SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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ScanSoft, Inc.
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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SCANSOFT, INC.
9 CENTENNIAL DRIVE
PEABODY, MA 01960
(978) 977-2000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of
SCANSOFT, INC.:
The Annual Meeting of Stockholders of ScanSoft, Inc. (the "Company") will
be held at the Company's headquarters, 9 Centennial Drive, Peabody,
Massachusetts, on June 14, 2002 at 9:00 a.m. for the purpose of considering and
acting upon the following proposals:
(1) To elect a Board of seven (7) directors to hold office until the next
annual meeting of stockholders or until their respective successors
have been elected and qualified;
(2) To approve an amendment to the 2000 Stock Option Plan to increase the
number of shares that may be issued under the Plan from 2,500,000 to
4,750,000, an increase of 2,250,000 shares;
(3) To approve an amendment to the 1995 Directors' Stock Option Plan to
increase the number of shares that may be issued under the Plan from
570,000 to 820,000, an increase of 250,000 shares;
(4) To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the year ending December 31,
2002; and
(5) To transact such other business as may properly come before the meeting
or any postponement or adjournment thereof.
The Board of Directors has fixed the close of business on April 29, 2002 as
the record date for determination of stockholders entitled to notice of, and to
vote at, the Annual 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 Annual Meeting.
The Company's Annual Report on Form 10-K for the year ended December 31,
2001 accompanies this Notice of Annual Meeting of Stockholders and Proxy
Statement.
By Order of the Board of Directors
KATHARINE A. MARTIN
Secretary
Peabody, Massachusetts
April 30, 2002
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE AND RETURN THE ACCOMPANYING PROXY
CARD IN THE ENCLOSED ENVELOPE.
SCANSOFT, INC.
9 CENTENNIAL DRIVE
PEABODY, MA 01960
(978) 977-2000
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF STOCKHOLDERS
JUNE 14, 2002
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of ScanSoft, Inc. (the "Company") of proxies for use at
the Annual Meeting of Stockholders of the Company to be held on June 14, 2002 at
9:00 a.m. at 9 Centennial Drive, Peabody, Massachusetts. This proxy statement
and the accompanying form of proxy are being mailed to stockholders on or about
May 8, 2002.
VOTING RIGHTS
Each share of Common Stock entitles its holder to one vote on matters to be
acted upon at the meeting, including the election of directors. The Company's
Series B preferred stock is not entitled to a vote on matters to be acted upon
at the meeting. Votes cast in person or by proxy at the Annual Meeting will be
tabulated by U.S. Stock Transfer Corporation, the Inspector of Elections. Any
proxy that is returned using the form of proxy enclosed and which is not marked
as to a particular item will be voted FOR the election of the director nominees
(Item 1), FOR the amendments to the 2000 Stock Option Plan (Item 2), FOR the
amendments to the 1995 Directors' Stock Option Plan (Item 3), FOR ratification
of the appointment of PricewaterhouseCoopers LLP as the Company's independent
accountants (Item 4) and as the proxy holders deem advisable in their sole
discretion on any other matters that may come before the meeting (Item 5). A
stockholder may indicate on the enclosed Proxy or its substitute that it is
abstaining from voting on a particular matter (an "abstention"). A broker may
indicate on the enclosed Proxy or its substitute that it does not have
discretionary authority as to certain shares to vote on a particular matter (a
"broker non-vote"). Abstentions and broker non-votes are each tabulated
separately.
The Inspector of Elections will determine whether or not a quorum is
present at the Annual Meeting. In general, Delaware law provides that a majority
of the shares entitled to vote present in person or represented by proxy
constitutes a quorum. Abstentions and broker non-votes of shares that are
entitled to vote are treated as shares that are present in person or represented
by proxy for purposes of determining the presence of a quorum. Except for the
election of directors, the affirmative vote of the majority of shares entitled
to vote and present in person or represented by proxy at a duly held meeting at
which a quorum is present is required under Delaware law for approval of
proposals presented to stockholders. Directors are elected by a plurality of the
votes.
In determining whether a proposal has been approved, abstentions of shares
that are entitled to vote are treated as present in person or represented by
proxy, but not as voting for such proposal, and hence have the same effect as
votes against such proposal, while broker non-votes of shares that are entitled
to vote are not treated as present in person or represented by proxy, and hence
have no effect on the vote for such proposal.
RECORD DATE AND SHARE OWNERSHIP
Stockholders of record of the Company as of the close of business on April
29, 2002 have the right to receive notice of and to vote at the Annual Meeting.
On April 29, 2002, the Company had issued and outstanding 64,087,025 shares of
Common Stock.
PROXIES
Proxies for use at the Annual Meeting are being solicited by the Board of
Directors of the Company from its stockholders.
Any person giving a proxy in the form accompanying this Proxy Statement has
the power to revoke it at any time before its exercise by (i) filing with the
Secretary of the Company a signed written statement revoking his or her proxy or
(ii) submitting an executed proxy bearing a date later than that of the proxy
being revoked. A proxy may also be revoked by attendance at the Annual Meeting
and the election to vote in person. Attendance at the Annual Meeting will not by
itself constitute the revocation of a proxy.
PROPOSAL NUMBER 1
ELECTION OF DIRECTORS
At the Annual Meeting, a Board of seven (7) directors will be elected.
Except as set forth below, unless otherwise instructed, the proxy holders will
vote the proxies received by them for Management's nominees named below. The
nominees are presently directors of the Company. In the event that any
Management nominee becomes unavailable, the proxy holders will vote in their
discretion for a substitute nominee. The term of office of each person elected
as a director will continue until the next Annual Meeting of Stockholders or
until a successor has been elected and qualified.
THE NAME, AGE AND PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS OF THE
DIRECTORS NOMINATED BY MANAGEMENT ARE:
NAME AGE PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS
---- --- -----------------------------------------
Paul A. Ricci........... 45 - Served as the Chairman of the Board of Directors of the
Company since March 2, 1999 and Chief Executive Officer of
the Company 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.
- Mr. Ricci has served as Chairman of the Board of Directors
of ScanSoft, Inc. which was then operating as an indirect
wholly-owned subsidiary of Xerox (as Xerox's subsidiary
"ScanSoft") since June 1997.
Michael K. Tivnan....... 49 - Served as the President and Chief Operating Officer of the
Company since August 21, 2000.
- From March 2, 1999 until August 21, 2000, Mr. Tivnan served
as the President and Chief Executive Officer of the Company.
- From February 1998 until March 2, 1999, Mr. Tivnan served as
the President of ScanSoft.
- From November 1993 until February 1998, Mr. Tivnan served as
General Manager and Vice President of ScanSoft.
- From January 1991 until November 1993, Mr. Tivnan served as
Chief Financial Officer of ScanSoft.
Robert J. Frankenberg... 55 - Served as a director of the Company 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 he has continued as Chairman, and since
January 2001 he's served as Acting President and CEO.
- From April 1994 to August 1996, he was Chairman, President
and Chief Executive Officer of Novell, Inc., a producer of
network software.
- He is a director of Electroglas, Inc., National
Semiconductor, Daw Technologies, Inc. and Secure Computing
Corporation.
2
NAME AGE PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS
---- --- -----------------------------------------
Herve Gallaire.......... 58 - Served as a director of the Company since June 27 2001.
- Since October 2001, Dr. Gallaire has served as President,
Xerox Innovation Group. He also serves as Xerox Chief
Technology Officer and Interim Business Group President.
- From December 1999 to October 2001, Dr. Gallaire served as
Senior Vice President for Research and Technology for Xerox
Corporation.
- From 1993 to 1998 Dr. Gallaire served as Manager of the
Xerox Research Centre Europe in Grenoble, France.
Katharine A. Martin..... 39 - Served as a director of the Company since December 17, 1999.
- Since March 2, 1999, Ms. Martin has served as the Company'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 the primary
outside corporate and securities counsel to the Company.
- Ms. Martin served as a Partner of Pillsbury Madison & Sutro
LLP from January 1995 to September 1999 and as an Associate
from September 1987 to December 1994.
Mark B. Myers........... 62 - Served as a director of the Company 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 December 1999.
- Dr. Myers is presently on the faculty of the Wharton
Business School, The University of Pennsylvania.
Robert G. Teresi........ 60 - Served as a director of the Company 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.
- Mr. Teresi is also a director of Daw Technologies, Inc.
REQUIRED VOTE
The seven (7) nominees receiving the highest number of affirmative votes of
the shares of the Company's Common Stock present at the Annual Meeting in person
or by proxy and entitled to vote shall be elected as directors. Unless marked to
the contrary, proxies received will be voted "FOR" management's nominees.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" MANAGEMENT'S
NOMINEES.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board of Directors held a total of 12 meetings during the fiscal year
ended December 31, 2001. Each director attended at least 75% of the aggregate
number of meetings of (i) the Board of Directors and (ii) the committees of the
Board of Directors on which he or she served.
The Board of Directors has an Audit Committee and a Compensation Committee.
It does not have a nominating committee or a committee performing the functions
of a nominating committee. Nominations for directors are made by the entire
Board of Directors.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board is responsible for providing an
independent, objective review of the Company's accounting functions and internal
controls. The Audit Committee is comprised of Messrs. Frankenberg, Teresi and
Myers, and is governed by a written charter first adopted and approved by the
Board of Directors in June 2001. Each of the members of the Audit Committee is
independent as defined by company policy and Rule 4200(a)(14) of the National
Association of Securities Dealers' listing standards.
