<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED SEPTEMBER 27, 1998
COMMISSION FILE NUMBER 0-27038
------------------------
VISIONEER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
34800 CAMPUS DRIVE
FREMONT, CA 94555
(510) 608-0300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares of the registrant's Common Stock, $0.001 par value,
outstanding as of October 31, 1998 was 19,818,300.
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<PAGE> 2
VISIONEER, INC.
FORM 10-Q
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Condensed Balance Sheets at September 30, 1998 and 3
December 31, 1997.......................................
(b) Condensed Statements of Operations for the three month 4
and nine month periods ended September 30, 1998 and
September 30, 1997......................................
(c) Condensed Statements of Cash Flows for the nine month 5
periods ended September 30, 1998 and September 30, 1997.....
(d) Notes to Condensed Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations...................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 17
Item 2. Changes in Securities....................................... 17
Item 3. Defaults Upon Senior Securities............................. 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 5. Other Information........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
Signatures........................................................... 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VISIONEER, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 12,823 $ 11,423
Short-term investments.................................... 201 3,029
Accounts receivable, less allowances of $3,820 and
$5,315................................................. 11,559 12,295
Inventory................................................. 6,466 3,078
Prepaid expenses and other current assets................. 605 1,059
-------- --------
Total current assets.............................. 31,654 30,884
Property and equipment, net................................. 1,191 2,454
Other assets................................................ 65 212
-------- --------
$ 32,910 $ 33,550
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings................................ $ 7,372 $ 2,821
Accounts payable.......................................... 11,869 12,837
Other accrued liabilities................................. 4,360 6,837
-------- --------
Total current liabilities......................... 23,601 22,495
-------- --------
Long-term liability......................................... 91 125
-------- --------
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares
authorized; 19,816,425 and 19,563,854 shares issued and
outstanding............................................ 20 20
Additional paid-in-capital................................ 87,979 87,682
Deferred compensation relating to stock options........... (92) (150)
Notes receivable from stockholders........................ -- (44)
Accumulated deficit....................................... (78,689) (76,578)
-------- --------
Total stockholders' equity........................ 9,218 10,930
-------- --------
$ 32,910 $ 33,550
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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VISIONEER, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net revenues....................................... $19,238 $17,477 $59,479 $ 37,958
Cost of revenues................................... 14,419 12,060 44,132 37,230
------- ------- ------- --------
Gross profit..................................... 4,819 5,417 15,347 728
------- ------- ------- --------
Operating expenses:
Research and development......................... 1,140 1,573 3,486 6,977
Selling, general and administrative.............. 4,323 4,745 14,209 18,093
------- ------- ------- --------
Total operating expenses................. 5,463 6,318 17,695 25,070
------- ------- ------- --------
Operating loss..................................... (644) (901) (2,348) (24,342)
Interest and other income, net..................... (40) 225 237 839
------- ------- ------- --------
Net loss......................................... $ (684) $ (676) $(2,111) $(23,503)
======= ======= ======= ========
Net loss per share: basic.......................... $ (0.03) $ (0.03) $ (0.11) $ (1.21)
======= ======= ======= ========
Net loss per share: diluted........................ $ (0.03) $ (0.03) $ (0.11) $ (1.21)
======= ======= ======= ========
Weighted average common shares and equivalents:
Basic and diluted................................ 19,776 19,405 19,689 19,359
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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VISIONEER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(2,111) $(23,503)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,444 1,883
Accounts receivable allowances......................... (1,495) 819
Other.................................................. 102 67
Changes in assets and liabilities:
Accounts receivable.................................. 2,231 (1,442)
Inventory............................................ (3,388) 1,590
Prepaid expenses and other current assets............ 454 (171)
Other assets......................................... 147 73
Accounts payable..................................... (968) 1,211
Other accrued liabilities and long term liability.... (2,511) 2,425
------- --------
Net cash used in operating activities....................... (6,095) (17,048)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of short-term investments....................... 2,828 7,245
Capital expenditures for property and equipment........... (181) (534)
------- --------
Net cash provided by investing activities................... 2,647 6,711
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank borrowings, net........................... 4,551 --
Proceeds from issuance of common stock, net............... 297 739
------- --------
Net cash provided by financing activities................... 4,848 739
------- --------
Net increase (decrease) in cash and cash equivalents........ 1,400 (9,598)
Cash and cash equivalents at beginning of period............ 11,423 22,391
------- --------
Cash and cash equivalents at end of period.................. $12,823 $ 12,793
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
VISIONEER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION:
The accompanying unaudited condensed financial statements of Visioneer,
Inc. (the "Company" or "Visioneer") have been prepared in accordance with
generally accepted accounting principles. In the opinion of management, these
interim condensed financial statements reflect all adjustments, consisting of
normal recurring adjustments necessary to present fairly the financial position,
results of operations, and cash flows at September 30, 1998, and for other
periods presented. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information normally included in financial statements and
related footnotes prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The accompanying financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
The results for the three and nine month periods ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998, or any future period.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The Company's fiscal year ends on the Sunday closest to December 31.
