in accordance with its terms and in material compliance
with all applicable laws, statutes, orders, rules and regulations, including but
not limited to ERISA or the Code. Any Parent Employee Plan intended to be
qualified under Section 401(a) of the Code and each trust intended to qualify
under Section 501(a) of the Code has either applied for, prior to the expiration
of the requisite period under applicable Treasury Regulations or IRS
pronouncements, or obtained a favorable determination, notification, advisory
and/or opinion letter, as applicable, as to its qualified status from the IRS or
still has a remaining period of time under applicable Treasury Regulations or
IRS pronouncements in which to apply for such letter and to make any amendments
necessary to obtain a favorable determination. For each Parent Employee Plan
that is intended to be qualified under Section 401(a) of the Code there has been
no event, condition or circumstance that has adversely affected or is, in any
material respect, likely to adversely affect such qualified status. Except, in
each case, or in the aggregate, as would not result in
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material liability to Parent or its Subsidiaries: (i) no "prohibited
transaction," within the meaning of Section 4975 of the Code or Sections 406 and
407 of ERISA, and not otherwise exempt under Section 408 of ERISA, has occurred
with respect to any Parent Employee Plan; (ii) neither Parent nor any Parent
ERISA Affiliate is subject to any penalty or tax with respect to any Parent
Employee Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of the
Code; and (iii) Parent and each Parent ERISA Affiliate have timely made all
contributions and other payments required by and due under the terms of each
Parent Employee Plan. There are no actions, suits or claims pending, or, to the
knowledge of Parent, threatened or reasonably anticipated (other than routine
claims for benefits) against any Parent Employee Plan or against the assets of
any Parent Employee Plan. Except to the extent limited by applicable law, each
Parent Employee Plan can be amended, terminated or otherwise discontinued after
the Effective Time in accordance with its terms, without material liability to
the Company, Parent or any of its Parent ERISA Affiliates (other than ordinary
administration expenses). There are no audits, inquiries or proceedings pending
or, to the knowledge of Parent or any Parent ERISA Affiliates, threatened by the
IRS or DOL, or any other Governmental Entity with respect to any Parent Employee
Plan.
(d) No Pension or Welfare Plans. Neither Parent nor any Parent ERISA
Affiliate has ever maintained, established, sponsored, participated in, or
contributed to, any (i) Parent Employee Plan which is a Pension Plan and is
subject to Title IV of ERISA or Section 412 of the Code, (ii) Pension Plan which
is a "multiemployer plan," as defined in Section 3(37) of ERISA, (iii) "multiple
employer plan" as defined in ERISA or the Code, or (iv) a "funded welfare plan"
within the meaning of Section 419 of the Code. No Parent Employee Plan provides
health benefits that are not fully insured through an insurance contract.
(e) No Post-Employment Obligations. Except as set forth in Section 3.12(e)
of the Parent Disclosure Letter, no Parent Employee Plan currently provides, or
reflects or represents any liability to provide post-termination or retiree
welfare benefits to any person for any reason, except as may be required by
COBRA or other applicable statute, and neither Parent nor any Parent ERISA
Affiliate has any liability to provide post-termination or retiree welfare
benefits to any person or ever represented, promised or contracted (other than
in written form) to any Parent Employee (either individually or to Parent
Employees as a group) or any other person that such Parent Employee(s) or other
person would be provided with post-termination or retiree welfare benefits,
except to the extent required by statute.
(f) Health Care Compliance. Neither Parent nor any Parent ERISA Affiliate
has, prior to the Effective Time and in any material respect, violated any of
the health care continuation requirements of COBRA, the requirements of the
Family Medical Leave Act of 1993, as amended, the requirements of the Health
Insurance Portability and Accountability Act of 1996, the requirements of the
Women's Health and Cancer Rights Act of 1998, the requirements of the Newborns'
and Mothers' Health Protection Act of 1996, or any amendment to each such act,
or any similar provisions of state law applicable to its Parent Employees.
(g) Executive Loans. Neither Parent nor any Parent ERISA Affiliate has
violated Section 402 of Sarbanes-Oxley Act of 2002 and the execution of this
Agreement and the consummation of the transactions contemplated hereby will not,
to the knowledge of Parent, cause such a violation.
(h) Effect of Transaction.
(i) The execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the
occurrence of an individual's termination of employment within one year
prior to or three years following the transactions contemplated hereby),
constitute an event under any Parent Employee Plan, Parent Employee
Agreement, trust or loan that will or may result in any payment (whether of
severance pay or otherwise), acceleration, forgiveness of indebtedness,
vesting, distribution, increase in benefits or obligation to fund benefits
with respect to any Parent Employee.
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(ii) No payment or benefit which will or may be made by Parent or its
Parent ERISA Affiliates with respect to any Parent Employee will be
characterized as a "parachute payment," within the meaning of Section
280G(b)(2) of the Code. There is no contract, agreement, plan or
arrangement to which Parent or any of its Parent ERISA Affiliates is a
party or by which it is bound to compensate any Parent Employee for excise
taxes paid pursuant to Section 4999 of the Code.
(i) Employment Matters. Parent: (i) is in compliance in all material
respects with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Parent Employees;
(ii) is not liable for any payment to any trust or other fund governed by or
maintained by or on behalf of any governmental authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for Parent Employees (other than routine payments to be made in the
normal course of business and consistent with past practice). There are no
claims or actions against Parent under any worker's compensation policy or
long-term disability policy. Neither Parent nor any Parent ERISA Affiliate has
or reasonably anticipates any direct or indirect material liability with respect
to any misclassification of any person as an independent contractor rather than
as an employee, or with respect to any employee leased from another employer.
(j) Labor. No work stoppage or labor strike against Parent or any Parent
ERISA Affiliate is pending, threatened or reasonably anticipated. Parent does
not know of any activities or proceedings of any labor union to organize any
Parent Employees. There are no actions, suits, claims, labor disputes or
grievances pending, or, to the knowledge of Parent, threatened or reasonably
anticipated relating to any labor, safety or discrimination matters involving
any Parent Employee, including, without limitation, charges of unfair labor
practices or discrimination complaints, which, if adversely determined, would,
individually or in the aggregate, result in any material liability to Parent.
Neither Parent nor any of its subsidiaries has engaged in any unfair labor
practices within the meaning of the National Labor Relations Act. Parent is not
presently, nor has it been in the past, a party to, or bound by, any collective
bargaining agreement or union contract with respect to Parent Employees and no
collective bargaining agreement is being negotiated with respect to Parent
Employees. Neither Parent nor any of its Subsidiaries have incurred any material
liability or material obligation under the Worker Adjustment and Retraining
Notification Act or any similar state or local law which remains unsatisfied.
(k) Parent International Employee Plan. Each Parent Employee Plan that has
been adopted or maintained by Parent or any Parent ERISA Affiliate, whether
informally or formally, or with respect to which Parent or any Parent ERISA
Affiliate will or may have any liability, for the benefit of Parent Employees
who perform services outside the United States (each a "PARENT INTERNATIONAL
EMPLOYEE PLAN") has been established, maintained and administered in material
compliance with its terms and conditions and with the requirements prescribed by
any and all statutory or regulatory laws that are applicable to such Parent
International Employee Plan. Furthermore, no Parent International Employee Plan
has unfunded liabilities, that as of the Effective Time, will not be offset by
insurance or fully accrued. Except as required by law, no condition exists that
would prevent Parent or the Company from terminating or amending any Parent
International Employee Plan at any time for any reason without liability to
Parent or its Parent ERISA Affiliates (other than ordinary administration
expenses or routine claims for benefits).
3.13 Title to Properties.
(a) Properties. Neither Parent nor any of its Subsidiaries owns any real
property. Section 3.13 of the Parent Disclosure Letter sets forth a list of all
real property currently leased by Parent or any of its Subsidiaries, the name of
the lessor, the date of the lease and each amendment thereto. All such current
leases are in full force and effect, are valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any existing
material default or material event of default (or event which with notice or
lapse of time, or both, would constitute a material default).
(b) Valid Title. Parent and each of its Subsidiaries has good and valid
title to, or, in the case of leased properties and assets, valid leasehold
interests in, all of its tangible properties and assets, real, personal and
mixed, used or held for use in its business, free and clear of any Liens except
for Liens
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imposed by law in respect of obligations not yet due which are owed in respect
of taxes, except for such Liens which are not material in character, amount or
extent, and which do not materially detract from the value, or materially
interfere with the present use, of the property subject thereto or affected
thereby.
3.14 Environmental Matters.
(a) Hazardous Material. Except as would not result in a Material Adverse
Effect on Parent or its Subsidiaries, no underground storage tanks and no amount
of any substance that has been designated by any Governmental Entity or by
applicable federal, state or local law to be a Hazardous Material are present,
as a result of the actions of Parent or any of its Subsidiaries or any affiliate
of Parent, or, to the knowledge of Parent, as a result of any actions of any
third party or otherwise, in, on or under any property, including the land and
the improvements, ground water and surface water thereof, that Parent or any of
its Subsidiaries has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as would not result in a
Material Adverse Effect on Parent: (i) neither Parent nor any of its
Subsidiaries has transported, stored, used, manufactured, disposed of, released
or exposed its employees or others to Hazardous Materials in violation of any
law in effect on or before the Closing Date and (ii) neither Parent nor any of
its Subsidiaries has conducted any Hazardous Material Activities in violation of
any rule, regulation, treaty or statute promulgated by any Governmental Entity
in effect prior to or as of the date hereof to prohibit, regulate or control
Hazardous Materials or any Hazardous Material Activity.
3.15 Contracts.
(a) Material Contracts. For purposes of this Agreement, "PARENT MATERIAL
CONTRACT" shall mean:
(i) any "material contracts" (as such term is defined in Item
601(b)(10) of Regulation S-K of the SEC) with respect to Parent and its
Subsidiaries;
(ii) any employment or consulting Contract with any executive officer
or other employee of Parent or member of Parent's Board of Directors
earning an annual salary in excess of the lowest annual base salary
reported in Parent's most recent annual report on Form 10-K or definitive
proxy statement for any of Parent's "named executive officers," as such
term is defined in Item 402(a)(3) of Regulation S-K of the SEC, other than
those that are terminable by Parent or any of its Subsidiaries on no more
than thirty (30) days notice without liability or financial obligation to
Parent;
(iii) any Contract or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(iv) any agreement of indemnification or any guaranty other than any
agreement of indemnification entered into in connection with the sale or
license of services or hardware or software products in the ordinary course
of business;
(v) any Contract containing any covenant (A) limiting in any respect
the right of Parent or any of its Subsidiaries to engage in any line of
business, to make use of any Intellectual Property or compete with any
Person in any line of business or to compete with any person, (B) granting
any exclusive rights, or (C) otherwise prohibiting or limiting the right of
Parent and its Subsidiaries to sell, distribute or manufacture any products
or services or to purchase or otherwise obtain any software, components,
parts or subassemblies;
(vi) any Contract relating to the disposition or acquisition by Parent
or any of its Subsidiaries after the date of this Agreement of a material
amount of assets not in the ordinary course of business or pursuant to
which Parent or any of its Subsidiaries has any material ownership interest
in any other Person or other business enterprise other than Parent's
Subsidiaries;
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(vii) any dealer, distributor, joint marketing or development
agreement, under which Parent or any of its Subsidiaries have continuing
obligations or costs in excess of $100,000 per year, to jointly market any
product, technology or service, and which may not be canceled without
penalty upon notice of ninety (90) days or less; or any agreement pursuant
to which Parent or any of its Subsidiaries have continuing obligations to
jointly develop any Intellectual Property that will not be owned, in whole
or in part, by Parent or any of its Subsidiaries;
(viii) any Contract to provide source code to any third party for any
product or technology that is material to Parent and its Subsidiaries taken
as a whole;
(ix) any Contract (A) containing any support or maintenance obligation
on the part of Parent or any of its Subsidiaries outside of the ordinary
course of business consistent with past practice or (B) containing any
service obligation or cost on the part of Parent or any of its Subsidiaries
in excess of $100,000, other than those obligations that are terminable by
Parent or any of its Subsidiaries on no more than thirty (30) days notice
without liability or financial obligation to Parent or its Subsidiaries;
(x) any Contract to license any third party to manufacture or
reproduce any of Parents products, services or technology or any Contract
to sell or distribute any of the Parent's products, services or technology,
except (A) agreements with distributors or sales representatives in the
ordinary course of business consistent with past practice, or (B)
agreements allowing internal backup copies made or to be made by end-user
customers in the ordinary course of business consistent with past practice;
(xi) any mortgages, indentures, guarantees, loans or credit
agreements, security agreements or other Contracts relating to the
borrowing of money or extension of credit, other than accounts receivables
and payables in the ordinary course of business;
(xii) (A) any settlement agreement entered into within five (5) years
prior to the date of this Agreement relating to Intellectual Property, and
(B) any settlement agreement not relating to Intellectual Property entered
into within two (2) years prior to the date of this Agreement, other than
(I) releases immaterial in nature and amount entered into with former
employees or independent contractors of Parent in the ordinary course of
business consistent with past practice in connection with the routine
termination of such employee's or independent contractor's employment with
Parent and (II) settlement agreements under which Parent's obligations do
not exceed $20,000 in the aggregate under any single agreement;
(xiii) any other agreement, contract or commitment that has a value of
$600,000 or more in any individual case not described in clauses (i)
through (xii) above;
(xiv) any Parent IP Agreement; or
(xv) any Contract, or group of Contracts with a Person (or group of
affiliated Persons), the termination or breach of which would be reasonably
expected to have a material adverse effect on any material division or
business unit or other material operating group of product or service
offerings of Parent or otherwise have a Material Adverse Effect on Parent.
(b) Schedule. Section 3.15(b) of the Parent Disclosure Letter sets forth a
list of all contracts to which Parent or any of its Subsidiaries is a party or
is bound by as of the date hereof which are described in Section 3.15(a)(v) or
Section 3.15(a)(vi) hereof.
(c) No Breach. All Parent Material Contracts are valid and in full force
and effect except to the extent they have previously expired in accordance with
their terms or if the failure to be in full force and effect, individually or in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect on Parent. Neither Parent nor any of its Subsidiaries has violated any
provision of, or committed or failed to perform any act which, with or without
notice, lapse of time or both would constitute a default under the provisions
of, any Parent Material Contract, except in each case for those violations and
defaults which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse
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Effect on Parent. To the knowledge of Parent, neither Parent nor any of its
Subsidiaries are in breach of any material provision of a Parent Material
Contract.
3.16 Disclosure. None of the information supplied or to be supplied by or
on behalf of Parent or Merger Sub for inclusion or incorporation by reference in
the Registration Statement will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. None of the information
supplied or to be supplied by or on behalf of Parent and Merger Sub for
inclusion or incorporation by reference in the Prospectus/Proxy Statement, will,
at the time the Prospectus/Proxy Statement is mailed to the stockholders of
Company, the time of the Stockholders' Meeting or as of the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder. Notwithstanding the foregoing, no
representation or warranty is made by Parent with respect to statements made or
incorporated by reference therein about the Company supplied by the Company for
inclusion or incorporation by reference in the Registration Statement or the
Prospectus/ Proxy Statement.
3.17 Board Approval. The Board of Directors of Parent has, by resolutions
duly adopted by unanimous vote at a meeting of all Directors duly called and
held and not subsequently rescinded or modified in any way (the "PARENT BOARD
APPROVAL") (i) determined that the Merger is fair to, and in the best interests
of, Parent and its stockholders and declared this Agreement and the Merger to be
advisable, and (ii) approved this Agreement and the transactions contemplated
thereby, including the Merger, and (iii) recommended that the stockholders of
Parent approve the Stock Issuance.
3.18 Fairness Opinion. Parent's Board of Directors has received a written
opinion from Evercore Partners, dated as of April 23, 2003, in customary form to
the effect that, as of such date, the Exchange Ratio is fair, from a financial
point of view, to Parent stockholders, and has delivered to the Company a copy
of such opinion.
3.19 Rights Plan. Parent's Board of Directors has not adopted any
resolution pursuant to Section 3(c) of the Parent Rights Agreement to the effect
that shares of Parent Common Stock issued pursuant to the Merger shall not be
entitled to the benefit of the Parent Rights.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by the Company.
(a) Ordinary Course. During the period from the date hereof and continuing
until the earlier of the termination of this Agreement pursuant to its terms or
the Effective Time, the Company shall and shall cause each of its Subsidiaries
to, except as otherwise expressly contemplated by this Agreement or to the
extent that Parent shall otherwise consent in writing, (i) carry on its business
in the usual, regular and ordinary course, in substantially the same manner as
heretofore conducted and in compliance with all applicable laws and regulations,
(ii) pay its debts and taxes when due, pay or perform other material obligations
when due (subject to good faith disputes over such debts, taxes or obligations),
and (iii) use all commercially reasonable efforts consistent with past practices
and policies to (x) preserve intact its present business organization, (y) keep
available the services of its present executive officers and Employees, and (z)
preserve its relationships with customers, suppliers, licensors, licensees, and
others with which it has business dealings.
