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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
COMMISSION FILE NUMBER 0-27038
VISIONEER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.001
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $32,013,844.17 as of February 28, 1998, based upon
the closing sale price on the NASDAQ National Market reported for such date.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of shares of the registrant's Common Stock, $0.001 par value,
outstanding as of February 28, 1998 was 19,633,939.
DOCUMENTS INCORPORATED BY REFERENCE:
There is incorporated by reference in Part III of this Annual Report on
Form 10-K the information contained in the Registrant's definitive proxy
statement for its annual meeting of stockholders to be held May 22, 1998.
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VISIONEER, INC.
TABLE OF CONTENTS
1997 FORM 10-K
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 8. Financial Statements and Supplementary Data................. 23
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 40
Item 10. Directors and Executive Officers of the Registrant.......... 40
Item 11. Executive Compensation...................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
Item 13. Certain Relationships and Related Transactions.............. 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 41
Signatures............................................................ 44
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PART I
FORWARD LOOKING STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K ARE MADE
PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. STOCKHOLDERS ARE CAUTIONED THAT ALL FORWARD-LOOKING
STATEMENTS PERTAINING TO THE COMPANY INVOLVE RISKS AND UNCERTAINTIES, INCLUDING,
WITHOUT LIMITATION, THOSE CONTAINED IN ITEM 7 OF THIS REPORT UNDER THE CAPTION
ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE
COMPANY'S PERIODIC REPORTS AND OTHER INFORMATION FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
ITEM 1. BUSINESS
GENERAL
Visioneer designs, develops and markets intelligent paper and image
management systems which facilitate the imaging, manipulation, distribution and
storage of information on personal computers, multi-function-peripherals and
from digital cameras. The Company's PaperPort products provide an easy-to-use,
fast and cost-effective solution for document and image input and management at
the desktop. The Company's products leverage peripherals and applications
resident on the computer and transform personal computers into multi-function,
paper-to-digital information systems for the electronic faxing, filing, editing,
printing and sending of paper-based documents and images via e-mail, on-line
information services and the Internet.
The market for the Company's products is characterized by rapidly changing
technology and frequent new product introductions. 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. 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. 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 distributors to claim price protection credits or return 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.
VISIONEER PRODUCTS
The Company has pioneered a new category of intelligent paper and image
management systems for use with personal computers. These systems bridge the
separation between paper-based and digital information by seamlessly integrating
the input, manipulation, management, distribution and storage of paper-based
information and images. Visioneer provides an easy-to-use, fast and
cost-effective solution for personal document and image input and management at
the desktop, which reduces the need for redundant office equipment. The speed,
convenience and advanced software capabilities of the Visioneer solution also
create new uses for paper-based documents, such as electronic filing and
attaching paper-based documents to e-mail messages.
The Company's PaperPort products provide an integrated hardware and
software solution at the desktop through compact sheetfed scanners and larger
flatbed scanners. PaperPort's high-performance scanners intelligently automate
the paper input process by performing multiple operating functions without user
intervention and provide advantages in scanning speed, image quality and image
orientation. PaperPort software provides a user-friendly interface and
application-rich environment for performing numerous annotation and image
manipulation and enhancement functions. The Company has established an open
development environment and offers direct links to more than 150 popular
software applications and peripherals. Visioneer's systems leverage peripherals
and third-party applications resident on the computer to
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provide enhanced faxing, electronic filing, business card reading, personal
copying, convenient scanning and text editing, color image manipulation and
enhancement, and also serves as a means of attaching paper documents to e-mail
and internet messages.
Product Description
PaperPort Sheetfed Scanners -- The PaperPort sheetfed scanners are
integrated hardware and software solutions for paper input and digitized
document and image management that are easy to use, fast and cost-effective. The
PaperPort Vx and mx grayscale scanners are small in size (12" X 2.5" X 3.75")
and are designed to operate on the desktop between the keyboard and monitor. The
PaperPort Vx is compatible with Macintosh personal computers, while the
PaperPort mx is compatible with Windows 3.1, Windows 95 and Windows NT. The
PaperPort ix, a scanning keyboard, is a grayscale scanner fully integrated into
a keyboard, and is compatible with the aforementioned Windows releases. The
PaperPort Strobe, introduced in June 1997, is a color scanner that is even
smaller (11" X 2.5" X 2") and faster than its grayscale predecessors. It is
available in both Macintosh and Windows versions, Windows 3.1 and Windows 95.
The Windows versions are also available in either a parallel or serial
interface, and the Macintosh version incorporates a SCSI interface. PaperPorts
are designed to handle multiple sizes, shapes and textures of paper, including
business cards, newspaper articles, business memos, receipts and photographs,
and a broad range of paper types. The Company's current line of PaperPort
sheetfed scanners process up to 8-bit, 400 dpi grayscale images, and 24-bit, 600
dpi color images, offering high-quality and high-resolution. Visioneer's
PaperPort sheetfed products incorporate proprietary technology to provide ease
of use. Visioneer's AnyPort technology allows users to connect the PaperPort
sheetfed hardware component directly to a serial or parallel port on a
Windows-based personal computer, or a serial or SCSI port on a Macintosh-based
computer, without the need for add-on hardware cards. Similarly, PaperPort
sheetfed scanners utilize Visioneer's Paper-Driven technology to automate the
paper input process by simultaneously starting the PaperPort sheetfed scanner
when the user inserts a piece of paper, launching the integrated PaperPort
software and digitizing the image for viewing on the computer screen. The
PaperPort sheetfed scanners complete the paper input process at speeds of less
than two seconds per page and an average scanning time of less than four seconds
per page.
PaperPort Flatbed Scanners -- The Company introduced its first line of
flatbed scanners in September 1997. The PaperPort 3000 scans 30-bit color images
at up to 300 X 600 dpi optical resolution. The PaperPort 6000 scans 30-bit color
images at up to 600 X 1200 dpi optical resolution. Both flatbed scanners are
compatible with Windows 95 and feature a pass-through parallel port design that
allows them to easily connect to virtually any Windows PC. In addition to the
base version of the Company's award winning document management and image
editing software, these flatbed scanners come bundled with Visioneer's Web
Publishing Kit, a collection of Internet tools and utilities, which simplify the
creation of Web sites.
As of February 1, 1998, the grayscale products sell for an average retail
price of $149; PaperPort Strobe for Macintosh sells for an average retail price
of $249; PaperPort Strobe for Windows, parallel, sells for an average retail
price of $229; PaperPort Strobe for Windows, serial, sells for an average retail
price of $199, PaperPort 3000 sells for an average retail price of $149; and
PaperPort 6000 sells for an average retail price of $199 in the United States.
Prices for the Company's products in international markets vary by country and
are generally higher than the average retail price for such products in the
United States. The above mentioned prices do not reflect a $50 end-user rebate
promotion in effect for all of the Company's hardware scanner products.
PaperPort Deluxe Software -- PaperPort Deluxe Software, introduced in
January 1997, is the first full featured standalone software product offered by
the Company. PaperPort Deluxe Software incorporates many new paper and image
management features which are not found on the base version of software bundled
with the Company's hardware products, and is compatible with the Windows 95 and
Windows NT operating systems. It communicates with most TWAIN-compliant input
devices. PaperPort Deluxe Software turns many scanners,
multi-function-peripherals and digital cameras into a versatile solution for
sending, filing, copying and finding paper and photographs. Key features
incorporated into this image-scanning software include SimpleSearch, which
enables the user to perform a text search and retrieval on all scanned images
and ScanDirect, which enables direct scanning into linked applications. In June
1997, the Company introduced a
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new release of PaperPort Deluxe Software. Among the key new features are simple
color image editing and enhancement tools and an advanced filing system which
allows for color coded folders and nested folders. As of January 1, 1998,
single-user PaperPort Deluxe Software sells for a suggested retail price of $79
in the United States. Multi-user software volume license agreements targeted at
corporate accounts are available at lower per seat prices.