3
The Audit Committee met four times in 2001 and performed the following
functions and activities:
- reviewed and discussed the interim quarterly financial statements and
audited annual financial statements with management;
- reviewed and evaluated the Company's accounting principles and the
adequacy of the Company's internal controls;
- discussed with the independent accountants the matters required to be
discussed by SAS 61;
- reviewed disclosures from the accountants regarding their independence as
required by Independence Standards Board Standard No. 1; and
- based on the review and discussions with management and the independent
accountants, recommended to the Board that the audited financial
statements be included in the Form 10-K
During the year ended December 31, 2001, PricewaterhouseCoopers LLP ("PwC")
rendered no professional services to the Company in connection with the design
and implementation of financial information systems. The aggregate fees for
professional services rendered by PwC in connection with its audit of the
Company's consolidated financial statements as of and for the year ended
December 31, 2001 and its limited reviews of the Company's unaudited
consolidated interim financial statements were approximately $218,000. In
addition to the fees described above, aggregate fees of approximately $668,000
were billed by PwC during the year ended December 31, 2001 for other services
consisting of $399,000 for audit-related services and $269,000 for income tax
compliance and related tax services. Audit-related services fees include fees
for business process reengineering services, due diligence in connection with
the Company's acquisition of assets of Lernout & Hauspie, issuance of consents
for various documents filed with the Securities and Exchange Commission,
accounting advisory services and the audit of the Company's 401(k) plan.
REPORT OF THE AUDIT COMMITTEE
In connection with the Company's audited financial statements for the year
ended December 31, 2001, the Audit Committee (1) reviewed and discussed the
audited financial statements with management, (2) discussed with the independent
accountants the matters required to be discussed by Statement on Auditing
Standards No. 61, and (3) received the written disclosures and the letter from
the independent accountants required by Independence Standards Board Standard
No. 1 and discussed with the independent accountants the independent
accountants' independence. The Audit Committee has considered whether the
provision of the services other than audit services referenced above is
compatible with maintenance of PwC's independence. Based upon these reviews and
discussions, the Audit Committee recommended to the Board of Directors, and the
Board of Directors approved, that the Company's audited financial statements be
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 for filing with the Securities and Exchange Commission.
Robert J. Frankenberg
Mark B. Myers
Robert G. Teresi, Chairman
COMPENSATION COMMITTEE MATTERS
The Compensation Committee consists of Messrs. Frankenberg and Teresi and
Ms. Martin. The Compensation Committee met four times during this fiscal year
ended December 31, 2001 and, in conjunction with the Board of Directors,
performed the following functions and activities:
- established salaries, incentives and other forms of compensation for
directors, officers and other employees;
4
- administered the various incentive compensation and benefit plans
(including the Company's stock purchase and stock option plans); and
- recommended policies relating to the Company's stock plans
COMPENSATION OF NON-EMPLOYEE DIRECTORS
Non-Employee Directors of the Company are entitled to participate in the
1995 Directors' Stock Option Plan. The plan provides that each Non-Employee
Director who was a director on the effective date of the plan, December 11,
1995, and each other Non-Employee Director first elected as a Director after
December 11, 1995, shall automatically be granted an option to purchase 20,000
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
date 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 annual grant of
stock options to purchase 5,000 shares of Common Stock 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 (6) months. Pursuant to the Directors'
Plan, on January 2, 2001, each Non-Employee Director was granted an option to
purchase 5,000 shares of Common Stock. These annual grants become fully vested
and exercisable one year from the date of grant. In June 2001, this plan was
amended to allow for the initial grant to be increased to 50,000 and for the
subsequent annual grants to be increased to 15,000. This plan was further
amended to allow for the non-automatic grant of 40,000 shares of Common Stock to
all Non-Employee Directors who were outside directors on January 23, 2001
("Eligible Directors"). Each Eligible Director received a grant of 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
become fully vested and exercisable on June 27, 2002, one year from the date of
grant.
COMPENSATION COMMITTEE REPORT ON COMPENSATION
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors. During this fiscal year ended
December 31, 2001, the Compensation Committee consisted of Robert G. Teresi,
Robert J. Frankenberg and Katharine A. Martin. No member of the Compensation
Committee during this fiscal year ended December 31, 2001 was an employee of the
Company or any of its subsidiaries.
COMPENSATION STRATEGY
Generally, the Company's executive compensation programs consist of a base
salary program, a performance-based cash bonus program and a long-term incentive
plan consisting solely of nonqualified stock options. A large part of executive
compensation is at-risk and tied to individual and Company performance. The
Compensation Committee's executive compensation policy has the following
objectives:
- To align the interests of the Company's executives and other key
employees with those of the Company's shareholders, employees, customers
and our strategic objectives;
- To link compensation of executives to the Company's performance;
- To target base salaries at about the 50th to 75th percentile and total
annual cash incentive at about the 75th percentile for each executive as
compared to his or her industry-specific peers; and
- To offer significant levels of at-risk compensation in the form of stock
options so that the long-term rewards available to the Company's
executive officers will have a direct correlation to shareholder value
FACTORS CONSIDERED IN ESTABLISHING COMPENSATION PACKAGES
Several of the more important factors that were considered in establishing
the components of each executive officer's compensation package are summarized
below. Additional factors were also taken into account to a lesser degree.
5
- Base Salary. The Compensation Committee reviews recommendations and sets
the salary levels of executive officers in the spring of each year. This
review is based on the duties and responsibilities that we expect each
executive to discharge during the current year and upon the executive's
performance during the previous year. We perform external market
comparisons, relative to industry-specific peers, based on individual job
responsibility. The Compensation Committee reviews companies whose
employee size and annual revenue are similar to the Company's. The
compensation for Messrs. Ricci and Tivnan is guided by the terms of their
employment agreements.
- Bonuses. Bonuses were paid to executive officers for the fiscal year
ended December 31, 2001. The Company has implemented an Incentive for
Performance Bonus Program pursuant to which bonuses were payable to
eligible employees upon achievement of Company performance goals.
Performance goals are aligned to the Company's strategy and include
earnings, revenue, product delivery and customer satisfaction criteria.
For the fiscal year ended December 31, 2001, the executive bonuses paid
represented 107.6% of 25% of the annual bonus opportunity for the first
six months of the year and 70% of 75% of the annual bonus opportunity for
the last six months of the year. Therefore, the total executive bonus
payout was 79.4% of the individual's annual opportunity.
- Options. The Compensation Committee periodically approves grants of
stock options to each of the Company's executive officers under the
Company's stock option plans. The grants are designed to give executive
officers the opportunity to build a meaningful stake in the Company, with
the objective of aligning executive officers' long-range interests with
those of the stockholders and encouraging the achievement of superior
results over time. Each grant generally allows the officer to acquire
shares of the Company's Common Stock at a fixed price per share (the fair
market value on the grant date) over a specified period of time (up to 10
years), thus providing a return to the executive officer only if the
market price of the shares appreciates over the option term.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The employment agreement dated August 21, 2000 between Mr. Ricci and the
Company establishes the base annual salary of $300,000 and other items included
in the "Other Annual Compensation" and "All Other Annual Compensation" columns
in the Summary Compensation Table. This Agreement includes a target bonus of
$50,000 per year and an option grant of 2,500,000 shares of our common stock at
$1.3438 per share, which vests 1/8 per quarter over a two-year period. In
addition, at least once during each fiscal year, the Compensation Committee has
agreed to consider granting Mr. Ricci additional options. The number and terms
and conditions of any options granted to Mr. Ricci will be determined in the
discretion of the Compensation Committee, but the Compensation Committee
generally will seek to grant options to Mr. Ricci in an amount and on terms and
conditions that are at least as favorable as option grants received by senior
officers of companies comparable to the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2001, no member of the Compensation Committee was an officer
or employee of the Company. During fiscal 2001, no member of the Compensation
Committee or executive officer of the Company 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 our Board or Compensation Committee.
Robert G. Teresi
Robert J. Frankenberg
Katharine A. Martin
6
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 28, 2002, as to (1) each
person (or group of affiliated persons) who is known by us to own beneficially
more than 5% of our common stock; (2) each of our directors and director
nominees; (3) each of our Chief Executive Officer and each other person named in
the Summary Compensation Table (collectively, the "Named Executive Officers");
and (4) all current directors and executive officers of the Company as a group.
PERCENT OF
NUMBER RIGHT TO OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) ACQUIRE(3) SHARES(4)
--------------------------------------- ---------- ---------- -----------
State of Wisconsin Investment Board..................... 12,129,101 -- 19.3%
P.O. Box 7842
Madison, WI 53707
Xerox Imaging Systems, Inc.(5).......................... 11,853,602 -- 18.8%
800 Long Ridge Road
Stamford, CT 06904
Lernout & Hauspie Speech Products N.V.(6)............... 7,400,000 -- 11.8%
Flanders Language Valley 50
8900 Ieper, Belgium
Paul A. Ricci........................................... 155,000 2,207,500 3.6%
Michael K. Tivnan....................................... 82,500 722,390 1.3%
Mark B. Myers........................................... -- 25,000 *
Katharine A. Martin..................................... 1,000 35,000 *
Robert G. Teresi........................................ 172,186 15,000 *
Robert J. Frankenberg................................... -- 156,708 *
Herve Gallaire.......................................... -- -- *
Wayne S. Crandall....................................... 28,000 461,112 *
Richard S. Palmer....................................... 2,000 454,166 *
Ben S. Wittner.......................................... 4,408 265,479 *
All directors and executive officers as a group (10
persons).............................................. 445,094 4,342,355 7.1%
---------------
* 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) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and:
- Includes shares for which the named person has sole voting and investment
power, has shared voting and investment power, or holds in a profit
sharing plan account, and
- Excludes shares that may be acquired through stock option exercises.