(b) Required Consent. In addition, without limiting the generality of
Section 4.1(a), except as permitted or specifically contemplated by the terms of
this Agreement, without the prior written consent of
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Parent, during the period from the date hereof and continuing until the earlier
of the termination of this Agreement pursuant to its terms or the Effective
Time, the Company shall not do any of the following, and shall not permit any of
its Subsidiaries to do any of the following:
(i) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for any capital stock, other than any
such transaction by a wholly-owned Subsidiary of it that remains a
wholly-owned Subsidiary of it after consummation of such transaction, in
the ordinary course of business consistent with past practice;
(ii) Purchase, redeem or otherwise acquire, directly or indirectly,
any shares of its capital stock or the capital stock of its Subsidiaries,
except repurchases of unvested shares at cost in connection with the
termination of the employment relationship with any employee pursuant to
stock option or purchase agreements in effect on the date hereof;
(iii) Issue, deliver, sell, authorize, pledge or otherwise encumber
any shares of capital stock, Voting Debt or any securities convertible into
shares of capital stock or Voting Debt, or subscriptions, rights, warrants
or options to acquire any shares of capital stock or Voting Debt or any
securities convertible into shares of capital stock or Voting Debt, or
enter into other agreements or commitments of any character obligating it
to issue any such securities or rights, other than (i) issuances of Company
Common Stock upon the exercise of Company Options, warrants or other rights
of the Company existing on the date hereof in accordance with their present
terms or (ii) issuances of Company Options for up to an aggregate 200,000
shares of Company Common Stock to Allowable New Hires (as defined in
Section 4.1(b)(xviii)); provided, however, that no Allowable New Hire shall
receive Company Options for more than 10,000 shares (in the aggregate as to
such Allowable New Hire) of Company Common Stock;
(iv) Cause, permit or propose any amendments to the Company Charter
Documents or any of the Subsidiary Charter Documents of the Company's
Subsidiaries;
(v) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any equity or voting interest in or a portion of the assets
of, or by any other manner, any business or any Person or division thereof,
or otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to the business of the Company;
(vi) Enter into any binding agreement, agreement in principle, letter
of intent, memorandum of understanding or similar agreement with respect to
any joint venture, strategic partnership or alliance; provided, however,
that this clause (vi) shall not prohibit the Company from entering into, in
the ordinary course of business consistent with past practice (i) original
equipment manufacturer agreements, (ii) agreements with end-user customers
or (iii) agreements with distributors or sales representatives; provided,
further, that nothing contained in this clause (vi) shall affect the
restrictions upon the Company set forth elsewhere in this Section 4.1;
(vii) Sell, lease, license, encumber or otherwise dispose of any
properties or assets except (A) sales of inventory in the ordinary course
of business consistent with past practice, (B) the sale, lease or
disposition (other than through licensing) of property or assets which are
not material, individually or in the aggregate, to the business of Company
and its Subsidiaries, (C) the sale of goods or non-exclusive licenses of
Intellectual Property in the ordinary course of business and in a manner
consistent with past practice or (D) dispositions of other immaterial
assets in the ordinary course of business and in a manner consistent with
past practice;
(viii) Make any loans, advances or capital contributions to, or
investments in, any other Person, other than employee advances for travel,
business and entertainment expenses made in the ordinary course of business
consistent with past practices provided such employee loans are in
compliance with applicable law;
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(ix) Except as required by GAAP or the SEC as concurred in by its
independent auditors, make any material change in its methods or principles
of accounting since the date of the Company Balance Sheet;
(x) Make or change any material Tax election or adopt or change any
accounting method, enter into any closing agreement, settle or compromise
any claim or assessment in respect of Taxes or consent to any extension or
waiver of any limitation period with respect to any claim or assessment for
Taxes;
(xi) Except as required by GAAP or the SEC (and upon consultation with
its independent auditors), revalue any of its assets or make any change in
accounting methods, principles or practices;
(xii) (A) Pay, discharge, settle or satisfy any claims (including any
Tax claim), liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), or litigation (whether or not
commenced prior to the date of this Agreement) other than the payment,
discharge, settlement or satisfaction for money, of claims, liabilities,
obligations or litigation (x) in the ordinary course of business consistent
with past practice or in accordance with their terms, of claims not in
excess of $100,000 individually or $500,000 in the aggregate or (y) to the
extent subject to reserves on the Company Financials existing as of the
date hereof in accordance with GAAP, or (B) waive the benefits of, agree to
modify in any manner, terminate, release any person from or knowingly fail
to enforce any confidentiality or similar agreement to which Company or any
of its Subsidiaries is a party or of which Company or any of its
Subsidiaries is a beneficiary;
(xiii) Except as required by applicable law and disclosed in writing
to Parent, take any of the following actions: (1) increase in any manner
(including by means of acceleration of payment) the amount of salary, cash
bonus, compensation or fringe benefits of, or pay any bonus to or grant
severance or termination pay to any Employee or director of the Company or
any Subsidiary of the Company, (2) make any increase in or commitment to
increase any Company Benefit Plan (including any severance plan), adopt or
amend or make any commitment to adopt or amend any Company Benefit Plan, or
make any contribution to any Company Benefit Plan, other than (x) regularly
scheduled contributions to a Company Benefit Plan or (y) an increase in the
number of shares of Company Common Stock authorized for issuance under the
Company Purchase Plan from an aggregate of 349,968 shares (which shares
have been issued prior to the date of this Agreement) to an aggregate of
700,000 shares, (3) waive any stock repurchase rights, accelerate (other
than by operation of the terms of the respective agreement or the Company
Purchase Plan as in effect on the date hereof), amend or change the period
of exercisability (other than by operation of the terms of the respective
agreement or the Company Purchase Plan as in effect on the date hereof) of
Company Options or Company Restricted Stock, or reprice any Company Options
or authorize cash payments in exchange for any Company Options, (4) enter
into any employment, severance, termination or indemnification agreement
with any Company Employee or enter into any collective bargaining agreement
(other than offer letters and letter agreements entered into in the
ordinary course of business consistent with past practice with employees
who are terminable "at will"), (5) make any material oral or written
representation or commitment with respect to any material aspect of any
Company Benefit Plan that is not materially in accordance with the existing
written terms and provision of such Company Benefit Plan, (6) grant any
stock appreciation right, phantom stock award, stock-related award or
performance award (whether payable in cash, shares or otherwise) to any
Person (including any Company Employee), or (7) enter into any agreement
with any Company Employee the benefits of which are (in whole or in part)
contingent or the terms of which are materially altered in favor of the
Company Employee upon the occurrence of a transaction involving Company of
the nature contemplated hereby; provided, however, that the Company shall
not be prohibited from increasing the compensation of Company Employees in
the ordinary course of business consistent with past practice to the extent
such increases are consistent with plans and forecasts that have been
previously provided to, and agreed with by, Parent.
(xiv) Grant any exclusive rights with respect to any Intellectual
Property of such party;
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(xv) Enter into or renew any Contracts containing, or otherwise
subject the Surviving Corporation or Parent to, any non-competition,
exclusivity or other material restrictions on the Company or the Surviving
Corporation or Parent, or any of their respective businesses, following the
Closing;
(xvi) Enter into any agreement or commitment the effect of which would
be to grant to a third party following the Merger any actual or potential
right of license to any Intellectual Property owned by Parent or any of its
Subsidiaries (other than the Surviving Corporation);
(xvii) Engage in any action that could reasonably be expected to cause
the Merger to fail to qualify as a "reorganization" under Section 368(a) of
the Code;
(xviii) Hire or offer to hire employees, other than: (i) up to ten
(10) new employees below the level of vice president hired to replace up to
ten (10) existing employees of the Company who leave the Company's employ
after the date hereof ("REPLACEMENT NEW HIRES"), provided however that the
hiring of Replacement New Hires shall not increase the then-current number
of existing employees of the Company; or (ii) additional new employees
hired to provide professional services on behalf of the Company with a view
toward building revenues, consistent with the Company operating plan
provided to Parent ("PROFESSIONAL SERVICES NEW HIRES" and together with the
Replacement New Hires, "ALLOWABLE NEW HIRES"), provided however that the
hiring of Professional Services New Hires shall not increase the current
number of existing professional services employees of the Company by more
than twelve (12) professional services employees, on a net basis as to
professional services employees; provided, further, that the Company shall
consult with Parent prior to hiring any Allowable New Hire; provided,
further, that this obligation to consult shall not, in any manner
whatsoever, be construed or implied to require the Company to obtain the
consent of Parent in connection with the hiring of any Allowable New Hire;
(xix) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another Person, issue or sell any debt securities or
options, warrants, calls or other rights to acquire any debt securities of
the Company or any of its Subsidiaries, guarantee any debt securities of
another Person, enter into any "keep well" or other agreement to maintain
any financial statement condition of any other Person or enter into any
arrangement having the economic effect of any of the foregoing;
(xx) Make any individual or series of related payments outside of the
ordinary course of business or make or commit to make capital expenditures
beyond those contained in the Company's capital expenditure budget in
effect on the date hereof, a copy of which is attached hereto as Schedule
4.1(b)(xx);
(xxi) Enter into, modify or amend in a manner adverse in any material
respect to the Company, or terminate any lease, sublease or Company
Material Contract, or waive, release or assign any material rights or
claims thereunder, in each case, in a manner adverse in any material
respect to the Company, other than entering into any new, or any
modification, amendment or termination of any existing, Company Material
Contract in the ordinary course of business, consistent with past practice;
(xxii) Permit Employees to exercise their Company Options with a
promissory note or through a net exercise;
(xxiii) Enter into any Contract requiring the Company or any of its
Subsidiaries to pay in excess of an aggregate of $250,000 or
(xxiv) Agree in writing or otherwise to take any of the actions
described in (i) through (xxiii) above.
4.2 Conduct of Business by Parent.
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement pursuant to its terms or the
Effective Time, except as permitted by the terms of this Agreement, without the
prior written consent of the Company, Parent shall not (i) cause, permit or
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propose any amendments to the Parent Charter Documents or any of the Subsidiary
Charter Documents of the Parent's Significant Subsidiaries that would materially
impair or adversely affect the ability of Parent to consummate the transactions
contemplated by this Agreement; (ii) declare, set aside or pay any dividends on
or make any other distributions (whether in cash, stock, equity securities or
property) in respect of any Parent capital stock unless the Exchange Ratio shall
be appropriately adjusted; (iii) adopt a plan of liquidation or dissolution;
(iv) purchase, redeem or otherwise acquire, directly or indirectly, shares of
its capital stock or the capital stock of its Subsidiaries for an aggregate
repurchase price in excess of $10,000,000, except repurchases of unvested shares
at cost in connection with the termination of the employment relationship with
any employee pursuant to stock option or purchase agreements in effect on the
date hereof; (v) acquire any Person if such acquisition is likely to delay the
Merger; (vi) except as required by GAAP or the SEC (and upon consultation with
its independent auditors), revalue any of its assets or make any change in
accounting methods, principles or practices; or (vii) adopt any resolution
pursuant to Section 3(c) of the Parent Rights Agreement that is intended to
treat the shares of Parent Common Stock issued pursuant to the Merger
differently under the Parent Rights Agreement than other outstanding shares of
Parent Common Stock for purposes of the issuance of Parent Rights in respect of
such shares of Parent Common Stock; provided, however, that nothing in this
clause (vii) shall in any manner whatsoever limit the ability of Parent to treat
differently under the Parents Rights Agreement shares of Parent Common Stock
beneficially owned by an "Acquiring Person," as such term is defined in the
Parent Rights Agreement. During the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement pursuant to
its terms or the Effective Time, Parent shall consult with the Company prior to:
(A) granting any exclusive rights with respect to any Intellectual Property of
Parent or any of its Subsidiaries, (B) entering into any settlement agreement
obligating Parent or any of its Subsidiaries to make cash payments in excess of
$100,000 individually or $1,000,000 in the aggregate in settlement of claims
with respect to the Intellectual Property of Parent or any of its Subsidiaries,
or (C) entering into any agreement or commitment the effect of which would be to
grant to a third party following the Merger a right to use any material
Intellectual Property owned by the Company; provided, however, that this
obligation to consult shall not, in any manner whatsoever, be construed or
implied to require Parent to obtain the consent of the Company in connection
with the actions set forth in clause (A), (B) or (C) of this sentence.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Prospectus/Proxy Statement; Registration Statement. As promptly as
practicable after the execution of this Agreement, Parent and the Company will
prepare and file with the SEC the Prospectus/ Proxy Statement, and Parent will
prepare and file with the SEC the Registration Statement in which the
Prospectus/Proxy Statement is to be included as a prospectus. Parent and the
Company will provide each other with any information which may be required in
order to effectuate the preparation and filing of the Prospectus/Proxy Statement
and the Registration Statement pursuant to this Section 5.1. Each of Parent and
the Company will respond to any comments from the SEC, will use all commercially
reasonable efforts to cause the Registration Statement to be declared effective
under the Securities Act as promptly as practicable after such filing and to
keep the Registration Statement effective as long as is necessary to consummate
the Merger and the transactions contemplated hereby. Each of Parent and the
Company will notify the other promptly upon the receipt of any comments from the
SEC or its staff in connection with the filing of, or amendments or supplements
to, the Registration Statement and/or the Prospectus/Proxy Statement. Whenever
any event occurs which is required to be set forth in an amendment or supplement
to the Prospectus/Proxy Statement and/or the Registration Statement, Parent or
the Company, as the case may be, will promptly inform the other of such
occurrence and cooperate in filing with the SEC or its staff, and/or mailing to
stockholders of Parent and/or the Company, such amendment or supplement. Each of
Parent and the Company shall cooperate and provide the other (and its counsel)
with a reasonable opportunity to review and comment on any amendment or
supplement to the Registration Statement and Prospectus/Proxy Statement prior to
filing such with the SEC, and will provide each other
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with a copy of all such filings made with the SEC. Each of Parent and the
Company will cause the Prospectus/Proxy Statement to be mailed to its respective
stockholders at the earliest practicable time after the Registration Statement
is declared effective by the SEC. Parent shall also use all commercially
reasonable efforts to take any action required to be taken by it under any
applicable state securities laws in connection with the issuance of Parent
Common Stock pursuant to the Merger and the conversion of the Company Options
into options to acquire Parent Common Stock, and the Company shall furnish any
information concerning the Company and the holders of the Company Common Stock
and the Company Options as may be reasonably requested in connection with any
such action.
5.2 Meetings of Stockholders; Board Recommendation.
(a) Company Stockholders' Meeting. Promptly after the Registration
Statement is declared effective under the Securities Act, the Company will take
all action necessary in accordance with Delaware Law and its Certificate of
Incorporation and Bylaws to call, hold and convene a meeting of its stockholders
to consider the adoption and approval of this Agreement and approval of the
Merger (the "COMPANY STOCKHOLDERS' MEETING") to be held as promptly as
practicable (without limitation, within 60 days, if practicable) after the
declaration of effectiveness of the Registration Statement. The Company will use
all commercially reasonable efforts to hold the Company Stockholders' Meeting on
the same date as the Parent Stockholders' Meeting (as defined below). The
Company will use all commercially reasonable efforts to solicit from its
stockholders proxies in favor of the adoption and approval of this Agreement and
the approval of the Merger, and will take all other action necessary or
advisable to secure the vote or consent of its stockholders required by the
rules of Nasdaq or Delaware Law to obtain such approvals; provided, however,
that the taking of any action allowed by Section 5.2(c) shall not be deemed to
be a breach or failure of performance under this Section 5.2(a). Notwithstanding
anything to the contrary contained in this Agreement, the Company may adjourn or
postpone the Company Stockholders' Meeting to the extent necessary to ensure
that any necessary supplement or amendment to the Prospectus/Proxy Statement is
provided to its stockholders in advance of a vote on the Merger and this
Agreement or, if as of the time for which the Company Stockholders' Meeting is
originally scheduled (as set forth in the Prospectus/Proxy Statement) there are
insufficient shares of Common Stock of Company represented (either in person or
by proxy) to constitute a quorum necessary to conduct the business of such
Company Stockholders' Meeting. The Company shall ensure that the calling,
notice, convening and conduct of the Company Stockholders' Meeting, and that all
proxies solicited by it in connection with the Company Stockholders' Meeting,
are solicited and done in compliance with Delaware Law, its Certificate of
Incorporation and Bylaws, the rules of Nasdaq and all other applicable Legal
Requirements.
(b) Parent Stockholders' Meeting. Promptly after the Registration
Statement is declared effective under the Securities Act, Parent will take all
action necessary in accordance with Delaware Law and its Certificate of
Incorporation and Bylaws to call, hold and convene a meeting of its stockholders
to consider the Stock Issuance (the "PARENT STOCKHOLDERS' MEETING") to be held
as promptly as practicable (without limitation, within 60 days, if practicable)
after the declaration of effectiveness of the Registration Statement. Parent
will use all commercially reasonable efforts to hold the Parent Stockholders'
Meeting on the same date as the Company Stockholders' Meeting. Parent will use
all commercially reasonable efforts to solicit from its stockholders proxies in
favor of the Stock Issuance and will take all other action necessary or
advisable to secure the vote or consent of its stockholders required by the
rules of Nasdaq or Delaware Law to obtain such approvals. Notwithstanding
anything to the contrary contained in this Agreement, Parent may adjourn or
postpone the Parent Stockholders' Meeting to the extent necessary to ensure that
any necessary supplement or amendment to the Prospectus/Proxy Statement is
provided to its stockholders in advance of a vote on the Stock Issuance or, if
as of the time for which the Parent Stockholders' Meeting is originally
scheduled (as set forth in the Prospectus/Proxy Statement) there are
insufficient shares of Common Stock of Parent represented (either in person or
by proxy) to constitute a quorum necessary to conduct the business of such
Parent Stockholders' Meeting. Parent shall ensure that the calling, notice,
convening and conduct of the Parent Stockholders' Meeting, and that all proxies
solicited by it in connection with the Parent Stockholders' Meeting, are
solicited and done in compliance
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with Delaware Law, its Certificate of Incorporation and Bylaws, the rules of
Nasdaq and all other applicable Legal Requirements.