New Products, Product Upgrades and Extensions
The Company intends to design and develop products to extend the life and
usability of its products for its installed base through the development of
software upgrades and add-on accessory products. The Company plans to offer
these upgrades to its installed base as well as that of its OEM partners. The
Company also plans to incorporate new software features into its PaperPort
software and develop links to additional third-party software applications, and
to expand its hardware and software product lines in 1998 through the
development of alternative form factors comprising new hardware shapes and
sizes, enhanced imaging capabilities, and other features and functionality. The
Company believes that the development of these and other products and features
is essential to its success. Accordingly, the Company will continue to make
significant investments in the research and development of new products. Such
expenses may fluctuate from quarter to quarter depending on a wide range of
factors including the status of various development projects.
TECHNOLOGY
The Company's PaperPort products incorporate a number of advanced
technologies designed to simplify the process of installation, paper input,
image manipulation and editing, digitized document management and integration
with resident applications and peripherals. The Company has devoted substantial
resources to develop hardware and software technologies to create an
easy-to-use, integrated system for individual computer users. The Company's
system-design approach has driven the development of several integration,
intelligent automation and image manipulation technologies within the software.
The "Paper-Driven" technology automates the functions of turning on the system,
launching the software and placing the digitized document into the PaperPort
application. With each launch, software applications on the hard drive are
recognized, and linking icons to applications supported by the PaperPort API are
placed on the desktop. In addition, "AutoLaunch" technology allows users to
launch with one keystroke digitized documents directly into third-party software
applications and peripherals already installed on the user's personal computer.
The PaperPort software locates these paper-enabled third-party software
applications and peripherals and builds drag and drop buttons for one-button
distribution of these digitized documents. Using the PaperPort API, developers
can create PaperPort links to expedite the intelligent transfer of documents
between the PaperPort software and their applications. These functions allow
developers to automate certain tasks such as user interface management, file
conversion, software initialization, object control and OCR.
MARKETING, SALES AND DISTRIBUTION
The primary market for the Company's products is comprised of computer
users who require access to both paper and electronic information. The SOHO
(Small Office, Home Office) market, which currently represents a significant
majority of the Company's branded business, has been targeted by the Company
because mobile and home-based professionals require office-like productivity
without access to copiers, fax machines and scanners. This market, within the
last 18 months, has been increasingly attracted to scanners offering color
imaging capability. Over the past year, the Company responded by introducing a
line of color sheetfed scanners in June 1997, PaperPort Strobe, and a line of
color flatbed scanners in September 1997, PaperPort 3000 and PaperPort 6000.
With the advent of color sheetfed and flatbed scanners, the grayscale sheetfed
scanner market declined dramatically in 1997, much more so than the Company had
anticipated. As a result, in the quarter ended March 31, 1997, the Company
recorded $9.5 million in charges relating to grayscale scanner inventory
reserves and cancellation charges for purchase order commitments. Although the
grayscale scanner market is currently a fraction of what it was just 18 months
ago, the Company has found that a limited demand still exists, especially within
the corporate and legal markets. These markets are less
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sensitive to color, which demand larger storage requirements, and are more
interested in business productivity paper management systems.
To date however, the development of the sheetfed scanner market, in
contrast to the flatbed scanner market, has not met the Company's expectations.
Recent indicators point to a market that has stabilized from its growth period
over the last few years. Industry analysts are forecasting a flat sheetfed
scanner market over the next two years. Many competitors entered this market
over the last few years during its growth period. As a result, prices dropped
dramatically and margins were cut severely as overall industry costs did not
keep pace, and within the last twelve months, many key players in the category
have exited. The Company, however, continues to command a significant share of
the sheetfed scanner market.
The flatbed scanner market is many times larger than the sheetfed scanner
market, and is growing very aggressively according to industry analysts. In
addition, the flatbed scanner market is more price sensitive than the sheetfed
scanner marked. The Company has successfully penetrated the color flatbed market
with the introduction of PaperPort 3000 and PaperPort 6000 in September 1997.
According to recent reports from PC Data, the Company had attained nearly 10% of
the US flatbed market for the months of December 1997 and January 1998. The
Company believes that its penetration of the flatbed scanner market is
attributable to three major factors. First, the Company has established brand
recognition through its previous PaperPort products; second, the Company's
flatbed scanners are priced very competitively; and finally, the Company's
flatbed scanners are bundled with the Company's award winning software. The
Company will continue to leverage its brand recognition and the benefits of its
software in order to grow its market share of the flatbed market in 1998 and
beyond. There can be no assurance that the Company will be successful in this
endeavor.
In the past, the Company built awareness of its integrated paper input
solutions and software by advertisements in targeted trade publications, public
relations efforts and retail merchandising efforts. The Company believes that
these efforts have resulted in increased brand recognition of the Visioneer and
PaperPort names within target markets and with selected resellers. However, the
Company also believes that recent changes in the scanner market and the
Company's increased focus on reducing operating expenses requires a different
strategy for the use of marketing funds. As growth in the sheetfed scanner
market has slowed, the Company has recently channeled the majority of its
marketing funds to flatbed scanner and software products. Since Visioneer's name
and PaperPort brand are well established in the industry, and the flatbed market
is relatively more price sensitive, the Company believes that the most efficient
use of its marketing funds is to target them as close to the end user as
possible. As a result, the Company has reduced its advertising in trade
periodicals, and increased its investments in end user programs, such as end
user rebates, in-store demos, and point of purchase displays.
To date, the Company has derived substantially all of its branded revenues
from sales through its independent distributors and resellers. Although the
Company has established strategic software OEM partnerships, the Company expects
that sales through its independent distributors and resellers will continue to
account for a substantial portion of its revenues for the foreseeable future.
The Company's top four retail customers for 1997 were Ingram Micro, Inc.
("Ingram"), Best Buy Company, Inc. ("Best Buy"), Office Depot, Inc. ("Office
Depot") and MicroWarehouse, Inc. ("MicroWarehouse") for distribution of its
products in North America. Sales to these top four independent distributors and
resellers accounted for 38% of the Company's total net revenues in 1997 in the
aggregate, 21%, 9%, 4% and 4%, respectively, as compared to 52% of the Company's
total revenues to the top four in 1996. The Company believes these percentages
may further decrease in the future because of its efforts to expand and
diversify its distribution channels domestically and internationally. The
Company's agreements with its 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. The loss of one or more of the
Company's major distributors would have a material adverse effect on the
Company's business, operating results and financial condition. Many of the
Company's distributors offer competitive products. There can be no assurance
that the Company's distributors and resellers will give priority to the
marketing of the Company's products as compared to competitor's products.
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Any reduction or delay in sales of the Company's products by its distributors
and resellers would have a material adverse effect on the Company's business,
operating results and financial condition.
The Company grants its distributors and resellers price protection and
certain rights of return with respect to products purchased by them. In
addition, the Company offers various end-user rebate programs for its products.
For example, the Company is currently offering a $50 end user rebate for all of
its hardware scanner products. The Company accrues for expected returns,
anticipated price reductions, and anticipated rebate redemptions in amounts that
the Company believes are reasonable. However, there can be no assurance that
these accruals will be sufficient or that any future returns, price protection
charges, or rebate redemptions will not have a material adverse effect on the
Company's business and operating results, especially in light of the rapid
product obsolescence which often occurs during product transitions. The short
product life cycles of the Company's products and the difficulty in predicting
future sales increase the risk that new product introductions, price reductions
by the Company or its competitors, or other factors affecting the paper input
market could result in significant product returns. These risks are especially
true in respect to the Company's ability to successfully manage the introduction
of new products in 1998. In addition, there can be no assurance that new product
introductions by competitors or other market factors will not require the
Company to reduce prices in a manner or at a time or rate which gives rise to
significant price protection charges and which would have a material adverse
effect on the Company's operating results. Any product returns, price protection
charges, or rebate redemptions in excess of recorded allowances would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Total Net Revenues."