(3) Shares that can be acquired through stock option exercise through May 27,
2002.
(4) Applicable percentage ownership is based on 62,940,748 shares of common
stock outstanding as of March 28, 2002.
(5) Does not include a warrant to purchase up to 520,413 shares of common stock
and 3,562,238 shares of non-voting Series B Preferred Stock as of March 28,
2002.
(6) These shares were issued to Lernout & Hauspie Speech Products N.V. ("L&H")
pursuant to that certain Asset Purchase Agreement dated as of December 7,
2001 by and among L&H, the other Sellers (as defined in the Asset Purchase
Agreement) and ScanSoft, Inc. (the "Issuer"). The Shares were issued solely
to L&H, however, approximately one-half of the Shares were received on
behalf of the other Sellers and will be allocated among the other Sellers in
accordance with an allocation schedule that is subject to the review and
approval of the U.S. Bankruptcy Court for the District of Delaware (the
"U.S.
7
Bankruptcy Court"). This information is based on a Schedule 13G filed with
the Securities and Exchange Commission on December 21, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
At December 31, 2000, Xerox owned approximately 12% of the Company's
outstanding common stock and all of the Company's outstanding Series B Preferred
Stock. In connection with the Company's acquisition of ScanSoft in 1999
(following which the Company renamed itself ScanSoft), the Company 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 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.
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 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.
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 the Company's
shares of common stock immediately after such exercise. From the date of
acquisition through December 31, 2001, approximately 520,413 ScanSoft options
have been forfeited and accordingly, the Xerox warrant was exercisable for the
purchase of 520,413 shares of the Company's common stock.
The Company and Xerox have entered into three non-exclusive agreements in
which the Company grants Xerox the royalty-bearing right to copy and distribute
certain versions of Pagis, TextBridge and PaperPort software programs with
Xerox's multi-function peripherals. All agreements were negotiated on an arm's
length basis, and the royalties and other economic terms are comparable with
ScanSoft's other OEM partners.
On June 29, 1998, the Company and Xerox entered into a Gold Disk Bundling
Agreement, as amended, wherein Xerox licensed the right to bundle and distribute
ScanSoft's Pagis and TextBridge software products with Xerox's document system
products for the small office and home office market. Under this agreement,
ScanSoft recorded revenue totaling $1.8 million, $2.4 million and $0.5 million
for the years ended December 31, 2001, 2000 and 1999 respectively, based upon
reported licenses of 389,000, 528,000 and 172,000, respectively.
On March 25, 1998, the Company and Xerox entered into a Gold Disk Bundling
Agreement, as amended, wherein Xerox licensed the right to bundle and distribute
ScanSoft's TextBridge Pro software with Xerox's large corporate multifunction
devices for 25 plus users (the "March 1998 Agreement"). On September 30, 1999,
the Company and Xerox entered into a Gold Disk Bundling Agreement, as amended,
wherein Xerox licensed the right to bundle and distribute ScanSoft's TextBridge
Pro and PaperPort software with Xerox's large corporate multifunction devises
and document center systems. This Agreement superseded the March 1998 Agreement.
Under these two agreements, ScanSoft recorded revenue totaling $5.4 million,
$3.4 million and $4.2 million for the years ended December 31, 2001, 2000 and
1999 respectively, based upon reported licenses of 898,000, 764,000 and 905,000
respectively.
In total, Xerox accounted for revenue of $7.2 million, $5.8 million and
$4.7 million for the years ended December 31, 2001, 2000 and 1999 respectively,
accounting for 11%, 11% and 14% of total revenue, respectively. During 2001,
Xerox paid ScanSoft $7 million under these agreements, and as of December 31,
2001, Xerox owed ScanSoft $1.8 million.
8
During fiscal 2001, the law firm of Wilson Sonsini Goodrich & Rosati,
Professional Corporation acted as primary outside corporate and securities
counsel to the Company. Ms. Martin, a director of the Company, is a member of
Wilson Sonsini Goodrich & Rosati. Aggregate fees and costs billed to the Company
during fiscal 2001 by Wilson Sonsini Goodrich & Rosati were approximately
$270,000. We believe that the services performed by Wilson Sonsini Goodrich &
Rosati were provided on terms no more favorable than those with unrelated
parties.
ADDITIONAL INFORMATION
MANAGEMENT
Executive officers are elected annually by the Board and serve at the
discretion of the Board. Set forth below is information regarding executive
officers of the Company who are not directors of the Company.
NAME AGE PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS
---- --- -----------------------------------------
Wayne S. Crandall.................... 43 - Serves as Senior Vice President of Worldwide Sales and
Business Development from January of 2002.
- Served as Senior Vice President Sales and Marketing of the
Company from November 2000 until December of 2001.
- From March 2000 to November 2000, Mr. Crandall was the
Senior Vice President Sales of the Company and from March
1995 to March 2000 he was the Vice President Sales and
Channel Marketing of the Company.
- From January of 1993 until March 1995 Mr. Crandall was
Managing Director of International Sales, Marketing and
Operations of the Company 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.
Richard S. Palmer.................... 51 - Served as Senior Vice President and Chief Financial
Officer of the Company since May 2000.
- From July 1994 to April 2000, Mr. Palmer was the Director
of Corporate Development at Xerox Corporation.
- Prior to that, he worked in a number of financial
management positions at 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.
Ben S. Wittner....................... 44 - Served as Senior Vice President Imaging Research and
Development of the Company 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 then operating as an indirect wholly-owned
subsidiary of Xerox.
- 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. Before 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.
9
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules of the Securities and Exchange Commission (the
"Commission") thereunder require the Company's executive officers, directors and
certain stockholders to file reports of ownership and changes in ownership of
the Common Stock with the Commission. Based upon a review of such reports, the
Company believes that all reports required by section 16(a) of the Exchange Act
to be filed by its executive officers and directors during the last fiscal year
were filed on time with the exception of one late filing by each of Mr. Kent and
by Mr. Ricci. Mr. Kent was late to report an option granted to him on December
31, 2001 that was reportable on a Form 5. Mr. Ricci was late reporting an
acquisition of shares purchased in February 2001. Both filings were late due to
an inadvertent error.
EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years 2001, 2000 and 1999 concerning compensation earned by the Company's Chief
Executive Officer and to the Company's four other most highly compensated named
executive officers whose compensation exceeded $100,000 in 2001 (the "Named
Executive Officers").
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------- -----------------------------
RESTRICTED SECURITIES ALL OTHER
OTHER ANNUAL STOCK UNDERLYING ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION AWARD(S)($) OPTIONS(#) COMPENSATION(2)
--------------------------- ---- ------- -------- ------------ ---------------- ---------- ---------------
Paul A. Ricci............. 2001 300,000 39,700 44,905(3) -- -- --
Chief Executive Officer 2000(4) 110,385 12,248 -- -- 2,505,000 --
Michael K. Tivnan......... 2001 275,016 99,250 -- -- -- 7,062
President and Chief 2000 269,180 36,378 -- -- 330,000 8,250
Operating Officer(5) 1999 204,304 76,840 -- -- 510,000 6,750
Wayne S. Crandall......... 2001 221,250 67,382 -- -- -- 9,154
Senior Vice President, 2000 178,596 58,102 -- -- 200,000 6,773
Sales and Business 1999(6) 127,676 102,551 -- -- 217,588 8,914
Development
Richard S. Palmer......... 2001 220,000 69,872 -- $90,750(7) 100,000 7,017
Senior Vice President and 2000(8) 155,833 25,868 -- 550,000 --
Chief Financial Officer
Ben S. Wittner............ 2001 178,333 58,192 -- -- 40,000 7,100
Senior Vice President, 2000(9) 140,839 34,170 -- -- 223,000 4,434
Digital Imaging R&D
---------------
(1) Bonuses were paid pursuant to Bonus Incentive Plans.
(2) Represents Company contributions to the Company's 401(k) plan.
(3) Represents allowance paid for remote living expenses.
(4) Mr. Ricci began operating in this capacity in August 2000.
(5) Mr. Tivnan served as President and Chief Executive Officer from March 1999
to August 2000, and thereafter as President and Chief Operating Officer.
(6) Mr. Crandall was appointed an executive officer of the Company in March
1999.
(7) 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
4/17/2004. The value of the Restricted Stock Award as of December 31, 2001
was $322,500.
(8) Mr. Palmer joined the Company in May 2000.
10
(9) Dr. Wittner was appointed an executive officer of the Company in August
2000.
CHANGE IN CONTROL AND EMPLOYMENT AGREEMENTS
In April 1999, ScanSoft's Board of Directors approved acceleration of
vesting of options for all officers and directors of the Company in the event of
a change in control. A change in control includes a merger or consolidation of
the Company not approved by the Board of Directors, certain changes in the
composition of the Board of Directors, and certain changes in the ownership of
the Company.
RECENT OPTION GRANTS
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 2001 to the Named Executive
Officers.