(c) Company Board Recommendation. (i) The Board of Directors of the
Company shall recommend that the stockholders of the Company vote in favor of
the adoption and approval of this Agreement and approval of the Merger at the
Company Stockholders' Meeting, (ii) the Prospectus/Proxy Statement shall include
a statement to the effect that the Board of Directors of the Company has
recommended that the Company's stockholders vote in favor of adoption and
approval of this Agreement and approval of the Merger at the Company
Stockholders' Meeting, and (iii) neither the Board of Directors of the Company
nor any committee thereof shall withdraw, amend or modify, or propose or resolve
to withdraw, amend or modify in a manner adverse to Parent, the recommendation
of its Board of Directors that the stockholders of the Company vote in favor of
the adoption and approval of this Agreement and the Merger; provided, however,
that the foregoing shall not prohibit the Board of Directors of the Company from
fulfilling its duty of candor or disclosure to the Company's stockholders under
applicable law. Notwithstanding the foregoing, the Board of Directors of the
Company may withhold, withdraw, amend or modify its recommendation in favor of
this Agreement and the Merger to the extent (and only to the extent) expressly
permitted by Section 5.3(d).
(d) Parent Board Recommendation. (i) The Board of Directors of Parent
shall recommend that the stockholders of Parent vote in favor of the Stock
Issuance at the Parent Stockholders' Meeting, (ii) the Prospectus/Proxy
Statement shall include a statement to the effect that the Board of Directors of
Parent has recommended that Parent's stockholders vote in favor of the Stock
Issuance at the Parent Stockholders' Meeting, and (iii) neither the Board of
Directors of Parent nor any committee thereof shall withdraw, amend or modify,
or propose or resolve to withdraw, amend or modify in a manner adverse to the
Company, the recommendation of its Board of Directors that the stockholders of
Parent vote in favor of the Stock Issuance; provided, however, that the
foregoing shall not prohibit the Board of Directors of Parent from fulfilling
its duty of candor or disclosure to Parent stockholders under applicable law.
5.3 Acquisition Proposals.
(a) No Solicitation. The Company agrees that neither it nor any of its
Subsidiaries nor any of the officers and directors of it or its Subsidiaries
shall, and that it shall use all commercially reasonable efforts to cause its
and its Subsidiaries' Employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) not to (and shall not authorize any of them to) directly or
indirectly: (i) solicit or initiate, or knowingly encourage, facilitate or
induce, the making, submission or announcement of any Acquisition Proposal (as
defined in Section 5.3(g)(i)), (ii) participate in any discussions or
negotiations regarding, or furnish to any person any nonpublic information with
respect to, or take any other action to knowingly encourage, facilitate or
induce any inquiries or the making of any proposal that constitutes or may
reasonably be expected to lead to, any Acquisition Proposal, (iii) engage in
discussions with any person with respect to any Acquisition Proposal, except as
to the existence of these provisions, (iv) approve, endorse or recommend any
Acquisition Proposal (except to the extent specifically permitted pursuant to
Section 5.3(d)), or (v) enter into any letter of intent or similar document or
any contract, agreement or commitment contemplating or otherwise relating to any
Acquisition Proposal or transaction contemplated thereby. The Company and its
Subsidiaries will each immediately cease any and all existing activities,
discussions or negotiations with any third parties conducted heretofore with
respect to any Acquisition Proposal.
(b) Notification of Unsolicited Acquisition Proposals. As promptly as
practicable after receipt of any (i) Acquisition Proposal; (ii) request for
nonpublic information; or (iii) inquiry from a third party regarding the making
of an Acquisition Proposal, or regarding whether the Company would be amenable
to the making of an Acquisition Proposal or as to the manner in which such third
party could proceed with the making of an Acquisition Proposal, the Company
shall provide Parent with oral and written notice of the material terms and
conditions of such Acquisition Proposal, request or inquiry, and the identity of
the person or group making any such Acquisition Proposal, request or inquiry and
a copy of all such written Acquisition Proposals, requests or inquiries. The
Company shall (x) provide Parent as promptly as
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practicable oral and written notice setting forth reasonable details of any
material amendments or proposed material amendments of any such Acquisition
Proposal, request or inquiry and shall promptly provide to Parent a copy of all
written materials subsequently provided by the Company to such third party in
connection with such Acquisition Proposal, request or inquiry, and (y) keep
Parent informed, on a current basis, of all material developments with respect
to the status of any negotiations or related discussions in connection with such
Acquisition Proposal.
(c) Superior Offers. Notwithstanding anything to the contrary contained in
Section 5.3(a), in the event that the Company receives an unsolicited, bona fide
written Acquisition Proposal from a third party that its Board of Directors has
in good faith concluded (following consultation with its outside legal counsel
and its financial advisor), is, or is reasonably likely to result in, a Superior
Offer (as defined in Section 5.3(g)(ii)), it may then take the following actions
(but only if and to the extent that its Board of Directors concludes in good
faith, following consultation with its outside legal counsel, that such actions
are required in order for the Board of Directors to comply with its fiduciary
obligations under applicable law):
(i) Furnish nonpublic information to the third party making such
Acquisition Proposal, provided that (A) (1) concurrently with furnishing
any such nonpublic information to such party, it gives Parent written
notice of its intention to furnish nonpublic information and (2) it
receives from the third party an executed confidentiality agreement
containing customary limitations on the use and disclosure of all nonpublic
written and oral information furnished to such third party on its behalf,
the terms of which are at least as restrictive as the terms contained in
the Confidentiality Agreement (as defined in Section 5.4(a)), it being
understood that such confidentiality agreement and any related agreements
shall not include any provision calling for any exclusive right to
negotiate with such party or having the effect of prohibiting the Company
from satisfying its obligations hereunder and (B) contemporaneously with
furnishing any such nonpublic information to such third party, it furnishes
such nonpublic information to Parent (to the extent such nonpublic
information has not been previously so furnished), together with a complete
list identifying all nonpublic information furnished to such third party;
and
(ii) Engage in negotiations with the third party with respect to the
Acquisition Proposal, provided that concurrently with entering into
negotiations with such third party, it gives Parent written notice of its
intention to enter into negotiations with such third party and (x) provides
Parent as promptly as practicable oral and written notice setting forth
reasonable details of any material amendments or proposed material
amendments of such Acquisition Proposal and promptly provides to Parent a
copy of all written materials subsequently provided by the Company to such
third party in connection with such Acquisition Proposal, and (y) continues
to keep Parent informed, on a current basis, of all material developments
with respect to the status of any such negotiations or related discussions.
(d) Changes of Recommendation. In response to the receipt of an
Acquisition Proposal, the Company Board of Directors may withhold, withdraw,
amend or modify its recommendation in favor of the Merger, and, in the case of a
Superior Offer that is a tender or exchange offer made directly to its
stockholders, may recommend that its stockholders accept the tender or exchange
offer (any of the foregoing actions, whether by the Company Board of Directors
or a committee thereof, a "CHANGE OF RECOMMENDATION"), if all of the following
conditions in clauses (i) through (v) are met:
(i) The Board of Directors determines, in good faith, that the
Acquisition Proposal constitutes a Superior Offer and such Acquisition
Proposal has been made and has not been withdrawn;
(ii) The Company Stockholders' Meeting has not occurred;
(iii) (A) The Company shall have delivered to Parent written notice (a
"CHANGE OF RECOMMENDATION NOTICE") at least three (3) business days prior
to effecting such Change of Recommendation, which notice shall state
expressly (1) that it has received an Acquisition Proposal which it has
determined is a Superior Offer and (2) that it intends to effect a Change
of
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Recommendation and the manner in which it intends or may intend to do so;
and (B) the Company and its Board of Directors shall have complied with all
obligations under Sections 5.3(a), (b) and (c) of this Agreement;
(iv) The Company Board of Directors has concluded in good faith, after
consultation with its outside legal counsel, that, in light of such
Superior Offer, such Change of Recommendation is required in order for the
Board of Directors to comply with its fiduciary obligations under
applicable law; and
(v) The Company shall not have breached any of the provisions set
forth in Section 5.2 or this Section 5.3.
During the three business day period set forth in Section 5.3(d)(iii)(A),
the Board of Directors of the Company shall provide Parent the opportunity to
make, and shall give due consideration to, adjustments to the terms and
conditions of this Agreement or the transactions contemplated hereby, and
alternative proposals in connection therewith.
(e) Continuing Obligation to Call, Hold and Convene Stockholders' Meeting;
No Other Vote. Notwithstanding anything to the contrary contained in this
Agreement, the obligation of the Company or Parent, as the case may be, to call,
give notice of, convene and hold its Stockholders' Meeting shall not be limited
or otherwise affected by the commencement, disclosure, announcement or
submission to it of any Acquisition Proposal, or by any Change of
Recommendation. The Company shall not submit to the vote of its stockholders any
Acquisition Proposal, or propose to do so.
(f) Compliance with Tender Offer Rules. Nothing contained in this
Agreement shall prohibit either the Company or Parent or their respective Boards
of Directors from taking and disclosing to their respective stockholders a
position contemplated by Rules 14d-9 and 14e-2(a) promulgated under the Exchange
Act; provided that the content of any such disclosure thereunder shall be
governed by the terms of this Agreement. Without limiting the foregoing proviso,
the Company shall not effect a Change of Recommendation unless specifically
permitted pursuant to the terms of this Agreement. Nothing contained in this
Section 5.3(f) shall be interpreted to affect or otherwise qualify, limit or
modify in any way the definition of "Parent Triggering Event" set forth in
Section 7.1 hereof.
(g) Certain Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
(i) "ACQUISITION PROPOSAL" shall mean any offer or proposal, relating
to any transaction or series of related transactions involving: (A) any
purchase from such party or acquisition by any Person or "GROUP" (as
defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of more than a fifteen percent (15%) interest in
the total outstanding voting securities of the Company or any of its
Subsidiaries or any tender offer or exchange offer that if consummated
would result in any person or group beneficially owning fifteen percent
(15%) or more of the total outstanding voting securities of the Company or
any of its Subsidiaries or any merger, consolidation, business combination
or similar transaction involving the Company or any of its Subsidiaries,
(B) any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of assets of the Company (including
its Subsidiaries taken as a whole) representing more than fifteen percent
(15%) of the aggregate fair market value of the Company's business
immediately prior to such acquisition, or (C) any liquidation or
dissolution (or the adoption of a plan pertaining thereto) of the Company
or the declaration or payment of an extraordinary dividend (whether in cash
or other property); provided, however, the Merger and the transactions
contemplated hereby shall not be deemed an Acquisition Proposal in any
case; and
(ii) "SUPERIOR OFFER" shall mean an unsolicited, bona fide written
offer made by a third party to acquire, directly or indirectly, pursuant to
a tender offer, exchange offer, merger, consolidation or other business
combination, all or substantially all of the assets of the Company or all
of the outstanding voting securities of the Company and as a result of
which the stockholders of the
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Company immediately preceding such transaction would hold less than fifty
percent (50%) of the equity interests in the surviving or resulting entity
of such transaction or any direct or indirect parent or Subsidiary thereof,
on terms that the Company Board of Directors has in good faith concluded
(following consultation with its outside legal counsel and its financial
adviser), taking into account, among other things, all legal, financial,
regulatory and other aspects of the offer and the Person making the offer,
to be more favorable to the Company's stockholders (in their capacities as
stockholders) than the terms of the Merger and is reasonably capable of
being consummated.
5.4 Confidentiality; Access to Information; No Modification of
Representations, Warranties or Covenants.
(a) Confidentiality. The parties acknowledge that the Company and Parent
have previously executed a Confidentiality Agreement dated November 19, 2002
(the "CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will continue
in full force and effect in accordance with its terms and each of Parent and the
Company will hold, and will cause its respective directors, officers, Employees,
agents and advisors (including attorneys, accountants, consultants, bankers and
financial advisors) to hold, any Information (as defined in the Confidentiality
Agreement) confidential in accordance with the terms of the Confidentiality
Agreement. Notwithstanding the foregoing, the Company and Parent (and each
employee, representative, or other agent of such party) may disclose to any and
all persons, without limitation of any kind, the U.S. federal tax treatment and
tax structure of the transaction contemplated hereby and all materials of any
kind (including opinions or other tax analyses) that are provided to the Company
or Parent relating to such tax treatment and tax structure. For this purpose,
"tax structure" is limited to any facts relevant to the U.S. federal income tax
treatment of the transaction.
(b) Access to Information. Each party will afford the other party's
accountants, counsel and other identified representatives (the "DESIGNATED
REPRESENTATIVES") reasonable access during normal business hours to its
properties, books, records and personnel during the period prior to the
Effective Time to obtain all reasonable information concerning its business as
may be reasonably requested, consistent with those certain Non-Disclosure
Agreements entered into by and among Parent, the Company and certain of the
Designated Representatives; provided, however, that the parties may restrict the
foregoing access to the extent that any law, treaty, rule or regulation of any
Governmental Entity applicable to a party requires such party or its
Subsidiaries to restrict or prohibit access to any such properties or
information.
(c) No Modification of Representations and Warranties or Covenants. No
information or knowledge obtained in any investigation or notification pursuant
to this Section 5.4, Section 5.6 or Section 5.7 shall affect or be deemed to
modify any representation or warranty contained herein, the covenants or
agreements of the parties hereto or the conditions to the obligations of the
parties hereto under this Agreement.
5.5 Public Disclosure. Without limiting any other provision of this
Agreement, Parent and the Company will consult with each other before issuing,
and provide each other the opportunity to review, comment upon and concur with,
and use all commercially reasonable efforts to agree on any press release or
public statement with respect to this Agreement and the transactions
contemplated hereby, including the Merger and any Acquisition Proposal, and will
not issue any such press release or make any such public statement prior to such
consultation and (to the extent practicable) agreement, except as may be
required by law or any listing agreement with Nasdaq or any other applicable
national or regional securities exchange. The parties have agreed to the text of
the joint press release announcing the signing of this Agreement.
5.6 Regulatory Filings; Reasonable Efforts.
(a) Regulatory Filings. Each of Parent, Merger Sub and the Company shall
coordinate and cooperate with one another and shall each use all commercially
reasonable efforts to comply with, and shall each refrain from taking any action
that would impede compliance with, all Legal Requirements, and as promptly as
practicable after the date hereof, each of Parent, Merger Sub and the Company
shall make all filings, notices, petitions, statements, registrations,
submissions of information, application or submission
A-46
of other documents required by any Governmental Entity in connection with the
Merger and the transactions contemplated hereby, including, without limitation:
(i) Notification and Report Forms with the United States Federal Trade
Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") as required by the HSR Act, (ii) any other filing
necessary to obtain any Necessary Consent, (iii) filings under any other
comparable pre-merger notification forms required by the merger notification or
control laws of any applicable jurisdiction, as agreed by the parties hereto,
and (iv) any filings required under the Securities Act, the Exchange Act, any
applicable state or securities or "blue sky" laws and the securities laws of any
foreign country, or any other Legal Requirement relating to the Merger. Each of
Parent and the Company will cause all documents that it is responsible for
filing with any Governmental Entity under this Section 5.6(a) to comply in all
material respects with all applicable Legal Requirements.
(b) Exchange of Information. Parent, Merger Sub and the Company each shall
promptly supply the other with any information that may be required in order to
effectuate any filings or application pursuant to Section 5.6(a). Except where
prohibited by applicable Legal Requirements, and subject to the Confidentiality
Agreement, each of the Company and Parent shall consult with the other prior to
taking a position with respect to any such filing, shall permit the other to
review and discuss in advance, and consider in good faith the views of the other
in connection with any analyses, appearances, presentations, memoranda, briefs,
white papers, arguments, opinions and proposals before making or submitting any
of the foregoing to any Governmental Entity by or on behalf of any party hereto
in connection with any investigations or proceedings in connection with this
Agreement or the transactions contemplated hereby (including under any antitrust
or fair trade Legal Requirement), coordinate with the other in preparing and
exchanging such information and promptly provide the other (and its counsel)
with copies of all filings, presentations or submissions (and a summary of any
oral presentations) made by such party with any Governmental Entity in
connection with this Agreement or the transactions contemplated hereby, provided
that with respect to any such filing, presentation or submission, each of Parent
and the Company need not supply the other (or its counsel) with copies (or in
case of oral presentations, a summary) to the extent that any law, treaty, rule
or regulation of any Governmental Entity applicable to such party requires such
party or its Subsidiaries to restrict or prohibit access to any such properties
or information. It is acknowledged and agreed by the parties hereto that, except
where prohibited by applicable Legal Requirements, Parent and the Company shall
mutually consult with each other on the strategy for dealing with the FTC, DOJ
or any other Governmental Authority with responsibility for reviewing the Merger
with respect to antitrust or competition issues; provided, however, in the event
Parent and the Company differ upon such strategy following such consultation,
Parent's strategy shall prevail and be cooperated with by the Company.
(c) Notification. Each of Parent, Merger Sub and the Company will notify
the other promptly upon the receipt of: (i) any comments from any officials of
any Governmental Entity in connection with any filings made pursuant hereto and
(ii) any request by any officials of any Governmental Entity for amendments or
supplements to any filings made pursuant to, or information provided to comply
in all material respects with, any Legal Requirements. Whenever any event occurs
that is required to be set forth in an amendment or supplement to any filing
made pursuant to Section 5.6(a), Parent, Merger Sub or the Company, as the case
may be, will promptly inform the other of such occurrence and cooperate in
filing with the applicable Governmental Entity such amendment or supplement.