Net revenues from distributors outside North America represented
approximately 10% of net revenues in 1997 as compared to 13% in 1996. The
Company plans to expand its international sales by establishing a more extensive
network of international distributors and resellers and developing versions of
its products suitable to the market requirements of particular foreign
countries, such as different languages. The Company has limited experience in
developing international versions of its products and marketing, distributing,
servicing and supporting such products. There can be no assurance that the
Company will be able to develop new or additional versions of its existing
products or successfully market, sell, deliver, service and support its products
in international markets. In addition, there are certain risks inherent in doing
business internationally, such as unexpected changes in regulatory requirements,
import and export duties and restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment cycles,
uncertainties in connection with collecting accounts receivable, political
instability, fluctuations in currency exchange rates, logistical difficulties in
managing multinational operations, seasonal reductions in business activity
during summer months in Europe and certain other parts of the world, and
potentially adverse tax consequences, including the inability of the Company to
recover withholding taxes, any of which could adversely impact the success of
the Company's international operations. There can be no assurance that one or
more of these factors will not have a material adverse effect on the Company's
international operations and, consequently, on the Company's business, operating
results and financial condition.
OEM RELATIONSHIPS
The Company has established a limited number of strategic OEM relationships
in order to promote its Visioneer and PaperPort brand names, drive industry
standardization and open new markets for its products.
In June 1995, the Company entered into an agreement with Compaq Computer
Corporation ("Compaq"), pursuant to which the Company and Compaq developed a
Compaq-branded scanner keyboard, incorporating the Company's technology. Compaq
included a version of the PaperPort-branded software on each personal computer
system which it sold with the scanner keyboard or bundled the PaperPort-branded
software with the scanner keyboard which it sold separately. Pursuant to the
agreement, the Company was responsible for the cost of development of the
scanner keyboard and retained ownership rights to the scanner keyboard. In
addition, Compaq placed purchase orders on NMB Technologies, Inc. ("NMB") to
manufacturer its scanner keyboard, and subsequently made fixed, per unit royalty
payments to Visioneer based on the number of scanner keyboards shipped by Compaq
to its customers. Sales of the Compaq scanner keyboard products have been below
the Company's expectations. In the fourth quarter of 1996, the Company was
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notified by Compaq of its intention to discontinue production of its scanner
keyboard products, and in the first quarter of 1997, the Company and Compaq
terminated the agreement and negotiated a final settlement for all outstanding
royalties due for the scanner keyboard products.
On August 14, 1996, the Company entered into a three year agreement with
Hewlett-Packard Company ("Hewlett-Packard") to develop and supply software
products on a non-exclusive basis to Hewlett-Packard. Under this agreement,
Hewlett-Packard was granted the royalty-bearing right to distribute certain
versions of the Company's PaperPort software with a variety of Hewlett-Packard
scanner products, including existing flatbed scanners and network scanners.
Hewlett-Packard was not obligated under the agreement to distribute Visioneer
software; however, Hewlett-Packard was required to make certain minimum royalty
payments to the Company through the third quarter of 1997. In the fourth quarter
of 1996, Hewlett-Packard requested that, beginning in the second half of 1997,
the Company include in its OEM software offering many of the same features
currently included in the Company's standalone product, PaperPort Deluxe
Software. However, this was inconsistent with the Company's general strategy of
building a strong stand-alone software business, so the Company was unable to
comply with Hewlett-Packard's request. In the fourth quarter of 1997, Hewlett-
Packard informed the Company that, commencing January 1, 1998, it would no
longer be building new scanner products incorporating the Company's software. In
December 1997, Hewlett-Packard announced that it planned to distribute software
from another company in a variety of scanner products. However, the Company
expects to receive royalty payments for at least the first quarter of 1998 from
Hewlett-Packard from sales of inventory on hand at the end of 1997.
Since entering into the OEM agreements with Hewlett-Packard and Compaq, the
Company has focused its OEM activities on licensing software to companies which
do not directly compete with its sheetfed scanner products. In November 1996,
the Company and Xerox Corporation ("Xerox") entered into a non-exclusive
agreement pursuant to which the Company has agreed to license Xerox the
royalty-bearing right to copy and distribute certain versions of Visioneer
PaperPort software programs with the Xerox Document Centre System (DCS) product
line of digital network fax and copier machines. Xerox has not yet commenced
shipment of royalty-bearing products.
In March 1997, the Company and Agfa-Gevaert NV ("Agfa") entered into a
non-exclusive agreement pursuant to which the Company agreed to license Agfa the
royalty-bearing right to copy and distribute certain versions of Visioneer
PaperPort software programs on Agfa's imaging devices, with the exception of
sheetfed scanner devices, through December 31, 1998. In addition to per unit
royalties, Agfa paid a one-time non-refundable license fee, which the Company is
amortizing over the life of the agreement. Agfa commenced shipment of product in
the third quarter of 1997.
In March 1997, the Company and Brother Industries, Ltd. ("Brother") entered
into an exclusive agreement pursuant to which the Company agreed to license
Brother the royalty-bearing right to copy and distribute certain versions of
Visioneer PaperPort software programs on Brother's Multi-Function Devices (MFD)
through March 2000. The agreement gives Brother exclusive rights to distribute
PaperPort software programs on certain MFDs, within North America, Europe and
the Pacific Rim for one year. In addition to the per unit royalties, Brother
paid a one-time non-recurring fee for the development of certain software
programs. Brother commenced shipping royalty-bearing products in the second
quarter of 1997.
In December 1997, the Company and Epson America, Inc. ("Epson") entered
into a non-exclusive agreement pursuant to which the Company agreed to license
Epson the royalty-bearing right to copy and distribute certain versions of
Visioneer PaperPort software programs on Epson's low end scanner and high-end
Multi-Function Peripheral (MFP) products.
In December 1997, the Company and Minebea Thai Ltd. ("Minebea") entered
into a non-exclusive agreement pursuant to which the Company agreed to license
Minebea the right to use specific scanner technology proprietary to the Company
in order to design, develop and manufacture scanner keyboard products. The
Company also agreed to license Minebea a limited exclusive, royalty-bearing
right to distribute scanner keyboard products, incorporating the Company's
scanner technology, only to OEMs for bundling the scanner keyboard products with
a PC CPU. In addition, the Company also agreed to license Minebea the
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non-exclusive royalty-bearing right to copy and distribute certain versions of
Visioneer PaperPort software only when bundled with the scanner keyboard
products.
The Company is pursuing and may enter into additional OEM agreements to
distribute the Company's hardware and software products. However, there are
certain risks associated with such relationships, including whether sufficient
priority will be given by such OEM partners to marketing the Company's products
and whether such OEM partners will continue to offer the Company's products.
Such risks were experienced by the Company with regards to its agreements with
Hewlett-Packard and Compaq. The loss of any OEM partnership or the inability of
the Company to enter into additional OEM partnerships could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview".
RESEARCH AND DEVELOPMENT
The Company's research and development team is located at its headquarters
in Fremont, California. As of December 31, 1997, the Company employed 26
full-time and 7 contract software design and quality assurance engineers,
technicians and support staff. The primary activities of these employees during
1997 was the design and development of the PaperPort Strobe, the development of
the PaperPort flatbed line of products, the development of a new release of
PaperPort Deluxe Software, the development of other software products,
enhancement of existing products, product testing, and technical documentation
development.
Upon the completion of the PaperPort Strobe project at the end of May 1997,
the research and development team was restructured into a smaller group. The
Company's new strategy is to concentrate its efforts on software development,
and leverage the hardware and mechanical engineering capabilities of its
manufacturing partners to design and build its future hardware products. The
PaperPort 3000 and PaperPort 6000 flatbed scanners, introduced in September
1997, were designed in cooperation with the Company's manufacturing partner,
Avision, Inc..
The ease of use and intelligent user interface of the Company's software
has been and will continue 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 first and second
quarters of 1997. However, such spending may fluctuate from quarter to quarter
depending on the requirements of certain projects and the timing of new product
introductions.