POTENTIAL REALIZABLE VALUE
PERCENT OF TOTAL AT ASSUMED ANNUAL
OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN EXERCISE OR TERM($)(2)
OPTIONS FISCAL BASE PRICE EXPIRATION --------------------------
NAME GRANTED(#) YEAR(%)(1) ($/SHARE) DATE 5% 10%
---- ---------- ---------------- ----------- ---------- ----------- ------------
Richard S. Palmer...... 100,000(3) 2.7352 1.2300 06/29/11 77,354.04 196,030.32
Ben S. Wittner......... 40,000(3) 1.0941 1.2300 06/29/11 30,941.62 78,412.13
---------------
(1) Based on options to purchase an aggregate of 3,656,021 shares of common
stock granted to employees during fiscal 2001.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of five percent (5%) and
ten percent (10%) compounded annually from the date the respective options
were granted to their expiration date and are not presented to forecast
possible future appreciation, if any, in the price of our common stock. The
gains shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise of the
options or the sale of the underlying shares of common stock. The actual
gains, if any, on the stock option exercises will depend on the future
performance of our common stock, the optionee's continued employment through
applicable vesting periods and the date on which the options are exercised.
(3) Options granted to Mr. Palmer and Mr. Wittner have a ten year term, and are
exercisable over a two year period commencing one month after grant date.
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, 2001. (No stock appreciation rights were granted by the Company in
2001 and none were outstanding at December 31, 2001.)
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES(1)
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/01 OPTIONS/SARS AT 12/31/01
SHARES ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------- -------- ----------- ------------- ----------- -------------
Paul A. Ricci............. -- -- 1,577,500 947,500 $4,645,163 $2,797,538
Michael K. Tivnan......... -- -- 637,390 444,546 1,962,119 1,008,875
Wayne Crandall............ -- -- 406,715 148,067 1,221,988 276,022
Richard S. Palmer......... -- -- 368,750 281,250 781,430 498,375
Ben Wittner............... -- -- 211,501 162,128 593,566 347,322
---------------
(1) Based on a per share price of $4.30, the closing price of our common stock
as reported by The Nasdaq National Market on December 31, 2001, the last
trading day of the fiscal year, less the exercise price. The actual value of
unexercised options fluctuates with stock market activity.
11
PERFORMANCE GRAPH
The following performance graph compares the Company's cumulative total
return on its Common Stock for a five-year period with the cumulative total
return of the Russell 2000, the JP Morgan H&Q Technology, and the S&P
Information Technology indices assuming $100 was invested in the Company's
Common Stock and each of the indices on December 31, 1996. The stock price
performance on the following graph is not necessarily indicative of future stock
price performance.
As of April 4, 2002, the JP Morgan H&Q Technology Index will no longer be
reporting as an index. As a result, the Company has selected the S&P Information
Technology Index for a representative comparison of returns.
COMPARISON OF CUMULATIVE TOTAL RETURN ON $100 INVESTED IN SCANSOFT, INC.
COMMON STOCK ON DECEMBER 31, 1996 VS. RUSSELL 2000, JP MORGAN H&Q
TECHNOLOGY, AND S&P INFORMATION TECHNOLOGY INDICES
[PERFORMANCE GRAPH]
--------------------------------------------------------------------------------
12/96 12/97 12/98 12/99 12/00 12/01
--------------------------------------------------------------------------------
Scansoft, Inc. $100.00 $ 36.11 $ 26.39 $ 88.89 $ 10.42 $ 95.56
--------------------------------------------------------------------------------
Russell 2000 $100.00 $122.36 $119.25 $144.60 $140.23 $143.71
--------------------------------------------------------------------------------
JP Morgan H&Q
Technology $100.00 $117.24 $182.36 $407.27 $263.28 $181.99
--------------------------------------------------------------------------------
S&P Information
Technology $100.00 $128.53 $228.97 $409.27 $241.87 $179.31
--------------------------------------------------------------------------------
12
PROPOSAL NUMBER 2
APPROVAL OF AMENDMENTS TO THE 2000 STOCK OPTION PLAN
The Board of Directors has approved an amendment to the Company's 2000
Stock Option Plan, subject to the approval of the Company's stockholders. The
Company's 2000 Stock Option Plan (the "2000 Plan") was originally adopted by the
Board and stockholders in May 2000.
In April 2002, the Board, subject to stockholder approval, amended the 2000
Plan to increase the number of shares of Common Stock authorized for issuance
under the 2000 Plan from 2,500,000 shares to 4,750,000 shares, an increase of
2,250,000 shares. If stockholders do not approve this Proposal Number 2, the
amendment will have no effect.
In addition to the 2000 Plan, the Company currently grants options to its
executive officers under the 1993 Incentive Stock Option Plan and the 1997
Employee Stock Option Plan. In August 2000, the Board of Directors adopted the
2000 Non-Statutory Stock Option Plan for granting options to non-officer
employees. Officers of the Company cannot be granted options from this plan.
As of March 31, 2002, the following options were outstanding under the
Company's employee stock option plans:
NUMBER OF OPTIONS
OPTIONS EXERCISE PRICE AVAILABLE
PLAN OUTSTANDING (RANGE) FOR GRANT
---- ----------- ------------------ ---------
1993 Incentive Stock Option Plan.................... 2,465,527 $1.2300 to $5.6900 110,561
1997 Employee Stock Option Plan..................... 951,689 $0.4063 to $5.0300 177,649
2000 Non-Statutory Stock Option Plan................ 4,411,089 $0.6563 to $4.4900 1,366,859
2000 Stock Option Plan.............................. 1,655,587 $1.2813 to $3.3125 548,252
Stand-Alone Grants.................................. 1,510,000 $1.3438 to $1.7200 0
1998 Stock Option Plan.............................. 971,654 $0.6100 to $1.3438 0
Caere Stock Option Plans............................ 543,687 $2.2800 to $5.9300 0
To ensure the Company can continue to grant stock options to officers of
the Company at levels determined appropriate by the Board and the Compensation
Committee of the Board, the shareholders are being asked to approve the
amendment to the 2000 Plan.
DESCRIPTION OF THE 2000 PLAN
The essential features of the 2000 Plan are outlined below. The following
summary of the principal provisions of the 2000 Plan as proposed to be amended
is qualified in its entirety by reference to the full text of the 2000 Plan,
which is included as Annex A hereto.
General. The purpose of the 2000 Plan is to attract and retain the best
available personnel for positions of substantial responsibility with the
Company, to provide additional incentive to the employees and consultants of the
Company and its subsidiaries and to promote the success of the Company'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 may generally be administered by the Board
or a Committee appointed by the Board (as applicable, the "Administrator"). The
Administrator may make any determinations deemed necessary or advisable for the
2000 Plan.
Eligibility. Nonstatutory stock options and stock purchase rights may be
granted under the 2000 Plan to employees, directors and consultants of the
Company and any parent or subsidiary of the Company. As of March 31, 2002, we
had 469 employees, 7 directors (including 2 employee directors), and 20
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 Internal Revenue Code of 1986, as
amended ("Code") places limits on the deductibility for federal income tax
purposes of compensation paid to certain executive officers of
13
the Company. In order to preserve the Company'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 of the
Company, 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 the Company, 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 the Company 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%
shareholder 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. As of March 28,
2002, the closing price of the Company Common Stock as reported on the
Nasdaq Stock Market was $5.90 per share.
The Company 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 Common Stock of the Company (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 (10) years from the date of grant; provided, however, that in
the case of an incentive stock option granted to a 10% shareholder, the
term of the option may be no more than five (5) 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 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.
14
(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 the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with the Company 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 the Company. The repurchase option shall lapse
at a rate determined by the Administrator.
Adjustments Upon Changes in Capitalization. In the event that the stock of
the Company changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in the capital
structure of the Company effected without the receipt of consideration,
appropriate adjustments shall be made in the number and class of shares of stock
subject to the 2000 Plan, the number and class of shares of stock subject to any
option or stock purchase right outstanding under the 2000 Plan, and the exercise
price of any such outstanding option or stock purchase right.
In the event of a liquidation or dissolution, any unexercised options or
stock purchase rights will terminate. The Administrator may, in its sole
discretion, provide that each optionee shall have the right to exercise all or
any part of the option or stock purchase right, including shares as to which the
option or stock purchase right would not otherwise be exercisable.
In connection with any merger of the Company with or into another
corporation or the sale of all or substantially all of the assets of the
Company, 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 (15) days from the date of such notice and that
the option terminates upon expiration of such period.
Amendment and Termination of the Plan. The Board may amend, alter, suspend
or terminate the 2000 Plan, or any part thereof, at any time and for any reason.
However, the Company shall obtain stockholder approval for any amendment to the
2000 Plan to the extent the Board determines it necessary and desirable to
comply with applicable law. No such action by the Board or stockholders may
alter or impair any option previously granted under the 2000 Plan without the
written consent of the optionee. 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.
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, the
CEO, the other Named Executive Officers and the current Directors of the Company
under the 2000 Plan for 2002 are not determinable. However, the following sets
forth the options or awards granted to such persons in fiscal year 2001. Amounts
granted in 2001 may not be representative of amounts granted in the future.
15
NAME AND POSITION DOLLAR VALUE ($) NUMBER OF UNITS
----------------- ---------------- ---------------
Paul A. Ricci (CEO)................................... 0 0
Michael K. Tivnan..................................... 0 0
Wayne S. Crandall..................................... 0 0
Richard S. Palmer..................................... 90,750 75,000
Ben S. Wittner........................................ 0 0
Executive Group....................................... 90,750 75,000
Non-Executive Director Group.......................... 0 0
Non-Executive Officer Employee Group.................. 200,002 58,824
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise is an adjustment item for alternative
minimum tax purposes and may subject the optionee to the alternative minimum
tax. Upon a disposition of the shares more than two years after grant of the
option and one year after exercise of the option, any gain or loss is treated as
long-term capital gain or loss. If these holding periods are not satisfied, the
optionee recognizes ordinary income at the time of disposition equal to the
difference between the exercise price and the lower of (i) the fair market value
of the shares at the date of the option exercise or (ii) the sale price of the
shares. Any gain or loss recognized on such a premature disposition of the
shares in excess of the amount treated as ordinary income is treated as
long-term or short-term capital gain or loss, depending on the holding period.