Accordingly, fiscal 1998 will end January 3, 1999 and will contain 53 weeks,
fiscal 1997 ended December 28, 1997 and contained 52 weeks. The Company reports
quarterly results on thirteen-week quarterly periods, each ending on the Sunday
closest to month-end. For purposes of presentation, the Company has indicated
its accounting year as ending December 31 and its interim quarterly periods as
ending on the respective calendar month-end.
NOTE 2. BALANCE SHEET COMPONENTS:
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials...................................... $ 677 $1,536
Work-in-process.................................... 357 329
Finished goods..................................... 5,432 1,213
------ ------
$6,466 $3,078
====== ======
</TABLE>
NOTE 3. NET LOSS PER SHARE:
Net loss per share is calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128 -- "Earnings per Share"
(SFAS No. 128), effective beginning in 1997. SFAS No. 128 requires the Company
to report both basic earnings per share, which is based on the weighted average
number of common shares outstanding, and diluted earnings per share, which is
based on the weighted average number of common shares outstanding and dilutive
potential common shares outstanding. Options to purchase 2,813,679 shares of
common stock at a weighted average price of $2.09 per share were outstanding at
September 30, 1998 but were not included in the computation of diluted EPS
because their impact was anti-dilutive. For the quarter ended September 30,
1997, options outstanding, aggregating 2,517,992 with a
6
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VISIONEER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
weighted average exercise price of $3.95, were excluded from diluted earnings
per share calculations because they were also anti-dilutive in view of the
losses incurred by the Company.
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS:
In September 1997, the Financial Accounting Standards Board issued two new
Statements of Financial Accounting Standards. SFAS No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income within a financial statement. This Statement requires the
Company to report additional information on comprehensive income to supplement
the reporting of income. SFAS No. 130 is effective for the year ending December
31, 1998. Comparative financial statements provided for earlier periods are
required to be reclassified so that comprehensive income is displayed in a
comparative format for all periods presented. SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," establishes standards for
reporting information about operating segments in annual and interim financial
statements. This Statement also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997; interim
disclosure is not required in the year of adoption. The Company adopted SFAS No.
130 during the first quarter of 1998 and to-date, there are no differences
between the net loss and comprehensive net loss for the three and nine month
periods ended September 30, 1998 and 1997. The Company will adopt SFAS No. 131
as of the year ending December 31, 1998 and is currently studying its
provisions.
NOTE 5. DEBT:
On March 19, 1998, the Company amended its $7.5 million line of credit
increasing the line to $12.5 million and extending the expiration date to March
1999. The line of credit is collateralized by a security interest in the
Company's assets. At September 30, 1998, the Company had bank borrowings of $7.4
million and outstanding letters of credit of $1.7 million. At September 30,
1998, the Company was not in compliance with certain conditions of the loan
covenants. Subsequently, the Company was able to secure a waiver of covenant
defaults from its bank.
7
<PAGE> 8
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
Financial Statements. Except for the historical information contained herein,
the matters discussed in this document are forward-looking statements that
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Potential risks
and uncertainties include, without limitation, those mentioned in this report
and, in particular, the factors described under "Additional Factors That May
Affect Future Results," and those mentioned in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OVERVIEW
Visioneer was incorporated in California in March 1992, and commenced
shipment of its initial product in the first quarter of 1994. In December 1995,
the Company reincorporated in Delaware in conjunction with its initial public
offering which raised $49.9 million, net of issuance costs. The Company has
experienced sequential growth in annual net revenues since the first year of
product shipments. The dramatic annual growth rates from 1994 to 1996 were
directly attributed to dramatic growth within the sheetfed scanner and document
management software markets, the development of OEM relationships and new
product introductions. In contrast, the slower growth from 1996 to 1998 was
attributed to several factors. First, the grayscale sheetfed scanner market
declined sharply with the advent of color sheetfed scanners. The transition of
the market from grayscale to color occurred at a much faster rate than the
Company had anticipated and, as a result, the Company recorded significant
charges relating to grayscale inventory reserves, purchase order commitments and
price protection charges in the first half of 1997. Second, the Company was late
in introducing a color scanner product and, as a result, did not capture planned
market share. Third, the Company's slower growth was further affected by
increased competition which caused overall sheetfed scanner average selling
prices to drop significantly. And finally, the growth of the sheetfed scanner
market, despite its earlier significant growth rates, has leveled off, and, in
fact, recent independent market reports show the sheetfed scanner market
declining in size.