(d) Reasonable Efforts. Subject to the express provisions of Section 5.2
and Section 5.3 hereof and upon the terms and subject to the conditions set
forth herein, each of the parties agrees to use all commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including using all commercially reasonable
efforts to accomplish the following: (i) the taking of all commercially
reasonable acts necessary to cause the conditions precedent set forth in Article
VI to be satisfied, (ii) the obtaining of all necessary actions or nonactions,
waivers, consents, approvals, orders and authorizations from Governmental
Entities and the
A-47
making of all necessary registrations, declarations and filings (including
registrations, declarations and filings with Governmental Entities, if any) and
the taking of all commercially reasonable steps as may be necessary to avoid any
suit, claim, action, investigation or proceeding by any Governmental Entity,
(iii) the obtaining of all necessary consents, approvals or waivers from third
parties, including all Necessary Consents, (iv) the defending of any suits,
claims, actions, investigations or proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of the
transactions contemplated hereby, including seeking to have any stay or
temporary restraining order entered by any court or other Governmental Entity
vacated or reversed, and (v) the execution or delivery of any additional
instruments necessary to consummate the transactions contemplated by, and to
fully carry out the purposes of, this Agreement. In connection with and without
limiting the foregoing, the Company and its Board of Directors shall, if any
takeover statute or similar Legal Requirement is or becomes applicable to the
Merger, this Agreement or any of the transactions contemplated by this
Agreement, use all commercially reasonable efforts to ensure that the Merger and
the other transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effect of such Legal Requirement on the Merger, this
Agreement and the transactions contemplated hereby.
(e) Limitation on Divestiture. Notwithstanding anything in this Agreement
to the contrary, nothing contained in this Agreement shall be deemed to require
Parent or any Subsidiary or affiliate of Parent to agree to any Action of
Divestiture (as defined below). The Company shall not take or agree to take any
Action of Divestiture without the prior written consent of Parent. For purposes
of this Agreement, an "ACTION OF DIVESTITURE" shall mean (i) making proposals,
executing or carrying out agreements or submitting to Legal Requirements
providing for the license, sale or other disposition or holding separate
(through the establishment of a trust or otherwise) of any assets or categories
of assets that are material to Parent, the Company or any of their respective
Subsidiaries or the holding separate of the Company capital stock or imposing or
seeking to impose any limitation on the ability of Parent, the Company or any of
their respective Subsidiaries, to conduct their respective businesses or own
such assets or to acquire, hold or exercise full rights of ownership of the
Company's business or (ii) otherwise taking any step to avoid or eliminate any
impediment which may be asserted under any Legal Requirement governing
competition, monopolies or restrictive trade practices.
5.7 Notification of Certain Matters.
(a) By the Company. The Company shall give prompt notice to Parent and
Merger Sub of any representation or warranty made by it contained in this
Agreement becoming untrue or inaccurate, or any failure of the Company to comply
with or satisfy in any material respect any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement, in each case, such
that the conditions set forth in Section 6.3(a) or 6.3(b) would not be
satisfied.
(b) By Parent. Parent and Merger Sub shall give prompt notice to the
Company of any representation or warranty made by it contained in this Agreement
becoming untrue or inaccurate, or any failure of Parent to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement, in each case, such that
the conditions set forth in Section 6.2(a) or 6.2(b) would not be satisfied.
5.8 Third-Party Consents.
(a) Company Efforts. As soon as practicable following the date hereof, the
Company will use all commercially reasonable efforts to obtain any material
consents, waivers and approvals under any of its or its Subsidiaries' respective
Contracts required to be obtained in connection with the consummation of the
transactions contemplated hereby.
(b) Parent Efforts. As soon as practicable following the date hereof,
Parent will use all commercially reasonable efforts to obtain any material
consents, waivers and approvals under any of its or its Subsidiaries' respective
Contracts required to be obtained in connection with the consummation of the
transactions contemplated hereby.
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5.9 Equity Awards and Employee Benefits; Company Warrants.
(a) Stock Plan; Company Options. Parent shall assume the Company's 2000
Employee, Director and Consultant Stock Plan at the Effective Time. Prior to the
Effective Time, the Company shall provide that each outstanding Company Option
shall accelerate and become fully vested, and to the extent not exercised prior
to the Effective Time shall terminate and be cancelled and shall not be assumed
by Parent. The Company shall take (or cause to be taken) all actions necessary
or appropriate to terminate, effective immediately prior to the Effective Time,
each Company Option, ensuring that no Company Employee (and no other person) has
any rights under such Company Options and that any liabilities of the Company
under such Company Options are fully extinguished at no cost to the Company. In
furtherance of the foregoing, the Company shall provide a notice to the
optionees informing them that the Company Options not exercised prior to the
Effective Time shall terminate immediately prior to the Effective Time, which
notice shall be provided to the optionees no later than thirty (30) days prior
to the Effective Time. The form and substance of such notice shall be subject to
advance review and approval of Parent, which approval will not be unreasonably
withheld.
(b) Termination of the Company's Stock Purchase Plan. Prior to the
Effective Time, the Company Purchase Plan shall be terminated. The rights of
participants in the Company Purchase Plan with respect to any offering period
then underway under such the Company Purchase Plan shall be determined by
treating the last business day prior to, or if more administratively advisable,
the last payroll date of the Company immediately prior to, the Effective Time,
as the last day of such offering period and by making such other pro-rata
adjustments as may be necessary to reflect the shortened offering period but
otherwise treating such shortened offering period as a fully effective and
completed offering period for all purposes under such Company Purchase Plan.
Prior to the Effective Time, the Company shall take all actions (including, if
appropriate, amending the terms of such Company Purchase Plan) that are
necessary to give effect to the transactions contemplated by this Section
5.9(b).
(c) Termination of 401(k) Plans. To the extent requested in writing by
Parent no later than five (5) business days prior to the Closing Date, the
Company shall take (or cause to be taken) all actions necessary or appropriate
to terminate, effective no later than the date immediately preceding the Closing
Date, any Company Employee Plan that contains a cash or deferred arrangement
intended to qualify under Section 401(k) of the Code (the "401(K) PLANS"). If
Parent provides such notice to the Company, Parent shall receive from the
Company, prior to the Effective Time, evidence that the Company's Board of
Directors has adopted resolutions to terminate the 401(k) Plans (the form and
substance of which resolutions shall be subject to review and approval of
Parent, which approval shall not be unreasonably withheld), effective no later
than the date immediately preceding the Closing Date.
(d) Employee Benefits. As soon as practicable after the Effective Time and
in any event within one year of the Effective Time, Parent shall use
commercially reasonable efforts to provide the employees of the Company and its
Subsidiaries who are employed by Parent or one of its Subsidiaries after the
Effective Time (the "CONTINUING EMPLOYEES") with similar types and levels of
employee benefits as those provided to similarly situated employees of Parent.
For purposes of determining eligibility to participate, vesting and entitlement
to benefits where length of service is relevant under any benefit plan or
arrangement (other than a defined benefit plan) of Parent and to the extent
permitted by applicable law, Parent shall provide that the Continuing Employees
shall receive service credit under Parent's benefit plans or arrangements for
their period of service with the Company and its Subsidiaries prior to the
Closing. Parent shall use commercially reasonable efforts to waive all
limitations as to preexisting conditions exclusions and waiting periods with
respect to participation and coverage requirements applicable to the Continuing
Employees under any medical, dental and vision plans that such employees may be
eligible to participate in after the Closing Date, other than limitations or
waiting periods that would apply if such Continuing Employee had been employed
by Parent for the period of the Continuing Employee's employment with the
Company or one of its Subsidiaries; provided that with respect to those
employees for whom such limitations and waiting periods cannot be waived, Parent
shall use commercially reasonable efforts to provide such employees with the
opportunity to retain any affected coverage they had under the Company Employee
Plans. Subject to Parent receiving sufficient information to comply with the
following, Parent shall also use
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its commercially reasonable efforts to provide Continuing Employees and their
eligible dependents with credit for any co-payments and deductibles paid under
Company's medical plans for the year in which the Closing occurs under Parent's
medical plans for the purposes of satisfying any applicable co-payments and
deductibles in the year in which the Closing occurs. Prior to the time that the
provisions of the first sentence of this paragraph are satisfied, Parent or one
of its Subsidiaries may continue one or more of the Company Employee Plans;
provided the employee benefits provided would, in the aggregate, in the
reasonable judgment of Parent, be no less favorable than those provided under
the Company Employee Plans (not including those provided under individual
agreements). Parent shall provide to the individual employees set forth in
Section 5.9(d) of the Parent Disclosure Letter the employee benefits described
therein as applicable to such individual employee
(e) Company Warrants. At the Effective Time, each outstanding Company
Warrant shall, in connection with the Merger, be automatically assumed by Parent
in accordance with the terms of the applicable Company Warrant. After the
Effective Time, each Company Warrant shall be exercisable upon the same terms
and conditions as were applicable to such Company Warrant immediately prior to
the Effective Time, except that each such Company Warrant shall, following the
Effective Time, become exercisable for that number of shares of Parent Common
Stock equal to the number of shares of Company Common Stock issuable upon
exercise of such Company Warrant multiplied by the Exchange Ratio and at an
exercise price per share equal to the exercise price per share of Company Common
Stock under such Company Warrant divided by the Exchange Ratio. Parent shall
take all corporate actions necessary to assume the Company Warrants and to
reserve for issuance a sufficient number of shares of Parent Common Stock for
delivery following the exercise of the Company Warrants. The Company will
provide notice required under the terms of any Company Warrant to the holder of
such Company Warrant in connection with the Merger.
5.10 Form S-8. Parent agrees to file a registration statement on Form S-8
for the shares of Parent Common Stock issuable with respect to assumed Company
Options to the extent Form S-8 is available as soon as is reasonably practicable
after the Effective Time and shall maintain the effectiveness of such
registration statement thereafter for so long as any of such options or other
rights remain outstanding.
5.11 Indemnification.
(a) Indemnity. From and after the Effective Time, Parent will, and will
cause the Surviving Corporation to, fulfill and honor in all respects the
obligations of the Company pursuant to the Certificate of Incorporation and
Bylaws of the Company as in effect on the date hereof, with respect to the
Company's directors and officers (the "INDEMNIFIED PARTIES"), subject to
applicable law. The Certificate of Incorporation and Bylaws of the Surviving
Corporation will contain provisions with respect to exculpation, advancement of
expenses and indemnification that are at least as favorable to the Indemnified
Parties as those contained in the Certificate of Incorporation and Bylaws of the
Company as in effect on the date hereof, which provisions will not be amended,
repealed or otherwise modified for a period of six (6) years from the Effective
Time in any manner that would adversely affect the rights thereunder of
individuals who, immediately prior to the Effective Time, were directors,
officers, Employees or agents of the Company, unless such modification is
required by law.
(b) Insurance. For a period of three (3) years after the Effective Time,
Parent will cause the Surviving Corporation to maintain directors' and officers'
liability insurance covering those persons who are covered by the Company's
directors' and officers' liability insurance policy as of the date hereof, on
terms comparable to those applicable as of the date hereof to the current
directors and officers of Parent (i.e., with policy coverage of $10,000,000).
(c) Third-Party Beneficiaries. This Section 5.11 is intended to be for the
benefit of, and shall be enforceable by the Indemnified Parties and their heirs
and personal representatives and shall be binding on Parent and the Surviving
Corporation and its successors and assigns. In the event Parent or the Surviving
Corporation or its successor or assign (i) consolidates with or merges into any
other Person and shall not be the continuing or surviving corporation or entity
in such consolidation or merger or (ii) transfers all or substantially all of
its properties and assets to any Person, then, and in each case, proper
provision shall be
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made so that the successor and assign of Parent or the Surviving Corporation, as
the case may be, honor the obligations set forth with respect to Parent or the
Surviving Corporation, as the case may be, in this Section 5.11.
5.12 Nasdaq Listing. Prior to the Effective Time, Parent agrees to use all
commercially reasonable efforts to authorize for listing on Nasdaq the shares of
Parent Common Stock issuable, and those required to be reserved for issuance, in
connection with the Merger, subject to official notice of issuance.
5.13 Company Affiliates; Restrictive Legend. The Company will use all
commercially reasonable efforts to deliver or cause to be delivered to Parent,
as promptly as practicable on or following the date hereof, from each person who
may reasonably be deemed to be an affiliate of the Company for purposes of Rule
145 promulgated under the Securities Act an executed affiliate agreement
pursuant to which such affiliate shall agree to be bound by the provision of
Rule 145 promulgated under the Securities Act in a form provided by Parent and
reasonably acceptable to the Company. Parent will give stop transfer
instructions to its transfer agent with respect to any Parent Common Stock
received pursuant to the Merger by any stockholder of the Company who may
reasonably be deemed to be an affiliate of the Company for purposes of Rule 145
promulgated under the Securities Act and there will be placed on the
certificates representing such Parent Common Stock, or any substitutions
therefor, a legend stating in substance that the shares were issued in a
transaction to which Rule 145 promulgated under the Securities Act applies and
may only be transferred (i) in conformity with Rule 145 or (ii) in accordance
with a written opinion of counsel, reasonably acceptable to Parent, in form and
substance that such transfer is exempt from registration under the Securities
Act.
5.14 Treatment as Reorganization. None of Parent, Merger Sub or the
Company shall, and they shall not permit any of their respective Subsidiaries
to, take any action prior to or following the Closing that would reasonably be
expected to cause the Merger to fail to qualify as a reorganization with the
meaning of Section 368(a) of the Code.
5.15 Section 16 Matters. Prior to the Effective Time, (i) the Company
shall take all such steps as may be required to cause any dispositions of the
Company Common Stock (including derivative securities with respect to the
Company Common Stock) resulting from the transactions contemplated by Article I
of this Agreement by each individual who is subject to the reporting
requirements of Section 16(a) of the Exchange Act with respect to the Company to
be exempt under Rule 16b-3 promulgated under the Exchange Act, and (ii) Parent
shall take all such steps as may be required to cause any acquisitions of Parent
Common Stock (including associated Parent Rights and derivative securities with
respect to Parent Common Stock) resulting from the transactions contemplated by
Article I of this Agreement by each individual who will, as a result of the
transactions contemplated by Article I of this Agreement, be subject to the
reporting requirements of Section 16(a) of the Exchange Act with respect to
Parent to be exempt under Rule 16b-3 promulgated under the Exchange Act.
5.16 Merger Sub Compliance. Parent shall cause Merger Sub to comply with
all of Merger Sub's obligations under or relating to this Agreement. Merger Sub
shall not engage in any business which is not in connection with the merger with
and into the Company pursuant to this Agreement.
5.17 Board of Directors. The Board of Directors of Parent shall take all
actions necessary such that effective as of immediately following the Effective
Time, the Board of Directors of Parent shall be comprised of 8 directors, and
shall include three (3) directors designated by the Company, who shall initially
be Stuart R. Patterson and two other directors reasonably acceptable to Parent
(the "COMPANY DESIGNATED DIRECTORS"). If any of the above named Company
Designated Directors is unable or unavailable to serve as a director of Parent
at the Effective Time, then the Company shall be entitled to designate another
Person to serve as a Company Designated Director, as long as such alternate
Person serves as a director on the Board of Directors of the Company on the date
hereof and is reasonably acceptable to Parent.
5.18 Comfort Letter. The Company shall use all commercially reasonable
efforts to cause its independent public accountants to deliver a letter dated
not more than five (5) days prior to the date on
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which the Registration Statement shall become effective and addressed to itself
and Parent and their respective Boards of Directors in form and substance
reasonably satisfactory to Parent and customary in scope and substance for
agreed-upon procedures letters delivered by independent public accountants in
connection with registration statements and prospectus/proxy statements similar
to the Registration Statement and the Prospectus/Proxy Statement.
5.19 Agreements with Respect to Salary. Except as set forth in Section
5.19 of the Company Disclosure Letter, if the Company has taken any action prior
to the date hereof to (i) increase in any manner the salary, cash bonus,
severance pay, termination pay or other cash compensation of any Company
Employee ("CASH COMPENSATION"), or (ii) accelerate in any manner the payment of
any Cash Compensation to any Company Employee, which increase or acceleration
would take effect after the date of this Agreement, then the Company shall
rescind any such previously taken actions that provide for any such increases or
acceleration.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to the Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted, and the Merger shall have been duly approved, by the requisite
vote under applicable law, by the stockholders of the Company and the Stock
Issuance shall have been approved, by the requisite vote under the Nasdaq
Marketplace Rules, by the stockholders of Parent.
(b) No Order. No Governmental Entity of competent jurisdiction shall
have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which (i) is in effect and (ii) has
the effect of making the Merger or the Stock Issuance illegal or otherwise
prohibiting consummation of the Merger or the Stock Issuance.
(c) Registration Statement Effective; Prospectus/Proxy Statement. The
SEC shall have declared the Registration Statement effective. No stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose, and no
similar proceeding in respect of the Prospectus/Proxy Statement, shall have
been initiated or threatened in writing by the SEC.
(d) HSR Act. All waiting periods (and any extension thereof) under
the HSR Act relating to the transactions contemplated hereby will have
expired or terminated early. All other material foreign antitrust approvals
required to be obtained prior to the Merger in connection with the
transactions contemplated hereby shall have been obtained.
(e) No Governmental Restriction. There shall not be any pending or
overtly threatened suit, action or proceeding asserted by any Governmental
Authority (i) challenging or seeking to restrain or prohibit the
consummation of the Merger or any of the other transactions contemplated by
this Agreement, the effect of which restraint or prohibition if obtained
would cause the condition set forth in Section 6.1(b) to not be satisfied
or (ii) seeking to require Parent or the Company or any Subsidiary or
affiliate to effect an Action of Divestiture.