The Company is generally entitled to a deduction in the same amount as the
ordinary income recognized by the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price. Any
taxable income recognized in connection with an option exercise by an employee
of the Company is subject to tax withholding by the Company. The Company is
generally entitled to a deduction in the same amount as the ordinary income
recognized by the optionee. Upon a disposition of such shares by the optionee,
any difference between the sale price and the optionee's exercise price, to the
extent not recognized as taxable income as provided above, is treated as
long-term or short-term capital gain or loss, depending on the holding period.
Stock Purchase Rights. Stock purchase rights will generally be taxed in
the same manner as nonstatutory stock options. However, restricted stock is
subject to a "substantial risk of forfeiture" within the meaning of Section 83
of the Code, because the Company may repurchase the stock when the purchaser
ceases to provide services to the Company. As a result of this substantial risk
of forfeiture, the purchaser will not recognize ordinary income at the time of
purchase. Instead, the purchaser will recognize ordinary income on the dates
when the stock is no longer subject to a substantial risk of forfeiture (i.e.,
when the Company's right of repurchase lapses). The purchaser's ordinary income
is measured as the difference between the purchase price and the fair market
value of the stock on the date the stock is no longer subject to right of
repurchase.
The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and begin his or her capital gains holding period by
timely filing (i.e., within thirty days of purchase), an election pursuant to
Section 83(b) of the Code. In such event, the ordinary income recognized, if
any, is measured as the difference between the purchase price and the fair
market value of the stock on the date of purchase, and the capital gain holding
period commences on such date. The ordinary income recognized by a purchaser who
is an employee will be subject to tax withholding by the Company. The Company
generally will be entitled to a tax deduction equal to the ordinary income
realized, subject to applicable limits.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF OPTIONS
UNDER THE 2000 PLAN. IT DOES NOT PURPORT TO BE COMPLETE,
16
AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF THE EMPLOYEE'S OR CONSULTANT'S
DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR
FOREIGN COUNTRY IN WHICH THE EMPLOYEE OR CONSULTANT MAY RESIDE.
REQUIRED APPROVAL
The affirmative vote of the holders of a majority of shares of capital
stock represented and voting at a duly held meeting at which a quorum is present
is required to approve the amendment to the 2000 Plan as it relates to the
additional 2,250,000 new shares available for issuance under the 2000 Plan.
Unless marked to the contrary, proxies received will be voted "FOR" approval of
the 2000 Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE AMENDMENT OF
THE 2000 STOCK OPTION PLAN.
PROPOSAL NUMBER 3
APPROVAL OF AMENDMENTS TO THE 1995 DIRECTORS' STOCK OPTION PLAN
The Board of Directors has approved an amendment to the Company's 1995
Directors' Stock Option Plan, subject to the approval of the Company's
stockholders. The Company's 1995 Directors' Stock Option Plan (the "Directors'
Plan") was originally adopted by the Board and stockholders in October 1995 and
subsequently amended by the Board and stockholders in June, 2001.
In April 2002, the Board adopted, subject to stockholder approval, the
following proposal to amend the Directors' Plan:
- To amend the Directors' Plan to increase the number of shares of Common
Stock authorized for issuance under the Directors' Plan from 570,000
shares to 820,000 shares, an increase of 250,000 shares.
The Board adopted this amendment to facilitate the Company's goals of
increasing the compensation of its non-employee directors when stockholder value
(represented by the trading price of the Company's stock) is increased and of
attracting, over time, additional highly qualified non-employee directors of the
Company.
As of March 31, 2002, there were options to purchase 420,000 shares of
Common Stock outstanding under the Directors' Plan, with exercise prices ranging
from $0.6563 to $5.9375 per share. As of March 31, 2002, without taking into
account the proposed amendment to the Directors' Plan, 135,000 shares remained
available for future grant under the plan.
DESCRIPTION OF THE DIRECTORS' PLAN
The essential features of the Directors' Plan are outlined below. The
following summary of the principal provisions of the Directors' Plan as proposed
to be amended is qualified in its entirety by reference to the full text of the
Directors' Plan, which is included as Annex B hereto.
General. The Directors' Plan currently provides for the non-discretionary
grant of non-statutory stock options. Non-statutory stock options granted under
the Directors' Plan are intended not to qualify as incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). See "Federal Income Tax Information" below for a
discussion of the tax treatment of non-statutory stock options.
Purpose. The Company, by means of the Directors' Plan, seeks to attract
and retain the best available personnel for service as directors of the Company,
to provide additional incentive for such persons to exert maximum efforts to
promote the success of the Company, and to encourage their continued service on
the Board.
17
Administration. The Board administers the Directors' Plan. Subject to the
provisions of the Directors' Plan, the Board has the power to construe and
interpret the Directors' Plan and options granted under it, to establish, amend,
and revoke rules and regulations for its administration, to amend the Directors'
Plan, and generally to exercise such powers and to perform such acts as the
Board deems necessary or expedient to promote the best interests of the Company.
Eligibility. Options may be granted under the Directors' Plan only to
non-employee directors of the Company. A "non-employee director" is a director
of the Company who is not an employee of the Company or of any "parent" or
"subsidiary" of the Company, as those terms are defined in the Code. The payment
of a director's fee by the Company is not sufficient in and of itself to
constitute "employment" by the Company. Five of the Company's seven current
directors (all except Messrs. Ricci and Tivnan) are eligible to participate in
the Directors' Plan.
Stock Subject to the Directors' Plan. If options granted under the
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 Directors' Plan. Subject to the approval of Proposal Number
3, the number of shares authorized for issuance under the Directors' Plan will
be increased from 570,000 to 820,000, an increase of 250,000 shares.
Terms and Conditions of Options. Each option under the 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 ("Shares") as follows:
- An initial grant of 50,000 on the date the person first becomes a
non-employee director (the "First Option"); and
- An annual grant of 15,000 on January 1 of each year, provided that, on
such date, the non-employee director has served on the Board for at least
6 months (the "Subsequent Option").
The First Option and Subsequent Option grant amounts were amended by the
stockholders at the June 2001 meeting. Along with amending the grant amounts,
the stockholders also approved a non-automatic grant to any director who was an
eligible director on January 23, 2001, an additional grant of 40,000 shares to
bring such directors into the adjusted grant arrangement. The 40,000 options
consist of (a) 30,000 shares to raise their First Option from 20,000 to 50,000
and (b) 10,000 shares to raise their Subsequent Option grant from 5,000 to
15,000. 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 Directors' Plan shall be equal to 100% of the fair market value of the
Common Stock subject to such option on the date such option is granted. The
exercise price of options granted under the Directors' Plan must be paid either:
(i) in cash or by check at the time the option is exercised, (ii) by other
Shares of Common Stock having a fair market value on the date of surrender equal
to the aggregate exercise price of the shares as to which said Option shall be
exercised (which, if acquired from the Company, shall have been held for at
least six months), or (iii) by a combination of such methods of payment.
The Company may not reduce the exercise price of any stock option,
including stock appreciation right, outstanding or to be granted in the future
under the 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.
(c) Option Vesting. Options granted pursuant to the Directors' Plan may be
exercised while the non-employee director is a Director of the Company and for a
period of 90 days after ceasing to be a director (this period may be extended in
limited circumstances where there is death or disability). The exercise price
per share of the Option is 100% of the fair market value per share on the grant
date. The First Option vests over four years in 25% installments on the
anniversary of the grant date. The Subsequent Option is exercisable as to
18
100% of the Shares subject to the Subsequent Option on the first anniversary of
the date of grant of the Subsequent Option.
(d) Termination of Options. Currently no option granted under the
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 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
Directors' Plan or subject to any option granted under the 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 Directors' Plan and options outstanding thereunder
will be appropriately adjusted as to the class and maximum number of shares
subject to the 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 the Company, (ii) a sale of all or substantially all of the
Company's assets, (iii) a merger or consolidation in which the Company is not
the surviving corporation, or (iv) any other capital reorganization in which
more than 50% of the shares of the Company entitled to vote are exchanged, the
Company shall give to directors, at the time of adoption of the 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 the
Company or acquiring its business by reason of such liquidation, dissolution,
sale, merger, consolidation or reorganization.
Duration, Amendment, and Termination. The Board may suspend or terminate
the Directors' Plan at any time. Unless sooner terminated, the Directors' Plan
terminates in October 2005.
The Board also may amend or terminate the Plan from time to time in such
respects as the Board may deem advisable; provided that, to the extent the Board
deems it necessary and desirable to comply with any applicable law or
regulation, the Company shall obtain approval of the stockholders of the Company
to Plan amendments.
Plan Benefits. The following shows the benefits or amounts that will be
received by, or allocated to, the CEO, other Named Executive Officers and
current Directors of the Company under the Directors Plan for 2002:
NAME AND POSITION DOLLAR VALUE ($) NUMBER OF UNITS
----------------- ---------------- ---------------
Paul A. Ricci (CEO)................................... 0 0
Michael K. Tivnan..................................... 0 0
Wayne S. Crandall..................................... 0 0
Richard S. Palmer..................................... 0 0
Ben S. Wittner........................................ 0 0
Executive Group....................................... 0 0
Non-Executive Director Group.......................... 333,750 75,000
Non-Executive Officer Employee Group.................. 0 0
19
FEDERAL INCOME TAX INFORMATION
Stock options granted under the Directors' Plan are subject to federal
income tax treatment pursuant to rules governing options that are not incentive
stock options.