A key component of the Company's business strategy is to penetrate the much
larger and rapidly growing flatbed market by leveraging off of its award winning
software. Historically, the Company has bundled its PaperPort software with its
scanner products, which has provided significant product differentiation. In the
second quarter of 1997, the Company decided to continue to leverage the merits
of its software in an attempt to penetrate the flatbed scanner market. The
PaperPort flatbed scanner line was introduced in September 1997. Despite an
intensely competitive market, the Company's efforts have been successful. In
addition, the Company introduced a new scanner line in the quarter ended
September 30, 1998: the PaperPort OneTouch 5300, that features the same button
functionality as the 36-bit PaperPort OneTouch but with 300x600 DPI and a lower
ASP (Actual Sales Price). Recent PC Data reports indicate the Company holds
approximately 10% share of the U.S. flatbed market. There can be no assurance
that the Company will be able to increase or maintain its share of the flatbed
scanner market.
In addition, the Company will continue to focus research and development
resources on software development. The ease of use and intelligent user
interface of the Company's software products have been, and will continue to be,
a key differentiator within the scanner and document and image management
market.
The success of the Company will depend on its ability to improve gross
margins and generate sales of PaperPort products significantly in excess of
sales during recent quarters. These in turn will depend in part on the ability
of the Company and its distributors, resellers and OEM partners to convince
end-users to adopt paper and image input systems for the desktop and to educate
end-users about the benefits of the Company's products. There can be no
assurance that the market for the Company's products will develop or that the
Company will achieve market acceptance of its products. Despite experiencing a
number of quarters of profitability throughout its brief history, the Company
has incurred annual net losses since inception. There can be no assurance that
the Company will be able to attain consistent quarterly profitability or attain
annual profitability in the near future. As of September 30, 1998, the Company
had an accumulated deficit of
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<PAGE> 9
$78.7 million. Although the Company has experienced revenue growth over the
prior year periods, these growth rates may not be sustainable and are not
necessarily indicative of future operating results.
RESULTS OF OPERATIONS
The following table presents, as a percentage of net revenues, certain
selected financial data for the three month and nine month periods ended
September 30, 1998 and September 30, 1997.
VISIONEER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................ 75.0 69.0 74.2 98.1
----- ----- ----- -----
Gross profit.............................................. 25.0 31.0 25.8 1.9
----- ----- ----- -----
Operating expenses:
Research and development.................................. 5.9 9.0 5.9 18.4
Selling, general and administrative....................... 22.5 27.1 23.9 47.7
----- ----- ----- -----
Total operating expenses.......................... 28.4 36.2 29.7 66.0
----- ----- ----- -----
Operating loss.............................................. (3.3) (5.2) (3.9) (64.1)
Interest and other income, net.............................. (0.2) 1.3 0.4 2.2
----- ----- ----- -----
Net loss.................................................... (3.6)% (3.9)% (3.5)% (61.9)%
===== ===== ===== =====
</TABLE>
Net Revenues
Total net revenues increased 10% to $19.2 million for the three month
period ended September 30, 1998, from $17.5 million for the comparable period in
1997, due primarily to an increase in product revenues, partially offset by a
decrease in royalty and development revenues. The increase in product revenues
was attributable to significant increases in hardware sales. However, the
percentage increase in unit volume exceeded the percentage increase in revenue
as prices continued to erode in the increasingly competitive flatbed scanner
market. Royalty and development revenues decreased as a result of the reduction
in royalty revenues from Hewlett-Packard. The growth in hardware sales was led
by the strong demand for the Company's flatbed scanners introduced in September
1997. In addition, the Company introduced a new flatbed scanner in the quarter
ended September 30, 1998: the PaperPort OneTouch 5300, that features the same
button functionality as the 36-bit PaperPort OneTouch but with 300x600 Dots Per
Inch (DPI), which is the expressed optical resolution of the scanner, and a
lower ASP (Actual Sales Price). Total net revenues, for the nine month period
ended September 30, 1998, increased 57% to $59.5 million from $38.0 million for
the comparable period in 1997. This increase is attributed to the strong demand
and growth of the flatbed scanner market offset by the decrease in royalty and
development revenue from Hewlett-Packard. However, the percentage increase in
unit volume exceeded the percentage increase in revenue as prices continued to
erode in the increasingly competitive flatbed scanner market. The Company's
software sales for the three month period ended September 30, 1998, decreased by
17% to $1.9 million compared to $2.3 million for the comparable period in 1997.
The Company's software sales declined in units and dollars due to the following
factors; (1) a soft retail market, and (2) the price reduction in the second
quarter 1998 of the Company's PaperPort Deluxe software from an ASP (Actual
Sales Price) of $79.99 to $49.99. However, for the nine month period ended
September 30, 1998, software sales increased 21% to $7.5 million compared to
$6.2 million for the comparable period in 1997. This was primarily due to strong
first quarter 1998 sales of the Company's PaperPort Deluxe, as well as the
introduction of three new software products; ProOCR, ScannerSuite and Visual
Explorer. In accordance with the Company's revenue recognition policy, certain
revenues have been deferred on new product introductions sold into the reseller
and distribution channel until
9
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sell through information validates that the product is actually being sold
through the respective channels. Overall, average selling prices of scanners and
software continued their downward trend in an increasingly competitive market.