(f) Tax Opinions. Parent and the Company shall each have received
written opinions from Wilson Sonsini Goodrich & Rosati, Professional
Corporation and Hale and Dorr LLP, respectively, in form and substance
reasonably satisfactory to them, to the effect that the Merger will
constitute a reorganization within the meaning of Section 368(a) of the
Code and such opinions shall not have been withdrawn; provided, however,
that if the counsel to either Parent or the Company does not render such
opinion, this condition shall nonetheless be deemed to be satisfied with
respect to such
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party if counsel to the other party renders the opinion to such party that
the Merger will constitute a tax-free reorganization within the meaning of
Section 368(a) of the Code. Parent and the Company shall deliver to tax
counsel, and tax counsel shall be entitled to rely upon, reasonable and
customary tax representations in connection with rendering such opinions
substantially in the form attached as Appendix 6.1(f) to each of the
Company Disclosure Letter and the Parent Disclosure Letter.
(g) Nasdaq Listing. The shares of Parent Common Stock to be issued
pursuant to the Merger and the transactions contemplated hereby shall have
been authorized for listing on Nasdaq, subject to official notice of
issuance.
6.2 Additional Conditions to the Obligations of the Company. The
obligation of the Company to consummate and effect the Merger shall be subject
to the satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company:
(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub contained in this Agreement shall be
true and correct on the date hereof and as of the Closing Date with the
same force and effect as if made on the Closing Date (except that those
representations and warranties which address matters only as of a
particular date shall have been true and correct only on such date),
except, in each case, or in the aggregate, as does not constitute a
Material Adverse Effect on Parent at the Closing Date (it being understood
that, (i) for purposes of determining the accuracy of such representations
and warranties, any update of or modification to the Parent Disclosure
Letter made or purported to have been made after the execution of this
Agreement shall be disregarded; and (ii) for purposes of determining
whether the inaccuracy of such representations and warranties constitutes,
in each case or in the aggregate, a Material Adverse Effect on Parent at
the Closing Date, any references in such representations and warranties to
materiality, whether by reference to the words "material," Material Adverse
Effect" or otherwise, shall be disregarded). The Company shall have
received a certificate with respect to the foregoing signed on behalf of
Parent, with respect to the representations and warranties of Parent, by an
authorized executive officer of Parent and a certificate with respect to
the foregoing signed on behalf of Merger Sub, with respect to the
representations and warranties of Merger Sub, by an authorized officer of
Merger Sub.
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it
on or prior to the Closing Date, and the Company shall have received a
certificate with respect to the foregoing signed on behalf of Parent, with
respect to the covenants of Parent, by an authorized executive officer of
Parent and a certificate with respect to the foregoing signed on behalf of
Merger Sub, with respect to the covenants of Merger Sub, by an authorized
officer of Merger Sub.
(c) Material Adverse Effect. No Material Adverse Effect on Parent
shall have occurred since the date hereof and be continuing.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
Parent and Merger Sub:
(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall be true and
correct on the date hereof and as of the Closing Date with the same force
and effect as if made on the Closing Date (except that those
representations and warranties which address matters only as of a
particular date shall have been true and correct only on such date),
except, in each case, or in the aggregate, as does not constitute a
Material Adverse Effect on the Company at the Closing Date (it being
understood that, (i) for purposes of determining the accuracy of such
representations and warranties, any update of or modification to the
Company Disclosure Letter made or purported to have been made after the
execution of this Agreement shall
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be disregarded; and (ii) for purposes of determining whether the inaccuracy
of such representations and warranties constitutes, in each case or in the
aggregate, a Material Adverse Effect on the Company at the Closing Date,
any references in such representations and warranties to materiality,
whether by reference to the words "material," Material Adverse Effect" or
otherwise, shall be disregarded). Parent and Merger Sub shall have received
a certificate with respect to the foregoing signed on behalf of the Company
by an authorized executive officer of the Company.
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it at or
prior to the Closing Date, and Parent and Merger Sub shall have received a
certificate to such effect signed on behalf of the Company by an authorized
executive officer of the Company.
(c) Material Adverse Effect. No Material Adverse Effect on the
Company shall have occurred since the date hereof and be continuing.
(d) Non-Competition Agreements. Each Non-Competition Agreement
entered into by and between the Company and (except as set forth in Section
2.20 of the Company Disclosure Letter) each Company Employee shall not have
been modified or amended since the date hereof, and shall be enforceable by
each of the Company and Parent immediately following the Merger to the full
extent enforceable by the Company immediately prior to the Merger.
(e) Material Consents. All third party consents, permits and
approvals listed in Section 6.3(e) of the Company Disclosure Letter shall
have been obtained.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, by action taken or authorized by the Board of Directors of the
terminating party or parties, and except as provided below, whether before or
after the requisite approvals of the stockholders of the Company or Parent:
(a) by mutual written consent duly authorized by the Boards of
Directors of Parent and the Company;
(b) by either the Company or Parent if the Merger shall not have been
consummated by October 15, 2003 (which date shall be extended by one
calendar day for each calendar day the Merger is delayed by reason of a
pending Parent Change of Control Transaction (as such term is defined in
Section 7.3(b)(ii) hereof), but only to the extent such delay is directly
attributable to such pending Parent Change of Control Transaction) (the
"END DATE"); provided, however, that the right to terminate this Agreement
under this Section 7.1(b) shall not be available to any party whose action
or failure to act has been a principal cause of or resulted in the failure
of the Merger to occur on or before such date and such action or failure to
act constitutes a material breach of this Agreement;
(c) by either the Company or Parent if a Governmental Entity shall
have issued an order, decree or ruling or taken any other action (including
the failure to have taken an action), in any case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger or
the Stock Issuance, which order, decree, ruling or other action is final
and nonappealable;
(d) by either the Company or Parent if the required approval of the
stockholders of Parent contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote at a meeting
of Parent stockholders duly convened therefor or at any adjournment
thereof; provided, however, that the right to terminate this Agreement
under this Section 7.1(d) shall not be available to Parent where the
failure to obtain Parent stockholder approval shall have been
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caused by the action or failure to act of Parent and such action or failure
to act constitutes a material breach by Parent of this Agreement;
(e) by either the Company or Parent if the required approval of the
stockholders of the Company contemplated by this Agreement shall not have
been obtained by reason of the failure to obtain the required vote at a
meeting of the Company stockholders duly convened therefore or at any
adjournment thereof; provided, however, that the right to terminate this
Agreement under this Section 7.1(e) shall not be available to the Company
where the failure to obtain the Company stockholder approval shall have
been caused by the action or failure to act of the Company and such action
or failure to act constitutes a material breach by the Company of this
Agreement;
(f) by Parent (at any time prior to the adoption and approval of this
Agreement and the Merger by the required vote of the stockholders of the
Company) if a Parent Triggering Event (as defined below) shall have
occurred;
(g) by the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of Parent set forth in this Agreement, or
if any representation or warranty of Parent shall have become untrue, in
either case such that the conditions set forth in Section 6.2(a) or Section
6.2(b) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue, provided
that if such inaccuracy in Parent's representations and warranties or
breach by Parent is curable by Parent prior to the End Date through the
exercise of reasonable efforts, then the Company may not terminate this
Agreement under this Section 7.1(g) prior to thirty (30) days following the
receipt of written notice from the Company to Parent of such breach,
provided that Parent continues to exercise all commercially reasonable
efforts to cure such breach through such thirty (30) period (it being
understood that the Company may not terminate this Agreement pursuant to
this paragraph 7.1(g) if it shall have materially breached this Agreement
or if such breach by Parent is cured within such thirty (30) day period);
(h) by Parent, upon a breach of any representation, warranty, covenant
or agreement on the part of the Company set forth in this Agreement, or if
any representation or warranty of the Company shall have become untrue, in
either case such that the conditions set forth in Section 6.3(a) or Section
6.3(b) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue, provided,
that if such inaccuracy in the Company's representations and warranties or
breach by the Company is curable by the Company prior to the End Date
through the exercise of commercially reasonable efforts, then Parent may
not terminate this Agreement under this Section 7.1(h) prior to thirty (30)
days following the receipt of written notice from Parent to the Company of
such breach, provided that the Company continues to exercise all
commercially reasonable efforts to cure such breach through such thirty
(30) day period (it being understood that Parent may not terminate this
Agreement pursuant to this paragraph 7.1(h) if it shall have materially
breached this Agreement or if such breach by the Company is cured within
such thirty (30) day period);
(i) by Parent, if a Material Adverse Effect on the Company shall have
occurred since the date hereof; and
(j) by the Company, if a Material Adverse Effect on Parent shall have
occurred since the date hereof.
For the purposes of this Agreement, a "PARENT TRIGGERING EVENT" shall be
deemed to have occurred if: (i) the Company's Board of Directors or any
committee thereof shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to Parent, including through the discharge of its
duty of candor or disclosure to its stockholders, its recommendation in favor
of, the adoption and approval of this Agreement or the approval of the Merger,
(ii) the Company shall have failed to include in the Prospectus/Proxy Statement
the recommendation of the Company's Board of Directors in favor of the adoption
and approval of this Agreement and the approval of the Merger, (iii) the
Company's Board of Directors fails to reaffirm (publicly, if so requested),
after public announcement of an Acquisition
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Proposal, its recommendation in favor of the adoption and approval of the
Agreement and the approval of the Merger within ten (10) business days after
Parent requests in writing that such recommendation be reaffirmed, (iv) the
Company's Board of Directors or any committee thereof shall have approved or
recommended any Acquisition Proposal, or (v) a tender or exchange offer relating
to the Company's securities shall have been commenced by a Person unaffiliated
with Parent and the Company shall not have sent to its securityholders pursuant
to Rule 14e-2 promulgated under the Securities Act, within ten (10) business
days after such tender or exchange offer is first published, sent or given, a
statement disclosing that the Board of Directors of the Company recommends
rejection of such tender or exchange offer.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of a valid written notice of the terminating party to the other party
hereto. In the event of the termination of this Agreement as provided in Section
7.1, this Agreement shall be of no further force or effect, except (i) as set
forth in Section 5.4(a), this Section 7.2, Section 7.3 and Article VIII, each of
which shall survive the termination of this Agreement and (ii) nothing herein
shall relieve any party from liability for any willful breach of this Agreement.
No termination of this Agreement shall affect the obligations of the parties
contained in the Confidentiality Agreement, all of which obligations shall
survive termination of this Agreement in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses whether
or not the Merger is consummated; provided, however, that Parent and the Company
shall share equally (i) all fees and expenses, other than attorneys' and
accountants' fees and expenses which fees shall be paid for by the party
incurring such expense, incurred in relation to the printing and filing (with
the SEC) of the Prospectus/Proxy Statement (including any preliminary materials
related thereto) and the Registration Statement (including financial statements
and exhibits) and any amendments or supplements thereto and (ii) the filing fee
for the Notification and Report Forms filed with the FTC and DOJ under the HSR
Act and premerger notification and reports forms under similar applicable laws
of other jurisdictions, in each case pursuant to Section 5.6(a).
(b) Payments.
(i) Payment by the Company. In the event that this Agreement is terminated
by Parent or the Company, as applicable, pursuant to Sections 7.1(b), (e), or
(f), the Company shall promptly, but in no event later than two (2) business
days after the date of such termination, pay Parent a fee equal to Six Million
Five Hundred Thousand Dollars ($6,500,000) in immediately available funds (the
"COMPANY TERMINATION FEE"); provided, that in the case of termination under
Section 7.1(b) or 7.1(e): (A) such payment shall be made only if following the
date hereof and prior to the termination of this Agreement, there has been
public disclosure of an Acquisition Proposal with respect to the Company and (1)
within twelve (12) months following the termination of this Agreement an
Acquisition (as defined in Section 7.3(b)(v)) of the Company is consummated or
(2) within twelve (12) months following the termination of this Agreement the
Company enters into an agreement providing for an Acquisition of the Company and
an Acquisition of the Company is consummated within twenty-four (24) months of
the termination of this Agreement and (B) such payment shall be made promptly,
but in no event later than two (2) business days after the consummation of such
Acquisition of the Company.
(ii) Payment by Parent. In the event that this Agreement is terminated by
Parent or the Company, as applicable, pursuant to Section 7.1(d), Parent shall
pay as provided below the Company a fee equal to Six Million Five Hundred
Thousand Dollars ($6,500,000) in immediately available funds (the "PARENT
TERMINATION FEE"); provided, however, that such payment shall be made only if
following the date hereof and prior to the Parent Stockholders' Meeting, there
has been public disclosure of a bona fide written offer made by a third party to
acquire, directly or indirectly, pursuant to a tender offer, exchange offer,
merger, consolidation or other business combination, all or substantially all of
the assets of Parent or all of the
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outstanding voting securities of Parent and as a result of which the
stockholders of Parent immediately preceding such transaction would hold less
than fifty percent (50%) of the equity interests in the surviving or resulting
entity of such transaction or any direct or indirect parent or Subsidiary
thereof (a "PARENT CHANGE OF CONTROL TRANSACTION") and within twelve (12) months
following the termination of this Agreement such Parent Change of Control
Transaction is consummated. Such payment, if any, shall be made not later than
two (2) business days after the consummation of such Parent Change of Control
Transaction.
(iii) Liquidated Damages. Each of Parent and the Company acknowledges that
(1) the damages that would result from a termination described in Section
7.3(b)(i) or 7.3(b)(ii) above are uncertain and incapable of accurate
calculation by any accepted rule of law; and (2) accordingly, the amount fixed
as the Company Termination Fee and the Parent Termination Fee are reasonable
estimates of the actual damages that would result from such a termination
described in Section 7.3(b)(i) or 7.3(b)(ii) above.
(iv) Interest and Costs; Other Remedies. Each of Parent and the Company
acknowledges that the agreements contained in this Section 7.3(b) are an
integral part of the transactions contemplated by this Agreement, and that,
without these agreements, the other party hereto would not enter into this
Agreement; accordingly, if Parent or the Company, as the case may be, fails to
pay in a timely manner the amounts due pursuant to this Section 7.3(b), and, in
order to obtain such payment, the other party hereto makes a claim that results
in a judgment against the party failing to pay for the amounts set forth in this
Section 7.3(b), the party so failing to pay shall pay to the other party its
reasonable costs and expenses (including reasonable attorneys' fees and
expenses) in connection with such suit, together with interest on the amounts
set forth in this Section 7.3(b) at the prime rate of Citibank, N.A. in effect
on the date such payment was required to be made. Payment of the fees described
in this Section 7.3(b) shall not be in lieu of damages incurred in the event of
breach of this Agreement.
(v) Certain Definitions. For the purposes of this Section 7.3(b) only,
"ACQUISITION," with respect to a party hereto, shall mean any of the following
transactions (other than the transactions contemplated by this Agreement): (i) a
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the party pursuant to which the
stockholders of the party immediately preceding such transaction hold less than
sixty percent (60%) of the aggregate equity interests in the surviving or
resulting entity of such transaction or any direct or indirect parent thereof,
(ii) a sale or other disposition by the party of assets representing in excess
of forty percent (40%) of the aggregate fair market value of the party's
business immediately prior to such sale, or (iii) the acquisition by any Person
or group (including by way of a tender offer or an exchange offer or issuance by
the party or such Person or group), directly or indirectly, of beneficial
ownership or a right to acquire beneficial ownership of shares representing in
excess of forty percent (40%) of the voting power of the then outstanding shares
of capital stock of the party.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto, by action taken or authorized by their respective Boards of
Directors, at any time before or after approval of the matters presented in
connection with the Merger by the stockholders of Parent and the Company,
provided, after any such approval, no amendment shall be made which by law or in
accordance with the rules of any relevant stock exchange requires further
approval by such stockholders without such further stockholder approval. This
Agreement may not be amended except by execution of an instrument in writing
signed on behalf of each of Parent, Merger Sub and the Company.
7.5 Extension; Waiver. At any time prior to the Effective Time either
party hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed: (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto, and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Delay in exercising any right under this
Agreement shall not constitute a waiver of such right.
A-57
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations
and warranties of the Company, Parent and Merger Sub contained in this
Agreement, or any instrument delivered pursuant to this Agreement, shall
terminate at the Effective Time, and only the covenants that by their terms
survive the Effective Time and this Article VIII shall survive the Effective
Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed duly given (i) on the date of delivery if delivered
personally, (ii) on the date of confirmation of receipt (or, the first business
day following such receipt if the date is not a business day) of transmission by
telecopy or telefacsimile, or (iii) on the date of confirmation of receipt (or,
the first business day following such receipt if the date is not a business day)
if delivered by a nationally recognized courier service. All notices hereunder
shall be delivered as set forth below, or pursuant to such other instructions as
may be designated in writing by the party to receive such notice:
(a) if to Parent or Merger Sub, to:
ScanSoft, Inc.
9 Centennial Drive
Peabody, MA 01960
Attention: Chief Financial Officer
Telephone No.: (978) 977-2000
Telecopy No.: (978) 977-2436
with copies to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
12 East 49th Street, 30th Floor
New York, New York 10017
Attention: Larry W. Sonsini
Katharine A. Martin
Robert Sanchez
Telephone No.: (212) 999-5800
Telecopy No.: (212) 999-5899
(b) if to the Company, to:
SpeechWorks International, Inc.
695 Atlantic Avenue, 3rd Floor
Boston, MA 02111
Attention: Chief Executive Officer
Telephone No.: (617) 428-4444
Telecopy No.: (617) 428-0027
with copies to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Mark G. Borden, Esq.
Telephone No.: (617) 526-6000
Telecopy No.: (617) 526-5000
A-58
8.3 Interpretation.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. When a
reference is made in this Agreement to Sections, such reference shall be to a
section of this Agreement unless otherwise indicated. For purposes of this
Agreement, the words "INCLUDE," "INCLUDES" and "INCLUDING," when used herein,
shall be deemed in each case to be followed by the words "without limitation."