The following is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Directors' Plan, does not purport to be complete, and does not
discuss the income tax laws of any state or foreign country in which an optionee
may reside.
Options granted under the Directors' Plan are non-statutory options. An
optionee does not recognize any taxable income at the time he or she is granted
a non-statutory stock option. Upon exercise, the optionee recognizes taxable
income generally measured by the excess of the then fair market value of the
shares over the exercise price. Any taxable income recognized in connection with
an option exercise by an optionee is subject to tax withholding by the Company.
The Company is entitled to a deduction in the same amount as the ordinary income
recognized by the optionee. Upon a disposition of such shares by the optionee,
any difference between the sale price and the optionee's exercise price, to the
extent not recognized as taxable income as provided above, is treated as
long-term or short-term capital gain or loss, depending on the holding period.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF OPTIONS
UNDER THE PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX
CONSEQUENCES OF THE EMPLOYEE'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
EMPLOYEE OR CONSULTANT MAY RESIDE.
REQUIRED APPROVAL
The affirmative vote of the holders of a majority of shares of capital
stock represented and voting at a duly held meeting at which a quorum is present
is required to approve the amendment to the Directors' Plan. Unless marked to
the contrary, proxies received will be voted "FOR" approval of the amendments of
the Directors' Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE AMENDMENT TO
THE DIRECTORS' PLAN.
PROPOSAL NUMBER 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has approved the appointment of
PricewaterhouseCoopers LLP ("PwC") as independent accountants for the Company
until revoked by further action.
The stockholders are asked to ratify the appointment of PwC as independent
accountants for the Company for the fiscal year ending December 31, 2002. A
representative of PwC is expected to be present at the Annual Meeting to make a
statement if he or she desires to do so, and such representative is expected to
be available to respond to appropriate questions.
Although ratification by stockholders is not required by law, the Board of
Directors has determined that it is desirable to request approval of this
selection by the stockholders. Notwithstanding its selection, the Board of
Directors, in its discretion, may appoint new independent accountants at any
time during the year if the Board of Directors believes that such a change would
be in the best interest of the Company and its stockholders. Should the
stockholders fail to ratify the appointment of PwC as independent accountants,
appointment of the firm for the fiscal year ending December 31, 2002 will be
reconsidered by the Board of Directors.
20
Unless marked to the contrary, proxies received will be voted "FOR"
ratification of the designation of PricewaterhouseCoopers LLP as independent
accountants for the Company's fiscal year ending December 31, 2002.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" RATIFICATION OF
APPOINTMENT OF THE COMPANY'S INDEPENDENT ACCOUNTANTS.
OTHER MATTERS
Proposals Intended to be Presented at Next Annual Meeting. Proposals of
security holders intended to be presented at the Company's 2003 Annual Meeting
of Stockholders must be received by the Company for inclusion in the Company's
proxy statement and form of proxy no later than December 31, 2002.
Other Matters. Management knows of no business that will be presented for
consideration at the Annual Meeting other than as stated in the Notice of
Meeting. If, however, other matters are properly brought before the meeting, it
is the intention of the persons named in the accompanying form of proxy to vote
the shares represented thereby on such matters in accordance with their best
judgment.
Proxy Solicitation. The expense of solicitation of proxies will be borne
by the Company. In addition to solicitation of proxies by mail, certain
officers, directors and Company employees who will receive no additional
compensation for their services may solicit proxies by telephone, telegraph or
personal interview. The Company is required to request brokers and nominees who
hold stock in their name to furnish this proxy material to beneficial owners of
the stock and will reimburse such brokers and nominees for their reasonable
out-of-pocket expenses in so doing.
Annual Report. The Company will provide a copy of its Annual Report on
Form 10-K for the year ended December 31, 2001, without charge, to any
stockholder who makes a written request to Richard Mack, Investor Relations,
ScanSoft, Inc., 9 Centennial Drive, Peabody MA 01960
Not Soliciting Materials. The information contained in this Proxy
Statement under the captions "Report of the Audit Committee", "Compensation
Committee Report on Compensation" and "Performance Graph" shall not be deemed to
be "soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor will such information be incorporated by reference into any
future filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent that the Company
specifically incorporates it by reference in such filing.
By Order of the Board of Directors,
KATHARINE A. MARTIN
Secretary
Peabody, Massachusetts
April 30, 2002
21
ANNEX A
2000 PLAN
1. Purposes of the Plan. The purposes of this 2000 Stock Plan are:
- to attract and retain the best available personnel for positions of
substantial responsibility,
- to provide additional incentive to employees, Directors and
Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws,
U.S. federal and state securities laws, the Code, any stock exchange
or quotation system on which the Common Stock is listed or quoted and
the applicable laws of any foreign country or jurisdiction where
Options or Stock Purchase Rights are, or will be, granted under the
Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the committee of Directors appointed by the Board in
accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
(g) "Company" means ScanSoft, Inc. a Delaware corporation.
(h) "Consultant" means any person, including an advisor, engaged by the
Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i)
any leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. For purposes of Incentive Stock Options,
no such leave may exceed ninety days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. If
reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated
as an Incentive Stock Option and shall be treated for tax purposes as
a Nonstatutory Stock Option. Neither service as a Director nor payment
of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
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(m) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or system for the market trading day on
the time of determination, as reported in The Wall Street Journal
or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, the Fair Market Value
of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market
trading day prior to the day of determination, as reported in The
Wall Street Journal or such other source as the Administrator
deems reliable; or
(iii) In the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code
and the regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase
Right grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
(s) "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of
the Plan.
(t) "Optioned Stock" means the Common Stock subject to an Option or Stock
Purchase Right.
(u) "Optionee" means the holder of an outstanding Option or Stock Purchase
Right granted under the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this 2000 Stock Plan.
(x) "Restricted Stock" means shares of Common Stock acquired pursuant to a
grant of Stock Purchase Rights under Section 11 of the Plan.
(y) "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase Right.
The Restricted Stock Purchase Agreement is subject to the terms and
conditions of the Plan and the Notice of Grant.
(z) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(aa) "Section 16(b)" means Section 16(b) of the Exchange Act.
(bb) "Service Provider" means an Employee, Director or Consultant.
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(cc) "Share" means a share of the Common Stock, as adjusted in accordance
with Section 13 of the Plan.
(dd) "Stock Purchase Rights" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of
Grant.
(ee) "Subsidiary" means a "Subsidiary Corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 4,750,000 (2,250,000 subject to Stockholder approval) Shares.
The Shares may be authorized, but unissued, or reacquired Common Stock.
(i) If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, the unpurchased Shares which
were subject thereto shall become available for future grant or sale
under the Plan (unless the Plan has terminated); provided, however,
that Shares that have actually been issued under the Plan, whether upon
exercise of an Option or Right, shall not be returned to the Plan and
shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the
Company at their original purchase price, such Shares shall become
available for future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. Different Committees with respect
to different groups of Service Providers may administer the Plan.
(ii) Section 162(m). To the extent that the Administrator determines
it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section
162(m) of the Code, the Plan shall be administered by a Committee
of two or more "outside directors" within the meaning of Section
162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the
requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have
the authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder.
(iii) to determine the number of shares of Common Stock to be covered
by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited
to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on
performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation
regarding any
A-3
Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to construe and interpret the terms of the Plan and awards granted
pursuant to the Plan;
(vii) to prescribe, amend and rescind rules and regulations relating to
the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax
treatment under foreign tax laws;
(viii) to modify or amend each Option or Stock Purchase Right (subject
to Section 15(c) of the Plan), including the discretionary
authority to extend the post-termination exercisability period of
Options longer than is otherwise provided for in the Plan;
(ix) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued
upon exercise of an Option or Stock Purchase Right that number of
Shares having a Fair Market Value equal to the amount required to
be withheld. The Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be
withheld is to be determined. All elections by an Optionee to have
Shares withheld for this purpose shall be made in such form and
under such conditions as the Administrator may deem necessary or
advisable;
(x) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xi) to make all other determinations deemed necessary or advisable for
administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by the Optionee during any
calendar year (under all plans of the Company and any Parent or
Subsidiary) exceeds $100,000, such Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in
which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is
granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they
interfere in any way with the Optionee's right or the Company's right
to terminate such relationship at any time, with or without cause.
(c) The exercise price of any Option outstanding or to be granted in the
future under the Plan shall not be reduced or cancelled and re-granted
at a lower exercise price (including pursuant to any "6 month and 1
day" cancellation and re-grant scheme), regardless of 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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(d) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of the
Company, Options to purchase more than 750,000 Shares.
(ii) In connection with his or her initial service, a Service Provider
may be granted Options to purchase up to an additional 750,000
Shares, which shall not count against the limit set forth in
subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of the Company
in which it was granted (other than in connection with a
transaction described in Section 13), the cancelled Option will be
counted against the limits set forth in subsections (i) and (ii)
above.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
effective upon its adoption by the Board. It shall continue in effect for a term
of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option granted to an Employee
who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant, and the per Share
exercise price shall be 100% of the Fair Market Value per share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share exercise
price shall be no less than 100% of the Fair Market Value per
Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a per
Share exercise price of less than 100% of the Fair Market Value
per Share on the date of grant pursuant to a merger or other
corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is granted,
the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied
before the Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including
the method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at
the time of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
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(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair
Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Option shall be
exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation
program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the
Administrator and set forth in the Option Agreement. Unless the
Administrator provides otherwise, vesting of Options granted hereunder
shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
(1) An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option,
and (ii) full payment for the Shares with respect to which the
Option is exercised. Full payment may consist of any consideration
and method of payment authorized by the Administrator and permitted
by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or
her spouse. Until the Shares are issued (as evidenced by the
appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or
receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of
the Option. The Company shall issue (or cause to be issued) such
Shares promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is
prior to the date the Shares are issued, except as provided in
Section 13 of the Plan.