Due to these competitive pressures, the Company announced a price reduction on
October 1, 1998 on its flatbed scanners. This price reduction may have an
adverse impact on the Company's quarterly and annual revenues if unit volumes
are not correspondingly increased. The Company expects that the price reduction
will result in lower gross margins with regard to the Company's hardware
products.
Despite declining average retail prices, net revenues from international
sales held essentially flat for the three month and nine month periods ended
September 30, 1998 as compared to the same periods in 1997. In order to increase
profitability for its international operations, in April 1997, the Company
terminated its local sales operations for Europe and the Asia-Pacific regions
and began searching for distribution partners who have established sales outlets
and local country expertise. This strategy, designed to minimize expenses and
maximize profitability for the regions, has not been fully implemented, and it
is unlikely that the Company will be able to realize significant increases in
the near future, in absolute terms, in revenues from international operations.
The introduction of major new products and enhancements of existing
products, such as PaperPort flatbed scanners and PaperPort ScannerSuite as well
as the latest version of PaperPort Deluxe software, are expected to have a
positive impact on the Company's quarterly and annual revenues. As is
characteristic of the initial stages of personal computer product life cycles,
the Company expects that sales volumes of new products will initially increase
in the months following introduction due to the purchase of initial inventory by
the Company's distribution channels. Thereafter, revenues may decline or
stabilize until the end of a product life cycle, at which time revenues are
likely to decline significantly, as a result of the reduction in unit sales and
prices. At the end of a product life cycle the Company may experience higher
rates of return and/or increased price protection charges as a result of price
reductions. This could have a material adverse impact on the Company's net
revenues and operating results. Although the Company has sought to mitigate the
effect of such transitions by controlling inventory levels at its distributors
and resellers, channel inventory levels are very difficult to accurately
quantify. The Company may experience higher than normal rates of return and may
incur significant price protection charges on its older version products in
connection with its planned release of new products and price reductions in
1998. Due to the inherent uncertainties of product development and new product
introductions, the Company cannot accurately predict the exact quarter in which
a new product or version will be ready to ship. Any delay in the scheduled
release of major new products could have a material adverse impact on the
Company's net revenues and operating results.
As of September 30, 1998, the Company had substantial channel inventory of
flatbed scanners. Due to continuing price pressure in the flatbed scanner
market, additional price reductions on this inventory could have an adverse
impact on the Company's quarterly and annual revenues.
Cost of Revenues
Cost of revenues as a percentage of net revenues was 75.0% for the three
month period ended September 30, 1998, as compared to 69.0% for the comparable
period in 1997. This increase in cost of revenues is attributable to the
decrease in product margins due to price pressure in the flatbed scanner market.
Cost of revenues as a percentage of total net revenues was 74.2% for the nine
month period ended September 30, 1998 compared to 98.1% for the comparable
period in 1997. The decrease was a result of significant charges taken in the
three month period ended March 31, 1997 for write-offs, increased reserves
relating to excess and obsolete inventory, and cancellation of certain purchase
commitments relating to grayscale sheetfed scanner products. In addition, the
Company anticipates that gross margins will decrease from the 25.0% experienced
for the three month period ended September 30, 1998, due to pricing pressure in
the flatbed scanner market.
The computer and peripherals industry has been characterized by ongoing
rapid price erosion and resulting pressure on gross margins. The Company expects
that, based on historical trends in the computer and peripherals industry and,
in particular, based on the Company's recent observations and experiences in the
sheetfed and flatbed scanner markets, prices will continue to decline in the
future and competitors will offer
10
<PAGE> 11
products which meet or exceed performance and capabilities of the Company's
products. The Company intends to introduce new hardware designs, software
products and software upgrades, accessory products and new software features, in
part, to respond to anticipated competitive price pressures and new product
introductions. If prices fall faster than expected by the Company, or if the
Company reduces its prices in order to become or remain competitive or for any
other reason, the Company may be unable to respond with significant cost
reductions, and its gross profit could be materially adversely affected. In
addition, the Company's gross profit will depend in part on other factors
including the ability of its manufacturing partners to meet their manufacturing
commitments, the success of the Company's new product introductions and product
transition to new releases, competition, the timing and amount of royalties
received under its OEM arrangements, the ability of the Company to accurately
forecast the mix and levels of its inventory requirements, and general economic
conditions. Fluctuations in gross profit could have a material adverse affect on
the Company's financial condition and operating results.
Research and Development Expenses
Research and development expense decreased 27.5% to $1.1 million in the
three month period ended September 30, 1998 from $1.6 million in the comparable
period in 1997. The significant decrease in spending was the result of the
Company's implementation of a strategy to focus on software development, and
leverage the engineering resources of its manufacturing partners to design
future hardware products. Research and development expenses decreased 50.0% to
$3.5 million in the nine month period ended September 30, 1998 from $7.0 million
in the comparable period in 1997. This decrease further illustrates the
Company's strategy to focus on software development. The ease of use and
intelligent user interface of the Company's software products have been, and are
expected to be, a key differentiator within the scanner and document and image
management market. Therefore, the Company expects to continue to make
significant investments in research and development over the foreseeable future,
although at levels below those experienced in the comparable prior year periods.