The table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. When reference is made herein to "THE BUSINESS OF" an entity,
such reference shall be deemed to include the business of all such entity and
its Subsidiaries, taken as a whole. For purposes of Article II and Article III
hereof the word "MATERIAL" shall modify only the object of the specific
representation and warranty and shall not be deemed to modify the business of an
entity and its Subsidiaries, taken as a whole, except where otherwise clearly
indicated. An exception or disclosure made in the Company Disclosure Letter with
regard to a representation of the Company, or in the Parent Disclosure Letter
with regard to a representation of Parent or Merger Sub, shall be deemed made
with respect to any other representation by such party which a reasonable person
would understand that such exception or disclosure would apply to such
representation or warranty (notwithstanding the absence of a specific
cross-reference); provided however, that this shall not be construed to expand
the scope of or otherwise include any information not specifically described in
such Disclosure Letter.
(b) For purposes of this Agreement, the term "MATERIAL ADVERSE EFFECT,"when
used in connection with an entity, means any change, event, violation,
inaccuracy, circumstance or effect (any such item, an "EFFECT"), individually or
when taken together with all other Effects that have occurred prior to the date
of determination of the occurrence of the Material Adverse Effect, that is or is
reasonably likely to (i) be materially adverse to the business, assets
(including intangible assets), capitalization, financial condition or results of
operations of such entity taken as a whole with its Subsidiaries or (ii)
materially impede the authority of such entity to consummate the transactions
contemplated by this Agreement in accordance with the terms hereof and
applicable Legal Requirements; provided, however, that, for purposes of clause
(i) above, in no event shall any of the following be taken into account in
determining whether there has been or will be, a Material Adverse Effect on any
entity: (A) any Effect resulting from compliance with the terms and conditions
of this Agreement, (B) any Effect resulting from the announcement or pendency of
the Merger (other than any Effects resulting from a breach of the
representations and warranties contained in Sections 2.7, 2.15, 3.7 or 3.15 of
this Agreement, which Effects, if any, shall be taken into account in
determining whether there has been or will be a Material Adverse Effect on any
entity), (C) any change in such entity's stock price or trading volume, (D) any
Effect that results from changes affecting any of the industries in which such
entity operates generally or the United States economy generally (which changes
in each case do not disproportionately affect such entity in any material
respect), or (E) any Effect that results from changes affecting general
worldwide economic or capital market conditions (which changes in each case do
not disproportionately affect such entity in any material respect).
(c) For purposes of this Agreement, the term "PERSON" shall mean any
individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, company (including any limited liability company or joint stock
company), firm or other enterprise, association, organization, entity or
Governmental Entity.
8.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third-Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company Disclosure Letter
and the Parent Disclosure Letter (i) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and
A-59
understandings, both written and oral, among the parties with respect to the
subject matter hereof, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Closing and shall survive any
termination of this Agreement and (ii) are not intended to confer upon any other
Person any rights or remedies hereunder, except as specifically provided,
following the Effective Time, in Section 5.11.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
Persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the greatest extent possible, the economic, business and
other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance.
(a) Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
(b) Specific Performance. It is accordingly agreed that the parties shall
be entitled to seek an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Any purported assignment in violation of this Section 8.10
shall be void. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 Waiver of Jury Trial. EACH OF PARENT, MERGER SUB AND THE COMPANY
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, MERGER SUB OR THE COMPANY
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
* * * * *
A-60
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
SCANSOFT, INC.
By: /s/ PAUL A. RICCI
------------------------------------
Paul A. Ricci
Chairman and Chief Executive
Officer
SPIDERMAN ACQUISITION CORPORATION
By: /s/ PAUL A. RICCI
------------------------------------
Paul A. Ricci
Chairman and Chief Executive
Officer
SPEECHWORKS INTERNATIONAL, INC.
By: /s/ STUART R. PATTERSON
------------------------------------
Stuart R. Patterson
Chief Executive Officer
****AGREEMENT AND PLAN OF REORGANIZATION****
A-61
ANNEX B
April 23, 2003
Board of Directors
ScanSoft, Inc.
9 Centennial Drive
Peabody, MA 01960
Members of the Board of Directors:
You have informed us that ScanSoft, Inc. ("ScanSoft"), Spiderman
Acquisition Corporation ("Merger Sub") and SpeechWorks International Inc.
("SpeechWorks") plan to enter into an Agreement and Plan of Merger (the "Merger
Agreement"). Pursuant to the Merger Agreement, SpeechWorks will merge with and
into Merger Sub (the "Merger") and each outstanding share of SpeechWorks common
stock, par value $0.001 per share (the "SpeechWorks Common Stock"), will be
converted into the right to receive 0.860 shares (the "Exchange Ratio") of
ScanSoft common stock, par value $0.001 per share ("ScanSoft Common Stock").
You have asked us for our opinion as to whether the Exchange Ratio is fair,
from a financial point of view, to ScanSoft.
In connection with rendering our opinion, we have, among other things:
(i) Analyzed certain publicly available financial statements and other
publicly available information relating to SpeechWorks and ScanSoft;
(ii) Analyzed certain internal financial statements and other non-public
financial and operating data relating to SpeechWorks and ScanSoft
that were prepared and furnished to us by the managements of
SpeechWorks and ScanSoft;
(iii) Analyzed certain internal financial projections relating to
SpeechWorks and ScanSoft that were prepared and furnished to us by
the managements of SpeechWorks and ScanSoft;
(iv) Discussed the past and current operations, financial projections and
current financial condition of SpeechWorks and ScanSoft with the
managements of SpeechWorks and ScanSoft;
(v) Reviewed certain internal presentations that the management of
ScanSoft has previously made to the Board of Directors of ScanSoft
describing ScanSoft's customers, competitors and strategy;
(vi) Reviewed the reported prices, trading activity and valuation
multiples for each of SpeechWorks Common Stock and ScanSoft Common
Stock;
(vii) Compared the financial performance of SpeechWorks and the prices,
trading activity and valuation multiples of the SpeechWorks Common
Stock with that of certain other publicly-traded companies and their
securities that we deemed relevant;
(viii) Reviewed the financial terms, to the extent available, of certain
comparable transactions and compared them to the proposed financial
terms of the Merger;
(ix) Reviewed certain information concerning cost savings and combination
benefits ("Synergies") expected to result from the Merger that was
prepared by and furnished to us by the management of ScanSoft,
including the amounts and timing of such Synergies and related
expenses;
(x) Participated in discussions and negotiations among representatives of
SpeechWorks and ScanSoft, and their advisors;
(xi) Reviewed the Merger Agreement in substantially final form and assumed
that the final form of such Merger Agreement will not vary in any
respect material to our analysis; and
B-1
April 23, 2003
Page 2
(xii) Performed other examinations and analyses and considered other
factors that we deemed appropriate
For purposes of our analysis and opinion, we have assumed and relied upon,
without assuming any responsibility for independent verification of, the
accuracy and completeness of the information publicly available, and the
information supplied or otherwise made available to, discussed with, reviewed by
or for us. With respect to the financial projections of ScanSoft and SpeechWorks
and the underlying analysis concerning the potential Synergies which were
furnished to us, discussed with us or reviewed for us by the managements of
ScanSoft and SpeechWorks, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and good
faith judgments of the future competitive, operating and regulatory environments
and related financial performance of ScanSoft and SpeechWorks. We have further
assumed that, in all material respects, such financial projections and Synergies
will be realized in the amounts and times indicated thereby. We express no view
as to such financial projections or Synergies, or the assumptions on which they
are based. Additionally, we have relied on ScanSoft management's views as to the
future strategic benefits of the Merger.
We have not made nor assumed any responsibility for making any independent
valuation or appraisal of the assets or liabilities of ScanSoft and SpeechWorks,
nor have we been furnished with any such appraisals, nor have we evaluated the
solvency or fair value of SpeechWorks or ScanSoft under any state or federal
laws relating to bankruptcy, insolvency or similar matters. Our opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information and Merger Agreement made available to us as of, the date
hereof. We have assumed the Merger will qualify as a tax-free reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended. We did not evaluate, nor did ScanSoft request us to evaluate,
alternative transaction structures or other financial alternatives other than
the Merger. Our opinion does not address ScanSoft's underlying business decision
to effect the Merger nor constitute a recommendation to any ScanSoft shareholder
as to how such holder should vote with respect to the Merger. Furthermore, we
express no opinion as to the price or range of prices at which the shares of
ScanSoft Common Stock will trade at any future time.
For purposes of rendering our opinion, we have assumed, in all respects
material to our analysis, that the representations and warranties of each party
contained in the Merger Agreement are true and correct, that each party will
perform all the covenants and agreements required under the Merger Agreement,
and that all conditions to the consummation of the Merger will be satisfied
without waiver thereof. We have also assumed that in the course of obtaining the
necessary regulatory or other approvals (contractual or otherwise) for the
Merger, no restrictions, including any divestiture requirements or amendments
and modifications, will be imposed that will have a material adverse effect on
the contemplated benefits of the Merger.
We have acted as financial advisor to ScanSoft in connection with the
Merger and will receive a fee for our services, including for rendering this
opinion. Payment of a portion of our fee is contingent upon the consummation of
the Merger. In addition, ScanSoft has agreed to indemnify us for certain
liabilities arising out of our engagement. In the past, Evercore and its
affiliates have provided financial advisory services for ScanSoft and have
received fees for the rendering of these services.
It is understood that this letter and the opinion expressed herein is for
the information of the Board of Directors of ScanSoft only and may not be quoted
or referred to or relied upon or used for any other purpose without our prior
written consent, provided that we hereby consent to the inclusion in full of the
text of this opinion in any document delivered to the stockholders of ScanSoft
in connection with the Merger.
B-2
April 23, 2003
Page 3
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair, from a financial point of view, to
ScanSoft.
Very truly yours,
Evercore Group Inc.
By: /s/ DAVID G. OFFENSEND
------------------------------------
David G. Offensend
Vice Chairman
B-3
ANNEX C
1585 Broadway
New York, NY 10036
tel 212 761 6863
fax 212 507 4469
[MORGANSTANLEY LOGO]
April 23, 2003
Board of Directors
SpeechWorks International, Inc.
695 Atlantic Avenue
Boston, MA 02111
Members of the Board:
We understand that SpeechWorks International, Inc. ("SpeechWorks" or the
"Company"), ScanSoft, Inc. ("ScanSoft") and Spiderman Acquisition Corporation, a
direct wholly-owned subsidiary of ScanSoft ("Merger Sub"), propose to enter into
an Agreement and Plan of Reorganization, substantially in the form of the draft
dated April 22, 2003 (the "Merger Agreement"), which provides, among other
things, for the merger (the "Merger") of Merger Sub with and into ScanSoft.
Pursuant to the Merger, SpeechWorks will become a wholly-owned subsidiary of
ScanSoft, and each outstanding share of common stock, par value $0.001 per
share, of SpeechWorks (the "SpeechWorks Common Stock"), other than shares held
in treasury or held by ScanSoft or any affiliate of ScanSoft or SpeechWorks,
will be converted into the right to receive 0.86 shares (the "Exchange Ratio")
of common stock, par value $0.001 per share of ScanSoft (the "ScanSoft Common
Stock"), subject to adjustment in certain circumstances. The terms and
conditions of the Merger are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to holders of the
SpeechWorks Common Shares.
For purposes of the opinion set forth herein, we have:
i) reviewed certain publicly available financial statements and other
information of SpeechWorks and ScanSoft, respectively;
ii) reviewed certain internal financial statements and other financial and
operating data concerning SpeechWorks and ScanSoft prepared by the
management of SpeechWorks and ScanSoft, respectively;
iii) reviewed certain financial projections prepared by the managements of
SpeechWorks and ScanSoft, respectively;
iv) discussed the past and current operations and financial condition and
the prospects of SpeechWorks and ScanSoft, including information
relating to certain strategic, financial, and operational benefits
anticipated from the Merger, with senior executives of SpeechWorks and
ScanSoft, respectively;
v) reviewed the reported prices and trading activity for the SpeechWorks
Common Stock and the ScanSoft Common Stock;
vi) compared the financial performance of SpeechWorks and ScanSoft and the
prices and trading activity of the Common Stock with that of certain
other comparable publicly-traded companies and their securities;
C-1
[MORGANSTANLEY LOGO]
vii) reviewed the pro forma impact of the Merger on ScanSoft's earnings
per share;
viii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
ix) participated in discussions and negotiations among representatives of
SpeechWorks and ScanSoft and their financial and legal advisors;
x) reviewed the Merger Agreement and certain related documents; and
xi) considered such other factors as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, including information
relating to certain strategic, financial, and operational benefits anticipated
from the Merger, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
future financial performance of SpeechWorks and ScanSoft. We have relied upon,
without independent verification, the assessment by the managements of
SpeechWorks and ScanSoft of SpeechWorks's and ScanSoft's technologies, products,
and intellectual property, the timing and risks associated with the integration
of SpeechWorks with ScanSoft and the validity of, and risks associated with
SpeechWorks's and ScanSoft's existing and future technologies, products, and
intellectual property. In addition, we have assumed that the Merger will be
consummated in accordance with the terms set forth in the Merger Agreement,
including, among other things, that the merger will be treated as a tax-free
reorganization, pursuant to the Internal Revenue Code of 1986, as amended. We
have not made any independent valuation or appraisal of the assets or
liabilities of the Company, nor have we been furnished with any such appraisals.
Our opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to an acquisition, business
combination, or other extraordinary transaction, involving SpeechWorks.
We have acted as financial advisor to the Board of Directors of SpeechWorks
in connection with this transaction and will receive a fee for our services. In
the ordinary course of our business we may actively trade the securities of
SpeechWorks and ScanSoft for our own account and for the accounts of our
customers or their or our affiliates and, accordingly, may at any time hold a
long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of SpeechWorks and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company in respect of the transaction with the
Securities and Exchange Commission. In addition, this opinion does not in any
manner address the prices at which the ScanSoft Common Stock or the SpeechWorks
Common Stock will trade following announcement of the Merger, or at any time
thereafter, and Morgan Stanley expresses no opinion or recommendation as to how
the shareholders of the Company should vote at the shareholders meeting held in
connection with the Merger.
C-2
[MORGANSTANLEY LOGO]
Based on and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to holders of SpeechWorks Common Stock.
Very truly yours,
Morgan Stanley & Co. Incorporated
By: /s/ ROBERT L. EATROFF
------------------------------------
Robert L. Eatroff
Managing Director
C-3
ANNEX D
AMENDED AND RESTATED PARENT VOTING AGREEMENT
This Amended and Restated Voting Agreement ("AGREEMENT") is made and
entered into as of June , 2003, between SPEECHWORKS INTERNATIONAL, INC., a
Delaware corporation (the "COMPANY") and the undersigned stockholder
("STOCKHOLDER") of SCANSOFT, INC., a Delaware corporation ("PARENT").
RECITALS
A. Parent, Spiderman Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of Parent ("MERGER SUB"), and the Company have entered
into an Agreement and Plan of Reorganization dated as of April 23, 2003 (the
"REORGANIZATION AGREEMENT"), which provides for the merger (the "MERGER") of
Merger Sub with and into the Company, with the Company being the surviving
corporation. Pursuant to the Merger, all outstanding capital stock of the
Company shall be converted into the right to receive common stock of Parent.
B. The Stockholder is the beneficial owner (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) of such
number of shares of the outstanding capital stock of Parent, and such number of
shares of capital stock of Parent issuable upon the exercise of outstanding
options and warrants, as is indicated on the signature page of this Agreement.
C. In consideration of the execution of the Reorganization Agreement by the
Company, the Stockholder (in his or her capacity as such) has agreed to vote the
Shares (as defined below) and such other shares of capital stock of Parent over
which the Stockholder has voting power, so as to facilitate consummation of the
Merger.
D. Stockholder and the Company entered into a voting agreement on April 23,
2003 (the "ORIGINAL AGREEMENT").
E. Stockholder and the Company desire to amend and restate the Original
Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
hereby agree as follows:
1. Certain Definitions. Capitalized terms used but not defined herein
shall have the respective meanings ascribed thereto in the Reorganization
Agreement. For all purposes of and under this Agreement, the following terms
shall have the following respective meanings:
1.1 "EXPIRATION DATE" shall mean the earlier to occur of (i) such date
and time as the Reorganization Agreement shall have been validly terminated
pursuant to its terms, or (ii) such date and time as the Merger shall
become effective in accordance with the terms and conditions set forth in
the Reorganization Agreement, or (iii) such date and time as the
Stockholder's employment with Parent has been terminated by action of
Parent.
1.2 "PERSON" shall mean any individual, any corporation, limited
liability company, general or limited partnership, business trust,
unincorporated association or other business organization or entity, or any
governmental authority.
1.3 "SHARES" shall mean: (i) all securities of Parent (including all
shares of Parent Common Stock and all options, warrants and other rights to
acquire shares of Parent Common Stock) owned by the Stockholder as of the
date of this Agreement, and (ii) all additional securities of Parent
(including all additional shares of Parent Common Stock and all additional
options, warrants and other rights to acquire shares of Parent Common
Stock) of which the Stockholder acquires beneficial ownership during the
period commencing with the execution and delivery of this Agreement until
the Expiration Date.
1.4 Transfer. A Person shall be deemed to have effected a "TRANSFER"
of a security if such person directly or indirectly (i) sells, pledges,
encumbers, grants an option with respect to, transfers or otherwise
disposes of such security or any interest therein, or (ii) enters into an
agreement or
D-1
commitment providing for the sale of, pledge of, encumbrance of, grant of
an option with respect to, transfer of or disposition of such security or
any interest therein.