(2) Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option within such
period of time as is 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). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for three (3) months
following the Optionee's termination. If, on the date of termination,
the Optionee is not vested as to his or her entire Option, the Shares
covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option
within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the
Plan.
(d) Disability of Optionee. If an Optionee ceases to be a Service Provider
as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option
Agreement to the extent the Option is vested on the date of termination
(but in no event
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later than the expiration of the term of such Option as set forth in
the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If, on the date of termination,
the Optionee is not vested as to his or her entire Option, the Shares
covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option
within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(e) Death of Optionee. If an Optionee dies while a Service Provider, the
Option may be exercised within such period of time as specified in the
Option Agreement (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant), by the Optionee's
estate or by a person who acquires the right to exercise the Option by
bequest or inheritance, but only to the extent that the Option is
vested on the date of death. In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for twelve (12)
months following the Optionee's termination. If, at the time of death,
the Optionee is not vested as to his or her entire Option, the Shares
covered by the unvested portion of the Option shall immediately revert
to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws
of descent or distribution. If the Option is not so exercised within
the time specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(f) Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either alone,
in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it
shall advise the offeree in writing or electronically, by means of a
Notice of Grant, of the terms, conditions and restrictions related to
the offer, including the number of Shares that the offeree shall be
entitled to purchase, the price to be paid, and the time within which
the offeree must accept such offer. The offer shall be accepted by
execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's service with the Company 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 or the purchaser to the Company. The
repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Administrator in its sole
discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is exercised,
the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is
entered upon the records of the duly authorized transfer agent of the
Company. No adjustment will be made for a dividend or other right for
which the record date is prior to the date the Stock Purchase Right is
exercised, except as provided in Section 13 of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may
A-7
be exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions, as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock
covered by each outstanding Option and Stock Purchase Right, and the
number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Options or Stock Purchase
Rights have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option or Stock Purchase Right,
as well as the price per share of Common Stock covered by each such
outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of
Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common
Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number of price of shares of Common
Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide
for an Optionee to have the right to exercise his or her Option until
ten (10) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option would not
otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased
upon exercise of an Option or Stock Purchase Right shall lapse as to
all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has
not been previously exercised, an Option or Stock Purchase Right will
terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the Company with or
into another Corporation, or the sale of substantially all of the
assets of the Company, each outstanding Option and Stock Purchase Right
shall be assumed or an equivalent option or right substituted by the
successor corporation or a Parent or Subsidiary of the successor
corporation. In the event that the successor corporation refuses to
assume or substitute for the Option or Stock Purchase Right, the
Optionee shall fully vest in and have the right to exercise the Option
or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable
in lieu of assumption or substitution in the event of a merger or sale
of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Purchase Right shall be fully
vested and exercisable for a period of fifteen (15) days from the date
of such notice, and the Option or Stock Purchase Right shall terminate
upon the expiration of such period. For the purposes of this paragraph,
the Option or Stock Purchase Right shall be considered assumed if,
following the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject
to the Option or Stock Purchase Right immediately prior to the merger
or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration,
the type of consideration chosen by the holders of a majority of the
outstanding Shares); provided, however, that if such consideration
received in the merger or sale of assets is solely common stock of the
successor corporation or its
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Parent, the Administrator may, with the consent of the successor
corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right, to be
solely common stock of the successor corporation or its Parent equal in
fair market value to the per share consideration received by holders of
Common Stock in the merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. Amendment and Termination of Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder approval of
any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the
Optionee and the Company. Termination of the Plan shall not affect the
Administrator's ability to exercise the powers granted to it hereunder
with respect to Options granted under the Plan prior to the date of
such termination.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the exercise
of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person
exercising such Option or Stock Purchase Right to represent and warrant
at the time any such exercise that the Shares are being purchased only
for investment and without any present intention to sell or distribute
such Shares if, in the opinion of counsel for the Company, such a
representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
A-9
ANNEX B
DIRECTORS' PLAN
1. Purposes of the Plan. The purposes of this Directors' Stock Option Plan
are to attract and retain the best available personnel for service as Directors
of the Company, to provide additional incentive to the Outside Directors of the
Company to serve as Directors, and to encourage their continued service on the
Board.
All options granted hereunder shall be "nonstatutory stock options".
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean ScanSoft, Inc., a Delaware corporation.
(e) "Continuous Status as a Director" shall mean the absence of any
interruption or termination of service as a Director.
(f) "Director" shall mean a member of the Board.
(g) "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient
in and of itself to constitute "employment" by the Company.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(i) "Option" shall mean a stock option granted pursuant to the Plan. All
options shall be nonstatutory stock options (i.e., options that are
not intended to qualify as incentive stock options under Section 422
of the Code).
(j) "Optioned Stock" shall mean the Common Stock subject to an Option.
(k) "Optionee" shall mean an Outside Director who receives an Option.
(l) "Outside Director" shall mean a Director who is not an Employee.
(m) "Parent" shall mean a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(n) "Plan" shall mean this 1995 Directors' Stock Option Plan.
(o) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(p) "Subsidiary" shall mean a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 820,000 (220,000 shares subject to stockholder approval)
Shares (the "Pool") of Common Stock. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. If Shares which were acquired upon exercise of an Option
are subsequently repurchased by the Company, such Shares shall not in any event
be returned to the Plan and shall not become available for future grant under
the Plan.
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4. Administration of and Grants of Options under the Plan.
(a) Administrator. Except as otherwise required herein, the Plan shall be
administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
automatic and nondiscretionary and shall be made strictly in accordance
with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of
Shares to be covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an Option to
purchase Shares (the "First Option") as follows: (A) with respect
to persons who are Outside Directors on the effective date of this
Plan, as determined in accordance with Section 6 hereof, 20,000
shares on such effective date, and (B) with respect to any other
person, on June 27, 2001, the plan was amended to increase the
initial grant from 20,000 shares to 50,000 shares on the date on
which such person first becomes an Outside Director, whether
through election by the shareholders of the Company or appointment
by the Board of Directors to fill a vacancy.
(iii) After the First Option has been granted to an Outside Director,
such Outside Director shall thereafter be automatically granted
an Option to purchase 5,000 Shares (a "Subsequent Option") on
January 1 of each year, with the first such grant being made on
January 1, 1997, provided that, on such date, he or she shall
have served on the Board for at least six (6) months prior to the
date of such Annual Meeting. The plan was further amended on June
27, 2001 to increase the subsequent option from 5,000 shares to
15,000 shares.
(iv) Each Outside Director shall be automatically granted an Option
(Subsequent Option) to purchase Shares as follows: (A) with
respect to persons who are Outside Directors on January 23, 01,
40,000 shares were granted on June 27, 2001.
(v) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, in the event that a grant would cause the number of Shares
subject to outstanding Options plus the number of Shares
previously purchased upon exercise of Options to exceed the Pool,
then each such automatic grant shall be for that number of Shares
determined by dividing the total number of Shares remaining
available for grant by the number of Outside Directors receiving
an Option on such date on the automatic grant date. Any further
grants shall then be deferred until such time, if any, as
additional Shares become available for grant under the Plan
through action of the shareholders to increase the number of
Shares which may be issued under the Plan or through cancellation
or expiration of Options previously granted hereunder.
(vi) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any grant of an Option made before the Company has
obtained shareholder approval of the Plan in accordance with
Section 17 hereof shall be conditioned upon obtaining such
shareholder approval of the Plan in accordance with Section 17
hereof.
(vii) The terms of each First Option granted hereunder shall be as
follows:
(1) the First Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth
in Section 9 hereof.
(2) the exercise price per Share shall be 100% of the fair market
value per Share on the date of grant of the First Option,
determined in accordance with Section 8 hereof.
(3) the First Option shall become exercisable in installments
cumulatively as to 25% of the Shares subject to the First Option
on each of the first, second, third and fourth anniversaries of
the date of grant of the Option.
(vii) The terms of each Subsequent Option granted hereunder shall be as
follows:
(1) the Subsequent Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth
in Section 9 hereof.
B-2
(2) the exercise price per Share shall be 100% of the fair market
value per Share on the date of grant of the Subsequent Option,
determined in accordance with Section 8 hereof. The exercise
price of any Option outstanding or to be granted in the future
under the Plan shall not be reduced or cancelled and re-granted
at a lower exercise price (including pursuant to any "6 month and
1 day" cancellation and re-grant scheme), regardless of whether
or not the cancelled Options are put back into the available pool
for grant; replace any 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.
(3) the Subsequent Option shall become exercisable as to one hundred
percent (100%) of the Shares subject to the Subsequent Option on
the first anniversary of the date of grant of the Subsequent
Option.
(c) Powers of the Board. Subject to the provisions and restrictions of the
Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with
Section 8(b) of the Plan, the fair market value of the Common Stock;
(ii) to determine the exercise price per share of Options to be
granted, which exercise price shall be determined in accordance with
Section 8(a) of the Plan; (iii) to interpret the Plan; (iv) to
prescribe, amend and rescind rules and regulations relating to the
Plan; (v) to authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option previously
granted hereunder; and (vi) to make all other determinations deemed
necessary or advisable for the administration of the Plan.