However, such expenses may fluctuate from quarter to quarter depending on a
variety of factors including the status of various development projects. To
date, the Company has not capitalized any development costs and does not
anticipate capitalizing any such costs in the foreseeable future.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 8.9% to $4.3 million
in the three month period ended September 30, 1998 from $4.7 million in the
comparable period in 1997. The decrease was primarily attributable to the
Company's 20% reduction in headcount in August 1998. In addition, the Company
implemented minor reductions in variable sales and marketing expenditures.
Although the spending cuts were designed to decrease the Company's on-going
operating expenses, there can be no assurance that the spending cuts will not
adversely affect future revenue levels, which would have an adverse affect on
the Company's financial condition and future operating results. Selling, general
and administrative expenses decreased 21.5% to $14.2 million in the nine month
period ended September 30, 1998 from $18.1 million in the comparable period in
1997. The decrease in spending is the result of the restructuring plan
implemented in May 1997 and the headcount and expense reductions in August 1998.
Although the Company has adopted rigid spending controls, selling, general and
administrative expenses may fluctuate from quarter to quarter based on a variety
of factors, including the timing of the introduction of any new products,
expansion of the Company's distribution channels, general advertising related to
product introductions, variable channel marketing programs, and a new
international sales and marketing strategy.
Interest and Other Income, Net
Interest and other income, net, consists primarily of interest earned on
cash equivalents and short-term investments offset by interest due on short term
debt. Interest and other income, net was ($40,000) for the three month period
ended September 30, 1998 compared to $225,000 for the three month period ended
September 30, 1997. Interest and other income, net was $237,000 for the nine
month period ended September 30, 1998 compared to $839,000 for the comparable
period in 1997. The decrease, in both the three and nine month periods ended
September 30, 1998, was the result of a decrease in interest income from
11
<PAGE> 12
decreased cash equivalents and short-term investments and the increase in
interest expense associated with an increase in short term debt in the
respective periods.
Taxation
There was no tax provision for the three and nine month periods ended
September 30, 1998 and 1997 due to the net losses incurred.
Liquidity and Capital Resources
As of September 30, 1998, the Company had cash, cash equivalents and
short-term investments of $13.0 million and working capital of $8.1 million, as
compared to $14.5 million of cash, cash equivalents and short-term investments
and $8.4 million of working capital at December 31, 1997.
The Company used $6.1 million of cash for operating activities in the nine
month period ended September 30, 1998. The use of cash was primarily to fund
losses and a $3.4 million increase in inventory and a $2.5 million decrease in
other liabilities offset by a $2.2 million decrease in accounts receivable. The
balance of the activity was attributable to changes in other working capital and
non-cash charges.
Cash provided by investing activities for the nine month period ended
September 30, 1998 was $2.6 million, as the Company had a net decrease in
short-term investments during the period.
Cash provided by financing activities for the nine month period ended
September 30, 1998 was $4.8 million. The Company increased short-term bank
borrowings by $4.6 million to $7.4 million from $2.8 million at December 31,
1997, and an additional $297,000 was raised from the issuance of new Common
Stock in connection with the Company's employee stock purchase plan.
As the Company introduces and ramps up production of its new products in
subsequent quarters, its investment in inventory, especially flatbed scanner
inventory, and accounts receivable will continue to represent a significant
portion of working capital. In order to increase liquidity, in March 1998, the
Company renegotiated its $7.5 million line of credit with Silicon Valley Bank
and increased it to $12.5 million. At September 30, 1998, the Company was not in
compliance with certain conditions of the loan covenants. Subsequently, the
Company was able to secure a waiver of covenant defaults from its bank. As of
September 30, 1998, the Company's principal sources of liquidity consisted of
$13.0 million of cash, cash equivalents and short-term investments. The Company
believes that its existing sources of liquidity, including current cash balances
and its line of credit, will provide adequate cash to fund its operations for at
least the next twelve months. If cash generated by operations is insufficient to
satisfy the Company's liquidity requirements, the Company may be required to
sell additional equity or debt securities. The sale of additional equity or
convertible debt securities would result in additional dilution to the Company's
stockholders and such securities may have rights, preferences, or privileges
senior to those of the Common Stock. There can be no assurance that additional
equity or debt financing will be available when required or, if available, will
be on terms satisfactory to the Company.
YEAR 2000 COMPLIANCE
The Year 2000 problem concerns the inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000.