2. Restriction on Transfer of Shares. Except (x) as expressly contemplated
by this Agreement or the Reorganization Agreement, or (y) sales of shares of
Parent Common Stock by Stockholder in connection with 10b5-1 plans of the Parent
currently in effect, during the term of this Agreement, Stockholder shall not,
directly or indirectly: (i) offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of, or enter into any contract, option or
other arrangement or understanding with respect to, or consent to the offer for
sale, sale, transfer, tender, pledge, encumbrance, assignment or other
disposition of, any or all of the Shares or any interest therein (except that
Stockholder may transfer any or all of the Shares to a trust established for the
benefit of Stockholder and/or for the benefit of one or more members of
Stockholder's immediate family, provided that in the event of such transfer or
gift, the transferee of such Shares agrees to be bound by the terms and
conditions of this Agreement); (ii) grant any proxies or powers of attorney with
respect to any Shares not Transferred or deposit any Shares not Transferred into
a voting trust or enter into a voting agreement with respect to any Shares not
Transferred, or (iii) take any action that would make any representation or
warranty of Stockholder contained herein untrue or incorrect or have the effect
of preventing or disabling Stockholder from performing any of Stockholder's
obligations under this Agreement. Stockholder further agrees with and covenants
to the Company that Stockholder shall not request that Parent register the
transfer of any certificate or uncertificated interest representing any of the
Shares, unless such transfer is made in compliance with this Agreement.
Stockholder agrees that, in order to ensure compliance with the restrictions
referred to herein, Parent may issue appropriate "stop transfer" instructions to
its transfer agent.
3. Agreement to Vote Shares. Until the Expiration Date, at every meeting
of stockholders of Parent called with respect to any of the following, and at
every adjournment or postponement thereof, and on every action or approval by
written consent of stockholders of Parent with respect to any of the following,
the Stockholder shall vote, to the extent not voted by the person(s) appointed
under the Proxy (as defined in Section 4 hereof), the Shares beneficially owned
by the Stockholder:
3.1 in favor of the issuance of shares of Parent Common Stock in
connection with the Merger, and in favor of each of the other actions
contemplated by the Reorganization Agreement, as the Reorganization
Agreement may be modified or amended from time to time, and the Proxy and
any action required in furtherance thereof;
3.2 against approval of any proposal made in opposition to, or in
competition with, consummation of the Merger and the transactions
contemplated by the Reorganization Agreement;
3.3 against any other action that is intended, or could reasonably be
expected to, impede, interfere with, delay, postpone, discourage or
adversely affect the Merger or any of the other transactions contemplated
by the Reorganization Agreement;
3.4 against any proposal that would result in a breach by Parent of
the Reorganization Agreement; and
3.5 against the election of a group of individuals to replace a
majority or more of the individuals on the Board of Directors of Parent as
of the date of this Agreement.
Prior to the Expiration Date, the Stockholder shall not enter into any
agreement or understanding with any person to vote or give instructions in any
manner inconsistent with the terms of this Section 3.
4. Irrevocable Proxy. Concurrently with the execution of this Agreement,
the Stockholder agrees to deliver to the Company a proxy in the form attached
hereto as Exhibit A (the "Proxy"), which shall be irrevocable to the fullest
extent permissible by applicable law, with respect to the Shares.
5. Representations and Warranties of the Stockholder. The Stockholder
hereby represents and warrants to the Company that, as of the date hereof and at
all times until the Expiration Date, (i) the Stockholder is and will be the
beneficial owner of the shares of Parent Common Stock, and the options, warrants
and other rights to purchase shares of Parent Common Stock, set forth on
signature page of this Agreement and not Transferred, with full power to vote or
direct the voting of the Shares not Transferred for
D-2
and on behalf of all beneficial owners of the Shares not Transferred; (ii) the
Shares are and will be, unless Transferred, free and clear of any liens,
pledges, security interests, claims, options, rights of first refusal, co-sale
rights, charges or other encumbrances of any kind or nature (other than pursuant
to the terms of restricted stock agreements as in effect on the date hereof);
(iii) the Stockholder does not beneficially own any securities of Parent other
than the shares of Parent Common Stock, and options, warrants and other rights
to purchase shares of Parent Common Stock, set forth on the signature page of
this Agreement; (iv) with respect to the Shares not Transferred, the Stockholder
has and will have full power and authority to make, enter into and carry out the
terms of this Agreement and the Proxy; (v) the execution, delivery and
performance of this Agreement by Stockholder will not violate any agreement or
court order to which the Shares are subject, including, without limitation, any
voting agreement or voting trust; and (vi) this Agreement has been duly and
validly executed and delivered by Stockholder and constitutes a valid and
binding agreement of Stockholder, enforceable against Stockholder in accordance
with its terms.
6. Legending of Shares. If so requested by the Company, the Stockholder
hereby agrees that the Shares shall bear a legend stating that they are subject
to this Agreement and to an irrevocable proxy.
7. Termination. This Agreement shall terminate and be of no further force
or effect as of the Expiration Date.
8. Fiduciary Duties. Each Stockholder is signing this Agreement solely in
such Stockholder's capacity as an owner of his, her or its respective Shares,
and nothing herein shall prohibit, prevent or preclude such Stockholder from
taking or not taking any action in his or her capacity as an officer or director
of Parent, to the extent permitted by the Reorganization Agreement.
9. Miscellaneous.
9.1 Waiver. No waiver by any party hereto of any condition or any
breach of any term or provision set forth in this Agreement shall be
effective unless in writing and signed by each party hereto. The waiver of
a condition or any breach of any term or provision of this Agreement shall
not operate as or be construed to be a waiver of any other previous or
subsequent breach of any term or provision of this Agreement.
9.2 Severability. In the event that any term, provision, covenant or
restriction set forth in this Agreement, or the application of any such
term, provision, covenant or restriction to any person, entity or set of
circumstances, shall be determined by a court of competent jurisdiction to
be invalid, unlawful, void or unenforceable to any extent, the remainder of
the terms, provisions, covenants and restrictions set forth in this
Agreement, and the application of such terms, provisions, covenants and
restrictions to persons, entities or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable,
shall remain in full force and effect, shall not be impaired, invalidated
or otherwise affected and shall continue to be valid and enforceable to the
fullest extent permitted by applicable law.
9.3 Binding Effect; Assignment. This Agreement and all of the terms
and provisions hereof shall be binding upon, and inure to the benefit of,
the parties hereto and their respective successors and permitted assigns,
but, except as otherwise specifically provided herein, neither this
Agreement nor any of the rights, interests or obligations of the
Stockholder may be assigned to any other Person without the prior written
consent of the Company.
9.4 Amendments. This Agreement may not be modified, amended, altered
or supplemented, except upon the execution and delivery of a written
agreement executed by each of the parties hereto.
9.5 Specific Performance; Injunctive Relief. Each of the parties
hereto hereby acknowledge that (i) the representations, warranties,
covenants and restrictions set forth in this Agreement are necessary,
fundamental and required for the protection of the Company and to preserve
for the Company the benefits of the Merger; (ii) such covenants relate to
matters which are of a special, unique, and extraordinary character that
gives each such representation, warranty, covenant and restriction a
special, unique, and extraordinary value; and (iii) a breach of any such
representation, warranty, covenant or
D-3
restriction, or any other term or provision of this Agreement, will result
in irreparable harm and damages to the Company which cannot be adequately
compensated by a monetary award. Accordingly, the Company and the
Stockholder hereby expressly agree that in addition to all other remedies
available at law or in equity, the Company shall be entitled to the
immediate remedy of specific performance, a temporary and/or permanent
restraining order, preliminary injunction, or such other form of injunctive
or equitable relief as may be used by any court of competent jurisdiction
to restrain or enjoin any of the parties hereto from breaching any
representations, warranties, covenants or restrictions set forth in this
Agreement, or to specifically enforce the terms and provisions hereof.
9.6 Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the internal laws of the State
of Delaware without giving effect to any choice or conflict of law
provision, rule or principle (whether of the State of Delaware or any other
jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
9.7 Entire Agreement. This Agreement and the Proxy and the other
agreements referred to in this Agreement set forth the entire agreement and
understanding of the Company and the Stockholder with respect to the
subject matter hereof and thereof, and supersede all prior discussions,
agreements and understandings between the Company and the Stockholder, both
oral and written, with respect to the subject matter hereof and thereof.
9.8 Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid,
to the respective parties at the following address (or at such other
address for a party as shall be specified by like notice):
(a) if to the Company, to:
SPEECHWORKS INTERNATIONAL, INC.
695 Atlantic Avenue
Boston, MA 02111
Attention: Stuart R. Patterson
Tel.: (617) 428-4444
with a copy to:
Hale and Dorr
60 State Street
Boston, MA 02109
Attention: Mark G. Borden, Esq.
Tel.: (617) 526-6000
Fax: (617) 526-5000
(b) if to the Stockholder, to the address for notice set forth on
the last page hereof,
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall only be
effective upon receipt.
9.9 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
9.10 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of
this Agreement.
[Remainder of Page Intentionally Left Blank]
D-4
IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Voting Agreement to be duly executed on the date and year first above written.
SPEECHWORKS INTERNATIONAL, INC.
By:
------------------------------------
Stuart R. Patterson
Chief Executive Officer
**** AMENDED AND RESTATED VOTING AGREEMENT ****
D-5
STOCKHOLDER:
--------------------------------------
[Name of Stockholder]
--------------------------------------
Telephone
--------------------------------------
Facsimile No.
Shares beneficially owned:
______ shares of the Parent Common
Stock
______ shares of the Parent Common
Stock issuable upon the exercise of
outstanding options, warrants or other
rights
Address:
--------------------------------------
--------------------------------------
**** VOTING AGREEMENT ****
D-6
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of SCANSOFT, INC., a Delaware corporation (the
"PARENT"), hereby irrevocably (to the fullest extent permitted by law) appoints
the directors on the Board of Directors of SPEECHWORKS INTERNATIONAL, INC., a
Delaware corporation (the "COMPANY"), and each of them, as the sole and
exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of the Parent that now are or
hereafter may be beneficially owned by the undersigned, and any and all other
shares or securities of the Parent issued or issuable in respect thereof on or
after the date hereof (collectively, the "SHARES") in accordance with the terms
of this Proxy. The Shares beneficially owned by the undersigned stockholder of
the Parent as of the date of this Proxy are listed on the final page of this
Proxy. Upon the execution of this Proxy by the undersigned, any and all prior
proxies given by the undersigned with respect to any Shares are hereby revoked
and the undersigned hereby agrees not to grant any subsequent proxies with
respect to the Shares until after the Expiration Date (as defined below).
This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Amended and
Restated Voting Agreement of even date herewith by and between the Company and
the undersigned stockholder (the "VOTING AGREEMENT"), and is granted in
consideration of the Company entering into that certain Agreement and Plan of
Reorganization (the "REORGANIZATION AGREEMENT"), by and among Parent, Merger Sub
and the Company, which provides for the merger of the Merger Sub with and into
the Company in accordance with its terms (the "MERGER"). This Proxy shall
terminate, and be of no further force and effect, automatically upon the
Expiration Date. As used herein, the term "EXPIRATION DATE" shall mean the
earlier to occur of (i) such date and time as the Reorganization Agreement shall
have been validly terminated pursuant to its terms, or (ii) such date and time
as the Merger shall become effective in accordance with the terms and conditions
set forth in the Reorganization Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect
to the Shares (including, without limitation, the power to execute and deliver
written consents) at every annual, special, adjourned or postponed meeting of
stockholders of the Parent and in every written consent in lieu of such meeting:
(i) in favor of approval of the Merger and the adoption and approval of the
Reorganization Agreement, and in favor of each of the other actions contemplated
by the Reorganization Agreement and any action required in furtherance thereof;
(ii) against approval of any proposal made in opposition to, or in competition
with, consummation of the Merger and the transactions contemplated by the
Reorganization Agreement; (iii) against any other action that is intended, or
could reasonably be expected to, impede, interfere with, delay, postpone,
discourage or adversely affect the Merger or any of the other transactions
contemplated by the Reorganization Agreement; (iv) against any proposal that
would result in a breach by the Parent of the Reorganization Agreement; and (v)
against the election of a group of individuals to replace a majority or more of
the individuals on the Board of Directors of the Parent as of the date of this
Proxy.
The attorneys and proxies named above may not exercise this Proxy to vote,
consent or act on any other matter except as provided above. The undersigned
stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned other than with respect to any Shares
sold in open market transactions and in accordance with Section 2 of the Voting
Agreement.
[Remainder of Page Intentionally Left Blank]
D-8
Dated: June , 2003
Signature of Stockholder:
-----------
Print Name of Stockholder:
-----------
shares beneficially owned:
________ shares of the Parent Common
Stock
________ shares of the Parent Common
Stock issuable upon the exercise of
outstanding options, warrants or other
rights
**** IRREVOCABLE PROXY ****
D-8
ANNEX E
EXECUTION COPY
AMENDED AND RESTATED COMPANY VOTING AGREEMENT
This Amended and Restated Voting Agreement ("AGREEMENT") is made and
entered into as of June 25, 2003, between SCANSOFT, INC., a Delaware corporation
("PARENT"), and the undersigned stockholder ("STOCKHOLDER") of SPEECHWORKS
INTERNATIONAL, INC., a Delaware corporation (the "COMPANY").
RECITALS
A. Parent, Spiderman Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of Parent ("MERGER SUB"), and the Company have entered
into an Agreement and Plan of Reorganization dated as of April 23, 2003 (the
"REORGANIZATION AGREEMENT"), which provides for the merger (the "MERGER") of
Merger Sub with and into the Company, with the Company being the surviving
corporation. Pursuant to the Merger, all outstanding capital stock of the
Company shall be converted into the right to receive common stock of Parent.
B. The Stockholder is the beneficial owner (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) of such
number of shares of the outstanding capital stock of the Company, and such
number of shares of capital stock of the Company issuable upon the exercise of
outstanding options and warrants, as is indicated on the signature page of this
Agreement.
C. In consideration of the execution of the Reorganization Agreement by
Parent, the Stockholder (in his or her capacity as such) has agreed to vote the
Shares (as defined below) and such other shares of capital stock of the Company
over which the Stockholder has voting power, so as to facilitate consummation of
the Merger.
D. Stockholder and Parent entered into a voting agreement on April 23, 2003
(the "ORIGINAL AGREEMENT").
E. Stockholder and Parent desire to amend and restate the Original
Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
hereby agree as follows:
1. Certain Definitions. Capitalized terms used but not defined herein
shall have the respective meanings ascribed thereto in the Reorganization
Agreement. For all purposes of and under this Agreement, the following terms
shall have the following respective meanings:
1.1 "EXPIRATION DATE" shall mean the earlier to occur of (i) such date
and time as the Reorganization Agreement shall have been validly terminated
pursuant to its terms, or (ii) such date and time as the Merger shall
become effective in accordance with the terms and conditions set forth in
the Reorganization Agreement, or (iii) such date and time as the
Stockholder's employment with the Company has been terminated by action of
the Company.
1.2 "PERSON" shall mean any individual, any corporation, limited
liability company, general or limited partnership, business trust,
unincorporated association or other business organization or entity, or any
governmental authority.
1.3 "SHARES" shall mean: (i) all securities of the Company (including
all shares of Company Common Stock and all options, warrants and other
rights to acquire shares of Company Common Stock) owned by the Stockholder
as of the date of this Agreement, and (ii) all additional securities of the
Company (including all additional shares of Company Common Stock and all
additional options, warrants and other rights to acquire shares of Company
Common Stock) of which the
E-1
Stockholder acquires beneficial ownership during the period commencing with
the execution and delivery of this Agreement until the Expiration Date.
1.4 Transfer. A Person shall be deemed to have effected a "TRANSFER"
of a security if such person directly or indirectly (i) sells, pledges,
encumbers, grants an option with respect to, transfers or otherwise
disposes of such security or any interest therein, or (ii) enters into an
agreement or commitment providing for the sale of, pledge of, encumbrance
of, grant of an option with respect to, transfer of or disposition of such
security or any interest therein.
1.5 Beneficial Ownership. Notwithstanding anything to the contrary
set forth herein or under Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended, the terms "beneficially own," "beneficial
owner," "beneficial ownership" and the like shall not include shares of
Company Common Stock held of record by Atlas Venture Fund II, L.P. and
Charles River Partnership VII.
2. Restriction on Transfer of Shares. Except (x) as expressly contemplated
by this Agreement or the Reorganization Agreement, (y) for sales of shares of
Company Common Stock by Stockholder issued after the date of initial filing of
the Joint Proxy Statement/Prospectus with the SEC pursuant to the valid exercise
of stock options by such Stockholder or (z) for sales of shares of restricted
Company Common Stock that accelerate and vest in connection with the Merger,
during the term of this Agreement, Stockholder shall not, directly or
indirectly:
(i) offer for sale, sell, transfer, tender, pledge, encumber, assign or
otherwise dispose of, or enter into any contract, option or other
arrangement or understanding with respect to, or consent to the offer
for sale, sale, transfer, tender, pledge, encumbrance, assignment or
other disposition of, any or all of the Shares or any interest therein
(except that Stockholder may transfer any or all of the Shares to a
trust established for the benefit of Stockholder and/or for the
benefit of one or more members of Stockholder's immediate family,
provided that in the event of such transfer or gift, the transferee of
such Shares agrees to be bound by the terms and conditions of this
Agreement);
(ii) grant any proxies or powers of attorney with respect to any Shares
not Transferred or deposit any Shares not Transferred into a voting
trust or enter into a voting agreement with respect to any Shares not
Transferred; or
(iii) take any action that would make any representation or warranty of
Stockholder contained herein untrue or incorrect or have the effect
of preventing or disabling Stockholder from performing any of
Stockholder's obligations under this Agreement.