MANUFACTURING
The Company outsources nearly all materials procurement, manufacturing,
assembly, testing and quality assurance to third party manufacturers. Purchase
orders are placed on the Company's manufacturing partners for final assemblies
or subassemblies, which in turn are delivered to other manufacturing partners
who perform final assembly, pack-out and shipment to the Company's customers.
This outsourcing strategy allows the Company to leverage off of the
manufacturing and engineering expertise and economies of scale of its
manufacturing partners, while allowing the Company's manufacturing and
operations team to concentrate on value added activities, such as vendor
management, product price negotiations, and cost reduction efforts.
The Company had four significant independent manufacturing partners in
1997. Flextronics International Marketing (L) Ltd. ("Flextronics"), located in
China, NMB Technologies, Inc. ("NMB"), located in Thailand, Avision, Inc.,
("Avision"), located in Taiwan, and DisCopyLabs ("DCL"), located in California.
Flextronics manufactured the Company's standalone grayscale product lines, the
PaperPort Vx for Macintosh, and the PaperPort mx for Windows. In 1997, the
Company placed purchase orders on Flextronics for finished products, which were
shipped to Flextronics' California facility for shipment to the Company's
customers. NMB manufactured the Company's scanning keyboard product, the
PaperPort ix and the Company's color sheetfed scanners, the PaperPort Strobe.
Similar to the Flextronics relationship, the Company placed purchase orders on
NMB for finished PaperPort ix product, which was shipped to DCL for shipment to
the Company's customers. With regards to PaperPort Strobe, the Company
implemented a product procurement system designed to more readily react to
customer orders and reduce the inventory risk of forecasting the
7
<PAGE> 10
wrong product configuration mix. Purchase orders were placed on NMB for Strobe
base scanner subassemblies and various cable assemblies. Purchase orders were
also placed on other vendors for other subassemblies and components. All of the
parts were shipped to DCL where final assembly and pack-out was performed as the
Company sent orders to DCL for shipment to its customers. Under these
manufacturing arrangements the Company was able to react quickly to customer
orders, but it also kept finished goods inventory levels very low and
significantly reduced inventory reconfiguration expenses. The Company operated
on a purchase order basis with Avision, its manufacturer for the PaperPort 3000
and PaperPort 6000 flatbed scanners. Purchase orders for finished product were
placed on Avision, Taiwan. Product was shipped to Avision's California facility,
for final configuration and pack-out. The Company utilized DCL to ship its
flatbed orders, which in turn worked closely with Avision to maintain
"just-in-time" inventory levels. The Company did not take possession of the
inventory until DCL picked-up the product, which impacted the Company's cash
flows favorably. The Company will continue to explore and implement similar
advantageous relationships with its current manufacturing partners and any new
manufacturing partners in the future. In addition to shipping the majority of
the Company's scanner products to its customers, DCL also manufactured and
shipped all of the Company's software products.
On January 19, 1998, the Company notified NMB that it wished to terminate
the manufacturing agreement for the PaperPort Strobe, based on NMB's inability
to comply with certain cost reduction stipulations as specified in the
agreement. As of March 16, 1998, the Company has qualified two manufacturers for
the PaperPort Strobe products. The Company believes that the loss of NMB as a
manufacturing partner will not have a material adverse effect on production of
PaperPort Strobe, or more generally, on the Company's business, operating
results and financial condition.
Commencement of production of new or existing products, such as PaperPort
Strobe, 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 production delays. There can be no assurance that
the Company will not experience such problems or production delays. Any
performance problems or production delays could have a material adverse effect
on the Company's business, operating results and financial condition. In
addition, there can be no assurance that current or future manufacturing
partners will be able to meet the Company's requirements for manufactured
products. Any inability to increase manufacturing capacity as required could
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, the current purchase order arrangements with
the Company's manufacturing partners would allow them to terminate the
arrangements by not accepting the Company's purchase orders. The unanticipated
loss of any of the Company's manufacturing partners could cause delays in the
Company's ability to ship orders while the Company identifies a replacement
manufacturer. Such an event would have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
Company is continually exploring alternative manufacturing sources, including
potential sources for new products. However, there can be no assurance that such
alternative sources can be successfully developed.
The Company's manufacturing policies are designed to reduce its investment
in inventories, yet still respond to rapid changes in customer demand, but may
in certain instances result in excess or insufficient inventory, or
inappropriate mix of component inventory, if orders do not match forecasts. To
the extent the Company has excess inventories, the Company may experience
inventory write-downs or may have to lower prices of its products which would
result in substantial price protection charges and a negative impact on gross
margins. In this regard, the Company took charges to write-down excess
inventories and recorded substantial reserves for cancellation charges and
excess purchase order commitments relating to its grayscale products in the
first quarter of 1997. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Total Cost of Revenues." To the
extent the Company has insufficient inventory, the Company may be materially
adversely impacted by the loss of one or more of the Company's distribution and
reseller relationships and the inability of the Company to obtain market
acceptance of its products.
As a result of negotiations with the Company's manufacturing partners,
various product cost reduction programs, and favorable currency exchange rates
in the Far East, the Company realized product cost reductions for its scanner
products during 1997. However, the scanner market is intensely competitive as
evidenced by the severe drop in average retail prices over the last two years.
In this regard, 600 dpi flatbed
8
<PAGE> 11
scanners, as recently as two years ago, were selling for an average retail price
in excess of $1,000. At the end of 1997, comparable scanners were selling for
$200 or less. Consequently, industry margins have been severely impacted. There
can be no assurance that the Company will be able to continue to realize product
cost reductions at levels which would allow it to compete effectively in the
scanner market. The inability to realize such levels of cost reductions will
materially adversely affect the Company's business, operating results and
financial condition.
Inherent in the electronics business are product returns from distribution.
The Company is unable to sell returned products that have been used as new
products. All returned products need to be screened, retested, and if need be,
repaired to original factory new specifications, before they can be sold as
factory reconditioned product. The Company has established a reserve for
reworking returned products; however, in the event that the Company's
manufacturing partners are unable to process these returned products in a timely
manor, the Company may need to increase its reserves to compensate for the
diminishing value of the inventory. In this regard, the Company recorded
significant charges relating to returned grayscale scanner inventory in the
first quarter of 1997. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Total Cost of Revenues."
Products as complex as those offered by the Company may contain certain
component, ASIC, other hardware, firmware, software or mechanical errors which
are detected only after commencement of product shipments. The existence of any
such errors could result in decreased shipments of products for an extended
period of time which, in turn, could cause the loss of revenues and market
acceptance of the Company's products, and the loss of credibility with
distributors, and end-user customers. In addition, such errors could result in
additional warranty expense and diversion of engineering and other resources.
COMPETITION
The market for scanners and document and image management software is
intensely competitive and rapidly evolving. The Company believes that this
market is characterized by limited periods of time during which the Company must
be able to provide product features that meet customer needs at appropriate
price levels. If the Company is unable to provide such products during such
limited periods of time, it may not remain competitive with others over the long
term. The Company expects that competition will continue to be intense and may
increase from a variety of sources. The Company's current competitors include
manufacturers of scanners and multi-function peripheral devices and developers
of digital image processing software. Scanner manufacturers include Brother,
Epson, Fujitsu, Hewlett-Packard, Mustek, Storm and Umax, many of which have
recently introduced products comprised of a hardware component bundled with a
software interface which compete with the PaperPort line of scanners. Certain of
these manufacturers offer products at retail prices that are lower than the
current retail price of the Company's comparable products. Certain features and
product pricing may be important to meeting market demand and may give the
manufacturer of such products a competitive edge. To the extent the Company is
unable to offer products with such features on a timely basis at appropriate
prices, the Company's products will not achieve market acceptance. In addition,
multi-function peripheral device manufacturers such as Brother, Canon,
Hewlett-Packard and Xerox have introduced group-use peripherals and digital
image processing products, some with software interfaces, providing copying,
printing and scanning and such manufacturers may in the future offer paper input
systems which more directly compete with those of the Company. Both Brother and
Xerox have entered into OEM agreements with the Company to bundle Visioneer
PaperPort software with certain multi-function peripheral devices. See " -- OEM
Relationships." Finally, the Company's OEM partners may in the future develop
products which compete with those of the Company and may, in turn, terminate
their relationships with the Company. In addition, the Company expects that
because of the lack of significant barriers to entry into the paper input
systems market, new competitors may enter the market in the future.