The Company's main operating systems, primarily SAP America, Inc.
enterprise software, Novell Network software, Compac hardware, and Windows
Office 95 software, are Year 2000 compliant. However, the Company is developing
a program designed to bring any remaining software and hardware systems into
Year 2000 compliance in time to minimize any significant detrimental effects on
operations. The program will cover information systems infrastructure, financial
and administrative systems, process control and manufacturing operating systems
and significant vendors and customers. The Company's Year 2000 program will
recognize that date sensitive systems may fail at different points in time
depending on their function. Forward looking systems may fail earlier and
require corrective actions sooner to allow for reasonable testing.
12
<PAGE> 13
The Company is planning to utilize internal personnel, contract programmers
and vendors to identify Year 2000 noncompliance problems, modify code and test
the modifications. In some cases, non-compliant software and hardware will be
replaced.
The Company rely on third party suppliers for finished goods, raw
materials, utilities, transportation and other key services. Interruption of
supplier operations due to Year 2000 issues could affect Company operations.
However, the Company's main finished goods supplier uses SAP software, which is
Year 2000 compliant, for their manufacturing, inventory, logistics, material
management and finance activities. The Company plans on initiating efforts to
evaluate the status of suppliers' efforts and to determine alternatives and
contingency plan requirements. While approaches to reducing risks of
interruption due to supplier failures will vary by business and facility,
options include identification of alternate suppliers and accumulation of
inventory to assure production capability where feasible or warranted. These
activities are intended to provide a means of managing risk, but cannot
eliminate the potential for disruption due to third party failure.
The Company is also dependent upon customers for sales and cash flow. Year
2000 interruptions in customers' operations could result in reduced sales,
increased inventory or receivable levels and cash flow reductions. The Company
will, however, take steps to monitor the status of customers as a means of
determining risks and alternatives.
The Company's software and hardware products that are sold to resellers and
distributors are Year 2000 compliant. The Company has posted a Year 2000
certification on its website that enables customers and suppliers the ability to
download the certification for their records.
The Company's Year 2000 plan is expected to significantly reduce the level
of uncertainty about the potential Year 2000 problem and, in particular about
the Year 2000 compliance and readiness of the Company's suppliers, resellers,
distributors, and external agents. The Company believes that, with completion of
the Year 2000 plan, the possibility of significant interruptions of normal
operations should be reduced. However, due to the uncertainty inherent in the
Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on the Company's results of operations, liquidity or financial
condition.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company intends to take advantage of the "Safe Harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that the following important factors, as well as other
factors, could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future
quarters to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company in this report.
Dependence on Developing Market; Product Concentration
The market for paper input systems and, in particular, for the Company's
PaperPort products, is new and rapidly evolving. The Company currently derives
substantially all of its revenues from its PaperPort products and expects that
revenues from these products will continue to account for a substantial portion
of all of its revenues for the foreseeable future. Broad market acceptance of
PaperPort products is critical to the Company's future success. This success
will depend in part on the ability of the Company, its distributors and other
suppliers of paper input scanners to convince end users to adopt paper input
systems for the desktop, and the Company's ability to educate end users about
the benefits of its products. This success will also depend in part on the
Company's ability to offer competitive hardware and software features in its
PaperPort products in a limited period of time.
Difficulties and Risks Associated with New Product Introduction and
Development
The market for the Company's products is characterized by rapidly changing
technology and frequent new product introductions.
13
<PAGE> 14
The Company's success will depend to a substantial degree upon its ability
to develop and introduce in a timely fashion new products and enhancements to
its existing products that meet changing customer requirements and emerging
industry standards, including the Company's recent introduction of its color 36
bit flatbed scanner products, including the PaperPort OneTouch and PaperPort
OneTouch 5300 as well as new software introductions that include Visioneer
ProOCR100, PaperPort ScannerSuite, PaperPort Deluxe 5.3 and Visioneer Visual
Explorer. The development of new, technologically-advanced products and product
enhancements is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. In this respect, the Company believes there will be a significant market
demand for color sheetfed and flatbed scanner products.
There can be no assurance that the Company will be able to identify,
develop, manufacture, market or support new products and product enhancements
successfully, that any new products or product enhancements will gain market
acceptance, or that the Company will be able to respond effectively to
technological changes, emerging industry standards or product announcements by
competitors. New product announcements by the Company could cause customers to
defer purchasing existing products or cause the Company to lower prices of its
older products, resulting in distributors claiming price protection credits or
returning such products to the Company. Any of these events could have a
material adverse effect on the Company's business, operating results and
financial condition.
The introduction of major new products and enhancements of existing
products, such as PaperPort 3000 and PaperPort 6000, introduced in the third
quarter of 1997 and Visioneer ProOCR100 introduced in the first quarter of 1998,
as well as the new products introduced in the second and third quarter of 1998,
such as PaperPort OneTouch, PaperPort One Touch 5300, PaperPort 6100, PaperPort
ScannerSuite, PaperPort Deluxe 5.3, and Visioneer Visual Explorer have had, and
will continue to have, a significant impact on the Company's quarterly and
annual revenues. As is characteristic of the initial stages of personal computer
product life cycles, the Company expects that sales volumes of any new product
may increase in the first few months following introduction due to the purchase
of initial inventory by the Company's distributors and resellers. Thereafter,
revenues may decline or stabilize until the end of a product life cycle, at
which time revenues are likely to decline significantly.