(d) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all
Optionees and any other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the President or his or her
designee reasonably believes that an Optionee has committed an act of
misconduct, the President may suspend the Optionee's right to exercise
any option pending a determination by the Board of Directors (excluding
the Outside Director accused of such misconduct). If the Board of
Directors (excluding the Outside Director accused of such misconduct)
determines an Optionee has committed an act of embezzlement, fraud,
dishonesty, nonpayment of an obligation owed to the Company, breach of
fiduciary duty or deliberate disregard of the Company rules resulting
in loss, damage or injury to the Company, or if an Optionee makes an
unauthorized disclosure of any Company trade secret or confidential
information, engages in any conduct constituting unfair competition,
induces any Company customer to breach a contract with the Company or
induces any principal for whom the Company acts as agent to terminate
such agency relationship, neither the Optionee nor his or her estate
shall be entitled to exercise any option whatsoever. In making such
determination, the Board of Directors (excluding the Outside Director
accused of such misconduct) shall act fairly and shall give the
Optionee an opportunity to appear and present evidence on Optionee's
behalf at a hearing before the Board or a committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. Term of Plan; Effective Date. The Plan shall become effective on the
effectiveness of the registration statement under the Securities Act of 1933
relating to the Company's initial public offering of securities. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 13 of the Plan.
7. Term of Options. The term of each Option shall be ten (10) years from
the date of grant thereof.
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8. Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be 100% of the fair market value
per Share on the date of grant of the Option.
(b) Fair Market Value. The fair market value shall be determined by the
Board; provided, however, that where there is a public market for the Common
Stock, the fair market value per Share shall be the mean of the bid and asked
prices of the Common Stock in the over-the-counter market on the date of grant,
as reported in The Wall Street Journal (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") System) or, in the event the Common Stock is traded on the Nasdaq
National Market or listed on a stock exchange, the fair market value per Share
shall be the closing price on such system or exchange on the date of grant of
the Option, as reported in The Wall Street Journal. With respect to any Options
granted hereunder concurrently with the initial effectiveness of the Plan, the
fair market value shall be the Price to Public as set forth in the final
prospectus relating to such initial public offering.
(c) Form of Consideration. The consideration to be paid for the Shares to
be issued upon exercise of an Option shall consist entirely of cash, check,
other Shares of Common Stock having a fair market value on the date of surrender
equal to the aggregate exercise price of the Shares as to which said Option
shall be exercised (which, if acquired from the Company, shall have been held
for at least six months), or any combination of such methods of payment and/or
any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times as are set forth in Section 4(b)
hereof; provided, however, that no Options shall be exercisable prior to
shareholder approval of the Plan in accordance with Section 17 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as a Director. If an Outside Director ceases to
serve as a Director, he or she may, but only within ninety (90) days after the
date he or she ceases to be a Director of the Company, exercise his or her
Option to the extent that he or she was entitled to exercise it at the date of
such termination. Notwithstanding the foregoing, in no event may the Option be
exercised after its term set forth in Section 7 has expired. To the extent that
such Outside Director was not entitled to exercise an Option at the date of such
termination, or does not exercise such Option (which he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding Section 9(b) above, in the
event a Director is unable to continue his or her service as a Director with the
Company as a result of his or her total and permanent disability (as defined in
Section 22(e)(3) of the Internal Revenue Code), he or she may, but only within
six
B-4
(6) months (or such other period of time not exceeding twelve (12) months as is
determined by the Board) from the date of such termination, exercise his or her
Option to the extent he or she was entitled to exercise it at the date of such
termination. Notwithstanding the foregoing, in no event may the Option be
exercised after its term set forth in Section 7 has expired. To the extent that
he or she was not entitled to exercise the Option at the date of termination, or
if he or she does not exercise such Option (which he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee:
(i) During the term of the Option who is, at the time of his or her
death, a Director of the Company and who shall have been in
Continuous Status as a Director since the date of grant of the
Option, the Option may be exercised, at any time within six (6)
months following the date of death, by the Optionee's estate or by
a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent of the right to exercise
that would have accrued had the Optionee continued living and
remained in Continuous Status as Director for six (6) months (or
such lesser period of time as is determined by the Board) after the
date of death. Notwithstanding the foregoing, in no event may the
Option be exercised after its term set forth in Section 7 has
expired.
(ii) Within three (3) months after the termination of Continuous Status
as a Director, the Option may be exercised, at any time within six
(6) months following the date of death, by the Optionee's estate or
by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
Notwithstanding the foregoing, in no event may the option be
exercised after its term set forth in Section 7 has expired.
10. Nontransferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder). The
designation of a beneficiary by an Optionee does not constitute a transfer. An
Option may be exercised during the lifetime of an Optionee only by the Optionee
or a transferee permitted by this Section.
11. Adjustments Upon Changes in Capitalization; Corporate Transactions.
(a) Adjustment. Subject to any required action by the shareholders of the
Company, the number of shares of Common Stock covered by each outstanding
Option, and the number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option.
(b) Corporate Transactions. In the event of (i) a dissolution or
liquidation of the Company, (ii) a sale of all or substantially all of the
Company's assets, (iii) a merger or consolidation in which the Company is not
the surviving corporation, or (iv) any other capital reorganization in which
more than fifty percent (50%) of the shares of the Company entitled to vote are
exchanged, the Company shall give to the Eligible Director, at the time of
adoption of the 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,
B-5
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 the Company or acquiring its business by reason of
such liquidation, dissolution, sale, merger, consolidation or reorganization.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable; provided
that, to the extent necessary and desirable to comply with Rule 16b-3 under the
Exchange Act (or any other applicable law or regulation), the Company shall
obtain approval of the shareholders of the Company to Plan amendments to the
extent and in the manner required by such law or regulation. Notwithstanding the
foregoing, the provisions set forth in Section 4 of this Plan (and any other
Sections of this Plan that affect the formula award terms required to be
specified in this Plan by Rule 16b-3) shall not be amended more than once every
six months, other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder.
(b) Effect of Amendment or Termination. Any such amendment or termination
of the Plan that would impair the rights of any Optionee shall not affect
Options already granted to such Optionee and such Options shall remain in full
force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance. As a
condition to the exercise of an Option, the Company may require the person
exercising such Option to represent and warrant at the time of any such exercise
that the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares, if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company at or prior to the first annual
meeting of shareholders held subsequent to the granting of an Option hereunder.
If such shareholder approval is obtained at a duly held shareholders' meeting,
it may be obtained by the affirmative vote of the holders of a majority of the
outstanding shares of the Company present or represented and entitled to vote
thereon. If such shareholder approval is obtained by written consent, it may be
obtained by the written consent of the holders of a majority of the outstanding
shares of the Company. Options may be granted, but not exercised, before such
shareholder approval.
B-6
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SCANSOFT, INC.
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 14, 2002
The undersigned stockholder of ScanSoft, Inc., a Delaware corporation (the
"Company"), hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and accompanying Proxy Statement each dated April 30, 2002 and
hereby appoints Paul A. Ricci, Michael K. Tivnan, and Richard S. Palmer, or any
of them, proxies and attorneys-in-fact, each with full power of substitution, to
represent the undersigned at the Annual Meeting of Stockholders of ScanSoft,
Inc. to be held on June 14, 2002 at 9:00 a.m., local time at the Company's
headquarters at 9 Centennial Drive, Peabody, Massachusetts, and at any
adjournment thereof, and to vote all shares of Common Stock of the Company held
of record by the undersigned on April 29, 2002 as hereinafter specified upon the
proposals listed on the reverse side.
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE ANNUAL MEETING OF STOCKHOLDERS,
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE.
PLEASE MARK VOTES AS IN THIS EXAMPLE. [X]
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE PROPOSALS BELOW
AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING OR MAY OTHERWISE BE ALLOWED TO BE CONSIDERED AT THE MEETING.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSALS BELOW.
THIS PROXY WILL BE VOTED "FOR" ALL OF THE NOMINEES UNLESS SUCH AUTHORITY IS
SPECIFICALLY WITHHELD AS TO ANY ONE NOMINEE OR NOMINEES.
1. To elect the following individuals as directors of the Company, to serve
until his or her successor shall be duly elected and qualified:
VOTE FOR [ ] WITHHOLD VOTE [ ]
Robert J. Frankenberg Herve Gallaire Katharine A. Martin Mark B. Myers
Paul A. Ricci Michael K. Tivnan Robert G. Teresi
Vote For, except vote withheld from the following
nominee(s) ______________________________
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
(REVERSE SIDE)
2. To approve an amendment to the 2000 Stock Option Plan to increase the number
of shares that may be issued under the Plan from 2,500,000 to 4,750,000, an
increase of 2,250,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To approve an amendment to the 1995 Directors' Stock Option Plan to increase
the number of shares that may be issued under the Plan from 570,000 to
820,000, an increase of 250,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To ratify the appointment of PricewaterhouseCoopers LLP as the independent
public accountants for the period ending December 31, 2002.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. To transact such other business as may properly come before the meeting or
any postponement or adjournment thereof.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
MARK HERE FOR ADDRESS CHANGE
AND NOTE AT LEFT [ ]
Please sign exactly as your
name appears hereon. When
shares are registered in the
names of two or more persons,
whether as joint tenants, as
community property or
otherwise, both or all of
such persons should sign.
When signing as attorney,
executor, administrator,
trustee, guardian or another
fiduciary capacity, please
give full title as such. If a
corporation, please sign in
full corporate name by
President or other authorized
person. If a partnership,
please sign in partnership
name by authorized person.
Signature __________________________________ Date: _____________
Signature: __________________________________ Date: _____________