Many of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and larger
customer bases, than the Company. As a result, these competitors may be able to
respond more effectively to new or emerging technologies and changes in customer
requirements, withstand significant price decreases or devote greater resources
to the development, promotion, sale and support of their products than
9
<PAGE> 12
the Company. Consequently, the Company expects to continue to experience
increased competition, which could result in significant price reductions,
decreased gross margins, loss of market share and lack of acceptance of the
Company's products. There can be no assurance that the Company will be able to
compete successfully in the future or that competition will not have a material
adverse effect on the Company's business, operating results and financial
condition.
PROPRIETARY TECHNOLOGY
The Company's future success depends in part upon its proprietary
technology. The Company is subject to the risk of alleged infringement of
intellectual property rights of others. In this regard, the Company has obtained
licenses at the end of 1995 to certain user interface patents held by Wang
Corporation and a compression/decompression patent held by Unisys Corporation
which relate to the Company's technology.
On November 1, 1996, Millennium, L.P. ("Millennium"), a Cayman Island
limited partnership, filed an infringement action against Compaq alleging that
Compaq's scanner keyboard system, which utilized certain technology licensed
from the Company, and used in its products, infringed certain patent claims. The
Company indemnified Compaq with respect to the claims that Millennium asserted
against Compaq to the extent required by the Company's OEM agreement with
Compaq. On September 17, 1997, Millennium and the Company entered into a
Settlement and License Agreement pursuant to which the Company licensed the
patents held by Millennium and the litigation was settled. The payments to
Millennium, called for by the settlement, were fully accrued by the end of 1996.
The Company also relies on certain technology which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions and
software which is bundled with the Company's software to provide additional
functionality. There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially reasonable
terms. The loss of or inability to maintain any of these technology licenses
could result in delays or reductions in product shipments until equivalent
technology is identified, licensed and integrated or bundled. Any such delays or
reductions in product shipments would materially adversely affect the Company's
business, operating results and financial condition.
The Company generally enters into confidentiality or license agreements
with its employees, consultants and vendors, and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. To license its
products, the Company primarily relies on "shrink wrap" licenses that are not
signed by the end-user customer and, therefore, may not be enforceable under the
laws of certain jurisdictions. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult.
There can be no assurance that the Company will be able to protect its
technology, or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to that of the
Company. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Furthermore, litigation may be necessary to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results or financial
condition.
As of December 31, 1997, the Company held four U.S. patents and had four
pending U.S. patent applications. The Company has filed counterpart applications
in several European countries including Canada, Japan and Australia. The Company
intends to file additional U.S. and foreign patent applications in the future.
There can be no assurance that patents will issue from any application filed by
the Company or that, if patents do issue, the claims allowed will be
sufficiently broad to protect the Company's technology. The source code for the
Company's proprietary software is protected both as a trade secret and as a
copyrighted work.
10
<PAGE> 13
On June 17, 1997, the Company granted Logitech Inc. ("Logitech") a
non-exclusive, non-transferable, world-wide, royalty bearing license under
certain Visioneer patents to make or have made on its behalf, use and sell
licensed products. A one time, non-refundable payment was made to the Company
covering all products distributed by or on behalf of Logitech or its OEM
partners prior to January 1, 1997.
EMPLOYEES
As of December 31, 1997, the Company had a total of 81 full-time salaried
employees, 26 of which were in research and development, 31 of which were in
sales, marketing, and customer support, 9 of which were in operations and 15 of
which were in administration and finance. The Company's future success depends
in a significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. Competition for highly qualified
personnel is intense and there can be no assurance that the Company will be able
to retain its key managerial and technical employees or that it will be able to
attract and retain additional highly qualified technical and managerial
personnel in the future. None of the Company's employees is represented by a
labor union. The Company has not experienced any work stoppage and considers its
relations with its employees to be good.
The Company implemented a restructuring plan of all its organizations in
May 1997 to significantly reduce its operating expenses. The restructuring plan
included a decrease of approximately 40% of total employee and consultant
headcount. Although management's decisions were made with consideration of its
reduced workforce's ability to most efficiently meet future goals and strategic
plans, there can be no assurance the reductions were not too severe nor that
they were in the appropriate organizations, which would adversely affect the
Company's financial condition and future operating results. The Company
anticipates, that from time to time, it will need to hire additional or
replacement employees in the future. There can be no assurance that the Company
will be successful in hiring and integrating such personnel, nor can there be
any assurance that the Company will be successful in retaining existing
personnel. Any inability of the Company to hire and integrate necessary
personnel, or to retain existing personnel could have a material adverse effect
on the Company's business, results of operations and financial condition.
ITEM 2. PROPERTIES
The Company leases its principal facility, which contains approximately
41,000 square feet of office space, in Fremont, California, of which 17,928
square feet is being subleased to a third party. This facility is leased through
July 2001, and the Company has an option to extend this lease for an additional
four-year term. The Company believes that its existing facilities are adequate
to meet its current and foreseeable requirements or that suitable additional or
substitute space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Registrant is
a party or of which any of its properties is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on October 3, 1997.
There was present at the meeting, in person or represented by proxy, holders of
17,618,076 shares of Common Stock, which represented
11
<PAGE> 14
approximately 90% of the outstanding shares of Common Stock. The matters voted
on at the meeting and the votes cast were as follows:
1. All management's nominees for directors were elected as listed below:
<TABLE>
<CAPTION>
NAME OF NOMINEE VOTES CAST
--------------- ----------
<S> <C> <C>
J. Larry Smart...................................... For: 17,289,353
Against: 0
Abstain: 328,723
William J. Harding.................................. For: 17,441,287
Against: 0
Abstain: 176,789
Jeffrey Heimbuck.................................... For: 17,439,137
Against: 0
Abstain: 178,939
David F. Marquardt.................................. For: 17,393,872
Against: 0
Abstain: 224,204
Vincent Worms....................................... For: 17,440,887
Against: 0
Abstain: 177,189
</TABLE>
2. The approval of an amendment to the Company's 1993 Incentive Stock Option
Plan to increase the number of shares of Common Stock reserved for issuance
thereunder by 1,000,000 shares to an aggregate of 3,870,000 shares. There
were 8,870,420 shares of Common Stock voting in favor, 1,015,198 shares of
Common Stock voting against, 24,250 shares of Common Stock abstaining, and
7,708,208 shares of Common Stock recorded as broker non-votes.
3. The approval of an amendment to the Company's 1995 Employee Stock Purchase
Plan to increase the number of shares of Common Stock reserved for issuance
thereunder by 400,000 shares to an aggregate of 700,000 shares. There were
11,852,676 shares of Common Stock voting in favor, 555,883 shares of Common
Stock voting against, 31,350 shares of Common Stock abstaining, and 5,178,167
shares of Common Stock recorded as broker non-votes.
4. The approval of an amendment to the Company's 1995 Directors' Stock Option
Plan to increase the number of shares of Common Stock reserved for issuance
thereunder by 120,000 shares to an aggregate of 320,000 shares. There were
11,666,341 shares of Common Stock voting in favor, 730,222 shares of Common
Stock voting against, 43,346 shares of Common Stock abstaining, and 5,178,167
shares of Common Stock recorded as broker non-votes.
5. The approval of the grant of an option to purchase 5,000 shares of the
Company's Common Stock at an exercise price of $3.50 per share to Jeffrey
Heimbuck, a director of the Company. There were 11,599,350 shares of Common
Stock voting in favor, 582,205 shares of Common Stock voting against, 45,234
shares of Common Stock abstaining, and 5,391,287 shares of Common Stock
recorded as broker non-votes.