Stockholder further agrees with and covenants to Parent that Stockholder
shall not request that the Company register the transfer of any certificate or
uncertificated interest representing any of the Shares, unless such transfer is
made in compliance with this Agreement. Stockholder agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent.
Notwithstanding anything to the contrary herein, Stockholder may elect to
substitute and sell other shares (the "Substituted Shares") of the Company
Common Stock beneficially owned by Stockholder, up to and in lieu of the number
of shares of Company Common Stock otherwise permitted to be sold under this
Section 2, provided that Stockholder is vested in any such Substituted Shares as
of the date of such substitution and sale.
3. Agreement to Vote Shares. Until the Expiration Date, at every meeting
of stockholders of the Company called with respect to any of the following, and
at every adjournment or postponement thereof, and on every action or approval by
written consent of stockholders of the Company with respect to any of the
following, the Stockholder shall vote, to the extent not voted by the person(s)
appointed under the Proxy (as defined in Section 4 hereof), the Shares
beneficially owned by the Stockholder:
3.1 in favor of approval of the Merger and the adoption and approval
of the Reorganization Agreement, and in favor of each of the other actions
contemplated by the Reorganization Agreement,
E-2
as the Reorganization Agreement may be modified or amended from time to
time, and the Proxy and any action required in furtherance thereof;
3.2 against approval of any proposal made in opposition to, or in
competition with, consummation of the Merger and the transactions
contemplated by the Reorganization Agreement;
3.3 against any other action that is intended, or could reasonably be
expected to, impede, interfere with, delay, postpone, discourage or
adversely affect the Merger or any of the other transactions contemplated
by the Reorganization Agreement;
3.4 against any proposal that would result in a breach by the Company
of the Reorganization Agreement; and
3.5 against the election of a group of individuals to replace a
majority or more of the individuals on the Board of Directors of the
Company as of the date of this Agreement.
Prior to the Expiration Date, the Stockholder shall not enter into any
agreement or understanding with any person to vote or give instructions in any
manner inconsistent with the terms of this Section 3.
4. Irrevocable Proxy. Concurrently with the execution of this Agreement,
the Stockholder agrees to deliver to Parent a proxy in the form attached hereto
as Exhibit A (the "Proxy"), which shall be irrevocable to the fullest extent
permissible by applicable law, with respect to the Shares.
5. Representations and Warranties of the Stockholder. The Stockholder
hereby represents and warrants to Parent that, as of the date hereof and at all
times until the Expiration Date, (i) the Stockholder is and will be the
beneficial owner of the shares of Company Common Stock, and the options,
warrants and other rights to purchase shares of Company Common Stock, set forth
on signature page of this Agreement and not Transferred, with full power to vote
or direct the voting of the Shares not Transferred for and on behalf of all
beneficial owners of the Shares not Transferred; (ii) the Shares are and will
be, unless Transferred, free and clear of any liens, pledges, security
interests, claims, options, rights of first refusal, co-sale rights, charges or
other encumbrances of any kind or nature (other than pursuant to the terms of
restricted stock agreements as in effect on the date hereof); (iii) the
Stockholder does not beneficially own any securities of the Company other than
the shares of Company Common Stock, and options, warrants and other rights to
purchase shares of Company Common Stock, set forth on the signature page of this
Agreement; (iv) with respect to the Shares not Transferred, the Stockholder has
and will have full power and authority to make, enter into and carry out the
terms of this Agreement and the Proxy; (v) the execution, delivery and
performance of this Agreement by Stockholder will not violate any agreement or
court order to which the Shares are subject, including, without limitation, any
voting agreement or voting trust; and (vi) this Agreement has been duly and
validly executed and delivered by Stockholder and constitutes a valid and
binding agreement of Stockholder, enforceable against Stockholder in accordance
with its terms.
6. Legending of Shares. If so requested by Parent, the Stockholder hereby
agrees that the Shares shall bear a legend stating that they are subject to this
Agreement and to an irrevocable proxy.
7. Termination. This Agreement shall terminate and be of no further force
or effect as of the Expiration Date.
8. Fiduciary Duties. Each Stockholder is signing this Agreement solely in
such Stockholder's capacity as an owner of his, her or its respective Shares,
and nothing herein shall prohibit, prevent or preclude such Stockholder from
taking or not taking any action in his or her capacity as an officer or director
of the Company, to the extent permitted by the Reorganization Agreement.
9. Miscellaneous.
9.1 Waiver. No waiver by any party hereto of any condition or any
breach of any term or provision set forth in this Agreement shall be
effective unless in writing and signed by each party hereto. The waiver of
a condition or any breach of any term or provision of this Agreement shall
not
E-3
operate as or be construed to be a waiver of any other previous or
subsequent breach of any term or provision of this Agreement.
9.2 Severability. In the event that any term, provision, covenant or
restriction set forth in this Agreement, or the application of any such
term, provision, covenant or restriction to any person, entity or set of
circumstances, shall be determined by a court of competent jurisdiction to
be invalid, unlawful, void or unenforceable to any extent, the remainder of
the terms, provisions, covenants and restrictions set forth in this
Agreement, and the application of such terms, provisions, covenants and
restrictions to persons, entities or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable,
shall remain in full force and effect, shall not be impaired, invalidated
or otherwise affected and shall continue to be valid and enforceable to the
fullest extent permitted by applicable law.
9.3 Binding Effect; Assignment. This Agreement and all of the terms
and provisions hereof shall be binding upon, and inure to the benefit of,
the parties hereto and their respective successors and permitted assigns,
but, except as otherwise specifically provided herein, neither this
Agreement nor any of the rights, interests or obligations of the
Stockholder may be assigned to any other Person without the prior written
consent of Parent.
9.4 Amendments. This Agreement may not be modified, amended, altered
or supplemented, except upon the execution and delivery of a written
agreement executed by each of the parties hereto.
9.5 Specific Performance; Injunctive Relief. Each of the parties
hereto hereby acknowledge that (i) the representations, warranties,
covenants and restrictions set forth in this Agreement are necessary,
fundamental and required for the protection of Parent and to preserve for
Parent the benefits of the Merger; (ii) such covenants relate to matters
which are of a special, unique, and extraordinary character that gives each
such representation, warranty, covenant and restriction a special, unique,
and extraordinary value; and (iii) a breach of any such representation,
warranty, covenant or restriction, or any other term or provision of this
Agreement, will result in irreparable harm and damages to Parent which
cannot be adequately compensated by a monetary award. Accordingly, Parent
and the Stockholder hereby expressly agree that in addition to all other
remedies available at law or in equity, Parent shall be entitled to the
immediate remedy of specific performance, a temporary and/or permanent
restraining order, preliminary injunction, or such other form of injunctive
or equitable relief as may be used by any court of competent jurisdiction
to restrain or enjoin any of the parties hereto from breaching any
representations, warranties, covenants or restrictions set forth in this
Agreement, or to specifically enforce the terms and provisions hereof.
9.6 Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the internal laws of the State
of Delaware without giving effect to any choice or conflict of law
provision, rule or principle (whether of the State of Delaware or any other
jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
9.7 Entire Agreement. This Agreement and the Proxy and the other
agreements referred to in this Agreement set forth the entire agreement and
understanding of Parent and the Stockholder with respect to the subject
matter hereof and thereof, and supersede all prior discussions, agreements
and understandings between Parent and the Stockholder, both oral and
written, with respect to the subject matter hereof and thereof.
9.8 Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
E-4
registered or certified mail (return receipt requested), postage prepaid,
to the respective parties at the following address (or at such other
address for a party as shall be specified by like notice):
(a) if to Parent, to:
SCANSOFT, INC.
9 Centennial Drive
Peabody, MA 01960
Attention: Paul A. Ricci
Tel.: (978) 977-2000
Fax: (978) 977-2436
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Katherine A. Martin
Robert Sanchez
Tel.: (650) 493-9300
Fax: (650) 493-6811
(b) if to Stockholder, to the address for notice set forth on the
last page hereof,
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall only be
effective upon receipt.
9.9 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
9.10 Effect of Headings. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
[Remainder of Page Intentionally Left Blank]
E-5
IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Voting Agreement to be duly executed on the date and year first above written.
SCANSOFT, INC.
By:
------------------------------------
Paul A. Ricci
Chairman and Chief Executive
Officer
****AMENDED AND RESTATED VOTING AGREEMENT ****
E-6
STOCKHOLDER:
By:
------------------------------------
(Signature)
Name:
----------------------------------
(Print Name)
--------------------------------------
Telephone
--------------------------------------
Facsimile No.
Shares beneficially owned:
______ shares of the Company Common
Stock
______ shares of the Company Common
Stock issuable upon the exercise of
outstanding options, warrants or other
rights
Address:
--------------------------------------
--------------------------------------
****AMENDED AND RESTATED VOTING AGREEMENT ****
E-7
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of SPEECHWORKS INTERNATIONAL, INC., a Delaware
corporation (the "COMPANY"), hereby irrevocably (to the fullest extent permitted
by law) appoints the directors on the Board of Directors of SCANSOFT, INC., a
Delaware corporation ("PARENT"), and each of them, as the sole and exclusive
attorneys and proxies of the undersigned, with full power of substitution and
resubstitution, to vote and exercise all voting and related rights (to the full
extent that the undersigned is entitled to do so) with respect to all of the
shares of capital stock of the Company that now are or hereafter may be
beneficially owned by the undersigned, and any and all other shares or
securities of the Company issued or issuable in respect thereof on or after the
date hereof (collectively, the "SHARES") in accordance with the terms of this
Proxy. Notwithstanding anything to the contrary set forth herein or under Rule
13d-3 promulgated under the Securities Exchange Act of 1934, as amended, the
terms "beneficially own," "beneficial owner," "beneficial ownership" and the
like shall not include shares of Company Common Stock held of record by Atlas
Venture Fund II, L.P. and Charles River Partnership VII. The Shares beneficially
owned by the undersigned stockholder of the Company as of the date of this Proxy
are listed on the final page of this Proxy. Upon the execution of this Proxy by
the undersigned, any and all prior proxies given by the undersigned with respect
to any Shares are hereby revoked and the undersigned hereby agrees not to grant
any subsequent proxies with respect to the Shares until after the Expiration
Date (as defined below).
This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Amended and
Restated Voting Agreement of even date herewith by and between Parent and the
undersigned stockholder (the "VOTING AGREEMENT"), and is granted in
consideration of Parent entering into that certain Agreement and Plan of
Reorganization (the "REORGANIZATION AGREEMENT"), by and among Parent, Merger Sub
and the Company, which provides for the merger of the Merger Sub with and into
the Company in accordance with its terms (the "MERGER"). This Proxy shall
terminate, and be of no further force and effect, automatically upon the
Expiration Date. As used herein, the term "EXPIRATION DATE" shall mean the
earlier to occur of (i) such date and time as the Reorganization Agreement shall
have been validly terminated pursuant to its terms, or (ii) such date and time
as the Merger shall become effective in accordance with the terms and conditions
set forth in the Reorganization Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect
to the Shares (including, without limitation, the power to execute and deliver
written consents) at every annual, special, adjourned or postponed meeting of
stockholders of the Company and in every written consent in lieu of such
meeting: (i) in favor of approval of the Merger and the adoption and approval of
the Reorganization Agreement, and in favor of each of the other actions
contemplated by the Reorganization Agreement and any action required in
furtherance thereof; (ii) against approval of any proposal made in opposition
to, or in competition with, consummation of the Merger and the transactions
contemplated by the Reorganization Agreement; (iii) against any other action
that is intended, or could reasonably be expected to, impede, interfere with,
delay, postpone, discourage or adversely affect the Merger or any of the other
transactions contemplated by the Reorganization Agreement; (iv) against any
proposal that would result in a breach by the Company of the Reorganization
Agreement; and (v) against the election of a group of individuals to replace a
majority or more of the individuals on the Board of Directors of the Company as
of the date of this Proxy.
The attorneys and proxies named above may not exercise this Proxy to vote,
consent or act on any other matter except as provided above. The undersigned
stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned other than with respect to any Shares
sold in open market transactions and in accordance with Section 2 of the Voting
Agreement.
E-8
Dated: June , 2003
Signature of Stockholder:
-----------
Print Name of Stockholder:
-----------
Shares beneficially owned:
______ shares of the Company Common
Stock
______ shares of the Company Common
Stock issuable upon the exercise of
outstanding options, warrants or other
rights
**** IRREVOCABLE PROXY ****
E-9
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145(a) of the General Corporation Law of the State of Delaware
("Delaware Corporation Law") provides, in general, that a corporation shall have
the power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), because the person is or was a director,
officer, employee or agent of the corporation. Such indemnity may be against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding, if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and if, with respect to any criminal action or
proceeding, the person did not have reasonable cause to believe the person's
conduct was unlawful.
Section 145(b) of the Delaware Corporation Law provides, in general, that a
corporation shall have the power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor because the person is or was a director, officer, employee or agent of
the corporation, against any expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or settlement
of such action or suit if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of the
corporation, subject to certain additional limitations.
Section 145(g) of the Delaware Corporation Law provides, in general, that a
corporation shall have the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against the person in any such
capacity, or arising out of the person's status as such, whether or not the
corporation would have the power to indemnify the person against such liability
under the provisions of the law.
Article IX of the Restated Certificate of Incorporation of the Registrant
provides in effect that, subject to certain limited exceptions, the Registrant
shall indemnify its directors and officers to the extent authorized or permitted
by the Delaware Corporation Law. The directors and officers of the Registrant
are insured under policies of insurance maintained by the Registrant, subject to
the limits of the policies, against certain losses arising from any claims made
against them by reason of being or having been such directors or officers. In
addition, the Registrant has entered into contracts with certain of its
directors providing for indemnification of such persons by the Registrant to the
full extent authorized or permitted by law, subject to certain limited
exceptions.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
2.1(1) Agreement and Plan or Reorganization, dated as of April 23,
2003, by and among the registrant, Spiderman Acquisition
Corporation and SpeechWorks International, Inc..............
3.1(2) Amended and Restated Certificate of Incorporation of the
registrant..................................................
3.2(3) Amended and Restated Bylaws of the registrant...............
5.1 Legal opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation....................................
8.1 Tax opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation....................................
8.2 Tax opinion of Hale and Dorr LLP............................
10.1 Employment Agreement, dated April 23, 2003, between the
registrant and Stuart R. Patterson..........................
10.2# Proposed Amended and Restated 1995 Employee Stock Purchase
Plan........................................................
10.3# Form of Warrant to be issued to Evercore Investments LLC....
21.1(4) Subsidiaries of the registrant..............................
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in exhibits 5.1 and 8.1)..............
23.2 Consent of Hale and Dorr LLP (included in exhibit 8.2)......
23.3 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.................................................
23.4 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.................................................
23.5 Consent of KPMG Accountants N.V.............................
23.6 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.................................................
24.1# Power of Attorney (included on signature page of this Form
S-4 and incorporated herein by reference)...................
99.1# Form of Proxy for the registrant............................
99.2 Form of Proxy for SpeechWorks International, Inc............
99.3(5) Opinion of Evercore Partners, financial advisor to the
registrant..................................................
99.4(6) Opinion of Morgan Stanley & Co. Incorporated, financial
advisor to SpeechWorks International, Inc...................
99.5 Consent of Evercore Partners, financial advisor to the
registrant (included in Annex B)............................
99.6 Consent of Morgan Stanley & Co. Incorporated, financial
advisor to SpeechWorks International, Inc. (included in
Annex C)....................................................
99.7 Consents of Persons Named to become directors of the
registrant who have not signed this registration statement.
---------------
# Previously filed
(1) Included as Annex A to this registration statement.
(2) Incorporated by reference from the registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2001, filed with the Commission
on May 11, 2001.
(3) Incorporated by reference from the registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2003, filed with the Commission
on May 15, 2003.
(4) Incorporated by reference from the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, filed with the Commission on
March 28, 2003.
(5) Included as Annex B to this registration statement.
(6) Included as Annex C to this registration statement.
II-2
(b) Financial Statement Schedules
The following documents are files as part of this joint proxy
statement/prospectus:
1. Report of Independent Accountants on Financial Statement Schedule
2. II -- Valuation and Qualifying Accounts and Reserves
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) that, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof;
(2) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
(3) that every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(4) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request; and
(5) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in Item 20 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in a successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Peabody,
Commonwealth of Massachusetts, on July 1, 2003.
SCANSOFT, INC.
By: /s/ RICHARD S. PALMER
------------------------------------
Richard S. Palmer
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- -------------
* Chairman of the Board and July 1, 2003
------------------------------------------------ Chief Executive Officer
Paul A. Ricci (Principal Executive Officer)
/s/ RICHARD S. PALMER Chief Financial Officer July 1, 2003
------------------------------------------------ (Principal Financial Officer)
Richard S. Palmer
/s/ GERALD C. KENT, JR. Vice President, Chief Accounting July 1, 2003
------------------------------------------------ Officer and Controller
Gerald C. Kent, Jr. (Principal Accounting Officer)
* Director July 1, 2003
------------------------------------------------
Robert J. Frankenberg
* Director July 1, 2003
------------------------------------------------
Katharine A. Martin
* Director July 1, 2003
------------------------------------------------
Mark B. Myers
* Director July 1, 2003
------------------------------------------------
Robert G. Teresi
*By: /s/ RICHARD S. PALMER
------------------------------------------
Richard S. Palmer
Attorney-in-Fact
II-4