The Company must successfully manage the transition to new products and new
versions of existing products. At the end of a product life cycle the Company
may experience higher rates of return on its older products and may have to
lower the prices of such products, which would result in increased price
protection charges and could have a material adverse impact on the Company's net
revenues and operating results. The Company experienced higher than normal rates
of return of its grayscale scanner products over the last several quarters and
incurred significant price protection charges in connection with the Company's
release of the PaperPort Strobe color sheetfed scanner. Due to the inherent
uncertainties of product development and new product introductions, the Company
cannot accurately predict the exact timing in which a new product or version
will be ready to ship. Any delay in the scheduled release of major new products
would have a material adverse impact on the Company's net revenues and operating
results.
Fluctuations in Operating Results
The Company has experienced and may continue to experience significant
fluctuations in revenues and operating results from quarter to quarter and from
year to year due to a combination of factors, many of which are outside of the
Company's direct control. These factors include development of the paper input
systems market, demand for the Company's products, the Company's success in
developing, introducing and shipping new products and product enhancements, the
market acceptance of such products, the Company's ability to respond to new
product introductions and price reductions by its competitors, which the Company
expects will continue through the foreseeable future, the timing, cancellation
or rescheduling of significant orders, the purchasing patterns and potential
product returns from the Company's distribution channels, the Company's
relationships with its OEM partners and distributors, the performance of the
Company's manufacturing partners and component suppliers, the availability of
key components and changes in the cost of materials for the Company's products,
the Company's ability to attract, retain and motivate qualified personnel, the
timing
14
<PAGE> 15
and amount of research and development and selling, general and administrative
expenditures, and general economic conditions.
Revenues and operating results in any quarter depend, to a large extent, on
the volume, timing and ability to fulfill customer orders, the receipt of which
is difficult to forecast. A significant portion of the Company's operating
expenses is relatively fixed in advance, based in large part on the Company's
forecasts of future sales.
If sales are below expectations in any given period, the adverse effect of
a shortfall in sales on the Company's operating results may be magnified by the
Company's inability to adjust operating expenses to compensate for such
shortfall. Accordingly, any significant shortfall in revenues relative to the
Company's expectations would have an immediate material adverse impact on the
Company's business, operating results and financial condition. The Company may
also be required to reduce prices in response to competition or to increase its
spending to pursue new product or market opportunities. In the event of
significant price competition in the market for the Company's products, which is
anticipated, the Company will be required to decrease costs at least
proportionately and the Company will be at a significant disadvantage with
respect to its competitors that have substantially greater resources. Such
competitors may more readily withstand an extended period of downward pricing
pressure. In such event, the Company will also incur price protection charges
from its distributors and resellers. Any price protection charges in excess of
recorded allowances would have a material adverse effect on the Company's
business, operating results and financial condition.
Due to the foregoing factors, it is likely that at some point in the future
the Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. Accordingly, the Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies participating in new and rapidly evolving
markets. There can be no assurance that the Company will be successful in
addressing such risks.
Dependence on Manufacturing Partners
The Company currently has four manufacturing partners which manufacture
virtually all of its hardware and software products. All hardware manufacturing
partners are located in the Far East, and therefore, the Company is exposed to
the political and economic risks associated with doing business in this region,
which could have a material adverse effect on the Company's business, operating
results and financial condition. Furthermore, commencement of production of
products at new or existing facilities involves certain start-up risks, such as
those associated with the procurement of materials and training of production
personnel, which may result in delays and quality issues. The unanticipated loss
of any of the manufacturing partners could cause delays in the Company's ability
to fulfill orders while the Company identifies a replacement manufacturer. Such
an event could have a material adverse effect on the Company's business,
operation results and financial condition.
The Company's manufacturing policies are designed to take advantage of
lower manufacturing costs overseas, which may, in certain instances, result in
excess or insufficient inventory if orders do not match forecasts. To date, the
Company's inventory reflects purchases based on forecasted sales. There can be
no assurance that actual sales will match sales forecasts. To the extent the
Company has excess inventory, the Company may experience inventory write-downs
or may have to lower product prices which would result in substantial price
protection charges and a negative impact on gross margins. In this regard, the
Company experienced a significant excess inventory situation during the quarter
ended March 31, 1997, and recorded significant inventory write-down and price
protection charges. Although the Company has made significant progress in
reducing its inventory risk over the last several quarters, there can be no
assurance that the Company will be successful in its continuing efforts and will
not experience similar excess inventory situations.