6. The ratification of the reappointment of Price Waterhouse LLP as the
Company's independent accountants for the fiscal year ending December 28,
1997. There were 17,491,296 shares of Common Stock voting in favor, 89,495
shares of Common Stock voting against, and 42,285 shares of Common Stock
abstaining.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET FOR COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq National Market
on December 11, 1995 and is traded under the symbol "VSNR." The following table
sets forth for the periods indicated the high and low sale prices for the Common
Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1996:
1st quarter...................................... 22 14 1/4
2nd quarter...................................... 15 9 1/2
3rd quarter...................................... 9 7/8 5 1/2
4th quarter...................................... 7 4 7/8
FISCAL 1997:
1st quarter...................................... 6 3 1/8
2nd quarter...................................... 4 3/8 2 1/2
3rd quarter...................................... 4 3/4 2 13/16
4th quarter...................................... 5 3/4 1 5/8
</TABLE>
The closing market price of the Company's stock on February 27, 1998 was
$2.31.
HOLDERS OF RECORD
As of February 28, 1998 , there were approximately 262 holders of record of
the Common Stock.
DIVIDENDS
To date, the Company has not paid any cash dividends on shares of its
Common Stock. The Company presently intends to retain all future earnings for
its business and does not anticipate paying cash dividends on its Common Stock
in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
information contained in Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements and
Notes to Financial Statements contained in Item 8 of this report.
13
<PAGE> 16
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Product revenues........................... $ 50,523 $ 44,233 $ 34,734 $ 3,903 $ --
Royalty and development revenues........... 7,100 11,848 2,605 -- --
-------- -------- -------- -------- -------
Total net revenues................. 57,623 56,081 37,339 3,903 --
-------- -------- -------- -------- -------
Cost of revenues:
Cost of product revenues................... 49,838 42,164 25,664 4,481 --
Cost of royalty and development revenues... 887 3,303 1,274 -- --
-------- -------- -------- -------- -------
Total cost of revenues............. 50,725 45,467 26,938 4,481 --
-------- -------- -------- -------- -------
Gross profit (loss).......................... 6,898 10,614 10,401 (578) --
-------- -------- -------- -------- -------
Operating expenses:
Research and development................... 8,115 10,938 8,975 4,532 3,739
Selling, general and administrative........ 22,428 26,342 11,805 6,482 1,808
Non-recurring items (2).................... 675 -- 1,600 -- --
-------- -------- -------- -------- -------
Total operating expenses........... 31,218 37,280 22,380 11,014 5,547
-------- -------- -------- -------- -------
Operating loss............................... (24,320) (26,666) (11,979) (11,592) (5,547)
Net interest income.......................... 940 2,274 426 137 114
-------- -------- -------- -------- -------
Net loss..................................... $(23,380) $(24,392) $(11,553) $(11,455) $(5,433)
======== ======== ======== ======== =======
Net loss per share: basic and diluted........ $ (1.20) $ (1.34) $ (4.28) $ (6.76) $ (3.35)
======== ======== ======== ======== =======
Weighted average common shares outstanding:
basic and diluted (3)...................... 19,450 18,255 2,699 1,694 1,620
======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (1):
Cash, cash equivalents and short-term
investments............................. $ 14,452 $ 31,200 $ 46,166 $ 4,032 $ 3,086
Working capital (deficit).................. 8,389 28,807 46,677 3,376 (441)
Total assets............................... 33,550 51,785 65,793 7,378 3,589
Long-term liability........................ 125 -- -- -- --
Capital lease obligations, less current
portion................................. -- -- -- 248 --
Total stockholders' equity (deficit)....... $ 10,930 $ 33,193 $ 49,860 $ 4,053 $ (8)
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
Company's fiscal year ends.
(2) See Note 7 of Notes to Financial Statements.
(3) As restated upon adoption of SFAS No. 128. See Note 1 of Notes to Financial
Statements.
14
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS DOCUMENT AND NOTES TO FINANCIAL STATEMENTS CONTAINED IN ITEM 8
OF THIS REPORT ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE CERTAIN RISK AND
UNCERTAINTIES, INCLUDING THE RISKS AND UNCERTAINTIES DISCUSSED BELOW.
OVERVIEW
Visioneer was incorporated in California in March 1992, and commenced
shipment of its initial product in the first quarter of 1994. Through September
1995, the Company financed its operations primarily through private placements
of equity securities, from which it raised an aggregate of approximately $33
million, net of issuance costs. In December 1995, the Company reincorporated in
Delaware in conjunction with its initial public offering and raised $43.5
million, net of issuance costs. In January 1996, the over allotment option
granted to the underwriters in the initial public offering was exercised,
resulting in additional net proceeds of approximately $6.4 million. The Company
has experienced sequential growth in annual net revenues since the first year of
product shipments. The dramatic annual growth rates between 1994 and 1996 were
directly attributed to the equally dramatic growth of the sheetfed scanner and
document management software markets, the development of OEM relationships and
new product introductions. In sharp contrast, the single digit growth rate from
1996 to 1997 was attributed to several factors. First, the grayscale sheetfed
scanner market declined sharply with the advent of color sheetfed scanners. The
transition of the market from grayscale to color occurred at a much faster rate
than 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, increased competition, 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, the market may be decreasing 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 off 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 appear initially to have
been successful. Recent PC Data reports indicate the Company held nearly a 10%
share of the flatbed market for the months of December 1997 and January 1998.
There can be no assurance that the Company will be able to increase its share of
the flatbed scanner market or that it will be able to maintain it at the
December 1997 and January 1998 levels.
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. 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 1997, which 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
several quarters of minor levels of profitability throughout its brief history,
most recently in the quarter ended December 31, 1997, the Company has incurred
annual net losses since inception. There can be no assurance that the Company
will be able to maintain quarterly profitability or attain annual profitability
in the near future. As of December 31, 1997, the Company had an accumulated
deficit of $76.6 million. Although the Company has experienced revenue growth
during the last several quarters, these growth rates may not be sustainable and
are not necessarily indicative of future operating results.
15
<PAGE> 18
RESULTS OF OPERATIONS
The following table presents, as a percentage of total net revenues,
certain selected financial data for each of the three years in the period ended
December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues:
Product revenues.............................. 87.7% 78.9% 93.0%
Royalty and development revenues.............. 12.3% 21.1% 7.0%
------ ------ ------
Total net revenues.................... 100.0% 100.0% 100.0%
Cost of revenues:
Cost of product revenues...................... 86.5% 75.2% 68.7%
Cost of royalty and development revenues...... 1.5% 5.9% 3.4%
------ ------ ------
Total cost of revenues................ 88.0% 81.1% 72.1%
------ ------ ------
Gross profit.................................... 12.0% 18.9% 27.9%
------ ------ ------
Operating expenses:
Research and development...................... 14.1% 19.5% 24.0%
Selling, general and administrative........... 38.9% 47.0% 31.6%
Non-recurring items(1)........................ 1.2% 0.0% 4.3%
------ ------ ------
Total operating expenses.............. 54.2% 66.5% 59.9%
------ ------ ------
Operating loss.................................. (42.2)% (47.5)% (32.1)%
Interest income................................. 1.7% 4.2% 1.4%
Interest expense................................ (0.1)% (0.1)% (0.3)%
------ ------ ------
Net loss........................................ (40.6)% (43.5)% (30.9)%
====== ====== ======
</TABLE>
- ---------------
(1) See Note 7 of Notes to Financial Statements.
Total Net Revenues
The Company derives its revenue primarily from three sources, the sale of
PaperPort hardware products, PaperPort software products, and royalties and
custom software development revenue, earned pursuant to arrangements with
certain OEM customers. To date, approximately 86% of the Company's product
revenues have been derived from sales of its PaperPort products to independent
distributors in North America and, to a lesser extent, in Europe and the
Asia-Pacific regions. Revenues from all sales to distributors and authorized
resellers are subject to agreements allowing price protection and certain rights
of return. Under the price protection rights granted by the Company, if the
Company lowers its selling price it is then obligated to issue credit to its
distributors and resellers equal to the difference between the new selling price
and the price paid for all unsold inventory held by the distributor and
reseller. Accordingly, reserves for estimated future returns, exchanges and
price protection are provided upon revenue recognition.
Total net revenues increased 3% to $57.6 million in 1997 from $56.1 million
in 1996, despite a 40% reduction in royalty and development revenues from $11.8
million in 1996 to $7.1 million in 1997. The decline in royalty revenues in 1997
was due to the termination, in the third quarter of 1996, of royalties under the
Company's first OEM agreement with Hewlett-Packard, which related to the
licensing of a Visioneer hardware and software product, and the termination of
royalties under the Company's OEM agreement with Compaq in the first quarter of
1997. In regards to the Company's second OEM agreement with Hewlett-Packard,
which involved the licensing of the Company's software for Hewlett-Packard
scanners, Hewlett-Packard informed the Company, in the fourth quarter of 1997,
that commencing January 1, 1998, it would no longer be building new scanner
products incorporating the Company's software. The Company expects royalties
from this agreement to decline significantly and ultimately terminate over the
next two to three quarters as Hewlett-Packard sells its existing inventory of
products incorporating the Company's software, which it held at December 31,
1997. Net revenues from hardware product sales remained relatively flat at
16
<PAGE> 19
$42.3 million in 1997 compared to $42.7 million in 1996. As a result of the
addition of the PaperPort Strobe and the PaperPort flatbed color scanners in
1997, overall scanner unit sales in 1997 increased by nearly 50% over 1996,
despite a 34% decrease in grayscale scanner units sales. The sharp decline in
the average retail prices offset the net revenue from the increased hardware
units sales from 1996 to 1997. Software revenues increased 450% to $8.3 million
in 1997 from $1.5 million in 1996. The increase was primarily attributable to
the commencement of sales of PaperPort Deluxe Software in January 1997.
Total net revenues increased 50% to $56.1 million in 1996 from $37.3
million in 1995. The increase was attributable to several factors: the market's
increasing acceptance of the Company's solutions for paper management systems,
new product introductions by the Company and increased royalty revenues from its
OEM partners. Increased product sales and increased royalty revenues contributed
nearly equally to the $18.7 million increase in total net revenues that the
Company experienced from 1995 to 1996.
The Company's ability to grow its revenues will largely depend upon its
ability to attain wider market acceptance for its current products, especially
its flatbed scanner products and its software products, and its ability to
introduce new products with enhanced end-user features on a timely basis. In
light of Hewlett-Packard's decision to discontinue bundling the Company's
software with its scanner products commencing the first quarter of 1998,
revenues from royalties will continue to decline unless the Company is able to
enter into additional OEM relationships. If the Company is unable to replace the
lost revenue stream from Hewlett-Packard, the Company's business, operating
results and financial condition may be materially adversely affected.
The Company's four largest distributors and resellers of its products in
1997 were Ingram, Best Buy, Office Depot and MicroWarehouse. Sales to these
independent distributors and resellers, in the aggregate, accounted for
approximately 38% of total net revenues in 1997. The four largest distributors
and resellers in 1996 were Ingram, Best Buy, Tech Data and Merisel. Sales to
these independent distributors, in the aggregate, accounted for approximately
52% of the Company's total net revenues in 1996. The four largest distributors
and resellers in 1995 were Ingram, Merisel, MicroAge and Tech Data. Total sales
to these independent distributors, in the aggregate, accounted for approximately
83% of the Company's total net revenues in 1995. Since inception, the Company's
dependence on any single distributor or reseller has decreased, and is expected
to decrease further in 1998 as the Company actively pursues its strategy to
increase and diversify its distribution channels throughout the world. In 1997,
three out of four of the Company's largest customers, excluding OEMs, were
resellers, in contrast to 1996, when three out of four were distributors. The
Company has focused on establishing direct relationships with major resellers,
thus bypassing distributors. This strategy, to a limited extent, reduces a layer
of the Company's inventory in the retail channel, thereby reducing inventory
risk and increasing channel inventory visibility.
Total net revenues from independent distributors outside North America,
primarily in Europe and the Asia-Pacific regions, were approximately 10%, 13%
and 6% of total net revenues in 1997, 1996 and 1995, respectively. Net revenues
from international sales decreased from $7.1 million in 1996 to $5.6 million in
1997. The reduction in international revenues from 1996 to 1997 was primarily
due to the delayed introduction of Japanese localized PaperPort Strobe products,
the first of which were shipped in February 1998, and the Company's decision to
restructure its international sales and marketing operations in May 1997. Net
revenues from international sales increased from $2.0 million in 1995 to $7.1
million in 1996. The increase was primarily attributable to commencement of
sales of localized grayscale scanners in Japan and growth in the European
region. Although the Company's international sales are all denominated in U.S.
dollars, these sales are subject to a number of risks inherent in doing business
on an international level, such as unexpected changes in regulatory
requirements, import and export duties and restrictions, fluctuations in
currency exchange rates, and the logistical difficulties of managing
multinational operations, any of which could adversely impact the success of the
Company's international operations. The growth of the Company's international
business will depend, in part, on the Company's ability to increase awareness of
the Company's products in international markets. See "Item
1 -- Business -- Sales, Marketing and Distribution."
The introduction of major new products and enhancements of existing
products, such as PaperPort Strobe and PaperPort 3000 and PaperPort 6000, is
expected to have a significant impact on the Company's quarterly
17
<PAGE> 20
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 distribution channel. Thereafter,
revenues may stabilize or decline until the end of a product life cycle, at
which time revenues are likely to decline significantly, as a result of unit
sales and price reductions. At the end of a product life cycle 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 total net revenues and operating results. Although the Company has
sought to mitigate the effect of such transition by controlling inventory levels
of its distributors and resellers, channel inventory levels are very difficult
to quantify accurately, and the Company may experience higher than normal rates
of return on its older version products and may incur significant price
protection charges in connection with its planned release of new PaperPort
products and price reductions in 1998. In this regard, receivable allowances
increased from $3.9 million at December 31, 1996 to $5.3 million at December 31,
1997. 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 would have a material adverse impact on the
Company's total net revenues and 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, 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 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. 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 all of 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.
18
<PAGE> 21
Total Cost of Revenues
Total cost of revenues consists primarily of the costs associated with the
purchase of PaperPort products and related costs of freight, inventory rework,
inventory obsolescence and warranty. For 1997, the Company's PaperPort hardware
products were manufactured, assembled and tested by three manufacturing
partners, Flextronics, NMB and Avision. Grayscale sheetfed scanners were
manufactured by Flextronics; the Company's scanning keyboard, PaperPort ix, and
the color sheetfed scanner, the PaperPort Strobe, were manufactured by NMB; and
the PaperPort flatbed scanners were manufactured by Avision. The Company's
software products were manufactured by DCL, which also packaged and shipped the
majority of the Company's hardware and software products to its customers. See
"Item 1 -- Business -- Manufacturing."
Total cost of revenues, as a percentage of total net revenues, was 88% in
1997 as compared to 81% in 1996. The increase was primarily a result of
approximately $9.5 million of charges taken in the first quarter of 1997 for
write-offs and increased reserves relating to excess and obsolete grayscale
inventory and cancellation charges relating to adverse purchase commitments for
grayscale products. In addition, the Company was unable to realize cost
reduction programs fast enough to keep pace with price reductions, which
negatively impacted gross margins.
Total cost of revenues as a percentage of total net revenues was 81% in
1996 as compared to 72% in 1995. The increase was primarily a result of charges
taken in the fourth quarter of 1996 for write-offs relating to excess and
obsolete inventory and adverse purchase commitments for components and
expediting charges relating to the transition of manufacturing PaperPort
products from Flextronics, California, to Flextronics, China.