Dependence on Distributors and Resellers
To date, the Company has derived a substantial portion of its revenues from
sales through its independent distributors and resellers. Although the Company
has established several strategic OEM partnerships, the Company expects that
sales through its independent distributors and resellers will continue to
account for a
15
<PAGE> 16
substantial portion of its revenues in the foreseeable future. Sales to the top
five independent distributors and resellers accounted for 54% of the Company's
net revenues in the first nine months of 1998. The Company anticipates that its
dependence on any one independent distributor or reseller will decrease in the
future because of efforts to expand distribution channels. The Company's
agreements with distributors and resellers are not exclusive, and each of the
Company's distributors and resellers can cease marketing the Company's products
with limited notice and with little or no penalty. There can be no assurance
that the Company's independent distributors and resellers will continue to offer
the Company's products or that the Company will be able to recruit additional or
replacement distributors or resellers. The loss of one or more of the Company's
major distributors or resellers could have a material adverse effect on the
Company's business, operating results and financial condition. Many of the
Company's distributors and resellers offer competitive products manufactured by
third parties.
There can be no assurance that the Company's distributors or resellers will
give priority to the marketing of the Company's products. Any reduction or delay
in sales of the Company's products by its distributors and resellers could have
a material adverse effect on the Company's business, operating results and
financial condition.
Intensely Competitive Market
The computer and peripherals industry has been characterized by ongoing
rapid price erosion and resulting pressure on gross margins. As an example, the
suggested retail price of PaperPort Strobe, when it was introduced in September
1997, was $299, the suggested retail price as of October 1, 1998 is $199 with a
$50 end user rebate. The Company expects that, based on historical trends in the
computer and peripherals industry and, in particular, on the Company's recent
observations and experiences in the paper management systems market, prices will
continue to decline in the future and that competitors will offer products which
meet or exceed performance and capabilities of the Company's products. The
Company intends to introduce new hardware designs, software products, software
upgrades, accessory products and software features, to respond to anticipated
competitive price pressures and new product introductions. If prices fall faster
than expected by the Company, or if the Company reduces its prices in order to
become or remain competitive or for any other reason, the Company may be unable
to respond with significant cost reductions and its gross margin could be
materially adversely affected. In addition, the Company's gross margin will
depend in part on other factors outside of the Company's control, including the
availability and prices of key components, the success of the Company's product
transition, competition, the timing and amount of royalties received under its
OEM arrangements and general economic conditions. Fluctuations in gross margin
could have a material adverse effect on the Company's financial condition and
operating results.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(1) The Company filed a complaint for damages and injunctive relief against
UMAX Technologies, Inc. on September 3, 1998, in the United States District
Court, for the Northern District of California, alleging false advertising and
unfair business practices in connection with UMAX's advertisements in connection
with its Astra 1220 Series Scanners. The potential outcome cannot be determined
at this time.
(2) The Company was named as the defendant in a Complaint filed by Caere
Corporation on August 10,1998, in the United States District Court, for the
Northern District of California. Caere Corporation alleged that the Company
engaged in false and misleading advertising concerning its software product,
ProOCR100. The Company plans to defend its position and does not anticipate the
outcome to have a material adverse effect upon the Company.
(3) The Company was named as a defendant as part of the Digital Imaging
Group, in a Complaint filed by Flashpix, Incorporated on July 16,1998, in the
United States District Court, for the Eastern District of Louisiana, alleging
among other things, trademark infringement, unfair competition, unfair trade
practices, and dilution of trademark. Visioneer plans to defend its position as
part of the Digital Imaging Group and does not anticipate the outcome to have a
material adverse effect upon the Company.
(4) The Company was named as the defendant in a complaint filed by Storm
Technology, Inc. on June 2, 1998, in the United States District Court, for the
Northern District of California, alleging patent infringement of specified
scanner technology. Subsequently, the parties settled the matter and executed an
updated Patent Cross License Agreement.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this Report on Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont, State of
California, on November 11, 1998.
VISIONEER, INC.
By: /s/ RICHARD M. BRENNER
------------------------------------
Richard M. Brenner
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET, CONDENSED STATEMENT OF OPERATIONS AND CONDENSED
STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE THREE MONTH
PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,822
<SECURITIES> 202
<RECEIVABLES> 15,378
<ALLOWANCES> 3,820
<INVENTORY> 6,466
<CURRENT-ASSETS> 31,654
<PP&E> 5,436
<DEPRECIATION> 4,245
<TOTAL-ASSETS> 32,910
<CURRENT-LIABILITIES> 23,601
<BONDS> 91
0
0
<COMMON> 20
<OTHER-SE> 9,198
<TOTAL-LIABILITY-AND-EQUITY> 32,910
<SALES> 19,238
<TOTAL-REVENUES> 19,238
<CGS> 14,419
<TOTAL-COSTS> 14,419
<OTHER-EXPENSES> 5,463
<LOSS-PROVISION> 00
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> (684)
<INCOME-TAX> 0
<INCOME-CONTINUING> (684)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (684)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