Due to variations in product mix, pricing actions, and manufacturing
related costs associated with product transitions, the Company anticipates
quarterly fluctuations in its cost of revenue levels in 1998. The Company's
strategy is designed, however, to increase its market share and expand its
presence in the price sensitive consumer market place. This strategy, along with
the expectation of continued aggressive pricing environment and product
transitions, will continue to put pressure on the Company's cost of revenues and
gross margins.
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 products which meet or exceed performance and
capabilities of the Company's products. The Company intends to introduce new
hardware designs, 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
outside of the Company's control, including the ability of its manufacturing
partners to meet their manufacturing commitments, 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 profit could have a material adverse affect on the Company's financial
condition and operating results.
Essentially all of the Company's hardware manufacturing is concentrated in
the Far East, with Flextronics, in China, NMB, in Thailand, and Avision, in
Taiwan. Although this manufacturing strategy has been adopted to help reduce
product costs, the Company is exposed to certain economic and political risks
associated with doing business in this region. Changes in the economic and
political climates in the Far East may have a material adverse effect on the
financial condition and results of operations of the Company.
19
<PAGE> 22
Research and Development Expenses
Research and development expenses consist principally of personnel costs,
costs of contractors and outside consultants, supplies and material expenses,
equipment depreciation and overhead costs relating to occupancy. As of December
31, 1997, the Company employed 26 full-time and 7 contract software design
engineers, technicians and support staff.
Research and development expenses were 14%, 20% and 24% of total net
revenues for 1997, 1996 and 1995, respectively. Research and development
expenses decreased 26% in absolute dollars to $8.1 million in 1997 from $10.9
million in 1996. The decrease was primarily the result of the restructuring of
the engineering group in May 1997. Upon the completion of the PaperPort Strobe
project, the research and development team was reduced to a significantly
smaller group. Going forward, the Company's strategy is to concentrate its
engineering efforts on software development, and leverage the hardware and
mechanical engineering resources of its manufacturing partners to design its
future hardware products. The PaperPort 3000 and PaperPort 6000 flatbed
scanners, introduced in September 1997, were designed in cooperation with the
Company's manufacturing partner, Avision.
Research and development expenses increased 22% in absolute dollars to
$10.9 million in 1996 from $9.0 million in 1995. The increase in spending was
primarily due to the hiring of additional consultants for product development.
The Company believes that the development of new products and the enhancement of
existing products is essential to its success. Accordingly, the Company will
continue to invest in research and development activities. However, such
expenses may fluctuate from quarter to quarter depending on a wide range of
factors including the status of various development projects. To date, 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 include personnel and related
overhead costs for sales, marketing, customer support, finance, human resources
and general management. Such costs also include advertising, commissions to
manufacturers' representative organizations (MROs), co-op paid to the Company's
distributors and resellers, trade shows and other marketing and promotional
expenses.
Selling, general and administrative expenses decreased 15% in absolute
dollars to $22.4 million in 1997 from $26.3 million in 1996, and also declined
as a percentage of total net revenues, to 39% from 47%. The decrease was the
direct result of a Company-wide restructuring plan implemented in May 1997, in
which the Company reduced overall headcount and spending by approximately 40% of
first quarter 1997 levels, and the Company abandoned its previous strategy of
investing heavily in promoting its brand name and attempting to establish the
sheetfed category. The Company believes that these severe spending reductions
were necessary in order to reduce the Company's cost structure to allow it to
compete more effectively.
Selling, general and administrative expenses increased 123% in absolute
dollars to $26.3 million in 1996 from $11.8 million in 1995. As a percentage of
total net revenues, selling, general and administrative expenses increased to
47% from 32%. The increase in spending was primarily attributed to three major
factors. First, the Company substantially increased its sales and marketing
efforts to create and expand overall market demand and build the Company's brand
name and product awareness. Second, customer support costs increased
significantly as a natural consequence of increased sales, increased installed
base, and expansion of distribution to international channels. Finally, an
increase in general administration expenses, including employees and expenses,
were required to support the Company's growing operations.
The Company will continue to control selling, general and administrative
expenses. However, if net revenues continue to grow, in order to support the
Company's growing operations, selling, general and administrative expenses may
increase in absolute terms. Such expenses may, fluctuate from quarter to quarter
depending on a variety of factors, including the timing of the introduction of
any new products, expansion of the Company's distribution channels, general
advertising not related to product introductions and expansion into
international markets.
20
<PAGE> 23
Non-Recurring Items
The non-recurring item in 1997 represents the expenses incurred for
severance and other charges related to the termination of approximately 40
employees and 20 contract employees in connection with the Company-wide
restructuring plan implemented in May 1997. The restructuring actions were fully
completed as of December 1997. The Company expects to realize the benefits of
reducing its operating expense levels for the foreseeable future, however such
expenses may increase over time in order to support the Company's growing
operations. The non-recurring item in 1995 represents amounts paid to Wang
Laboratories Corporation ("Wang") in connection with the settlement of a patent
matter.
Other Income, Net
Other income, net, consists primarily of interest earned on cash
equivalents and short-term investments. Other income, net, was $940,000, $2.3
million and $426,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease in other income, net from 1996 to 1997 was a result
of decreased interest income from significantly lower cash, cash equivalents and
short-term investments, which were used primarily to fund the Company's
operating losses. The net increase from 1995 to 1996 was primarily the result of
an increase in interest income from increased cash equivalents and short-term
investments made with the application of proceeds from the Company's initial
public offering in 1995 and the subsequent exercise by the underwriters of the
over-allotment in January 1996.
Taxation
At December 31, 1997, the Company had net operating loss carryforwards for
federal tax purposes and federal tax credit carryforwards of approximately $56
million and $18 million, respectively. The Company had gross deferred tax
assets, including net operating loss and federal tax credit carryforwards, of
approximately $28.4 million, which were fully reserved because of the
uncertainty of their realization. See Note 3 of Notes to Financial Statements.
There was no tax provision for 1997, 1996 and 1995, due to the net losses
incurred, and the Company has not recorded a tax benefit from the realization of
gross deferred tax assets due to the uncertainty of their realization.
Liquidity and Capital Resources
Through September 30, 1995, the Company financed its operations primarily
through private placements of equity securities, from which it raised an
aggregate of approximately $33 million, net of issuance costs. In December 1995,
the Company completed its initial public offering, and raised approximately
$43.5 million, net of issuance costs. In January 1996, the over allotment option
granted to the underwriters in the initial public offering was exercised,
resulting in proceeds of approximately $6.4 million, net of issuance costs. As
of December 31, 1997, the Company had cash, cash equivalents and short-term
investments of $14.5 million and working capital of $8.4 million, as compared to
$31.2 million in cash, cash equivalents and short-term investments and $28.8
million of working capital at December 31, 1996.
The Company used $20.0 million of cash for its operating activities for
1997, as compared to $18.9 million for 1996. Negative cash flows from operating
activities for both periods were attributed primarily to net losses incurred of
$23.4 million and $24.4 million for 1997 and 1996, respectively, offset by
non-cash charges and changes in working capital. In 1995, the Company used $10.5
million of cash towards its operating activities, primarily to fund losses of
$11.6 million for the year.
Cash provided by investing activities during 1997 was $5.4 million as the
Company decreased short-term investments by $5.7 million and made capital
expenditures of $0.3 million. Cash used for financing activities during 1996 was
$5.6 million as the Company increased investments of short-term securities by
$2.5 million and made capital expenditures of approximately $3.1 million. Cash
used for financing activities during 1995 was $7.1 million. Short-term
investments increased by $4.1 million and capital expenditures were
approximately $3.0 million. Capital expenditures for all three years consisted
primarily of purchases of manufacturing tools and molds, computer equipment and
software tools.
21
<PAGE> 24
Cash provided by financing activities was $3.6 million during 1997. At
December 31, 1997, the Company had short-term bank borrowings of $2.8 million,
and $0.7 million was provided by proceeds from the issuance of Common Stock in
connection with the Company's employee stock purchase plan and the exercises of
stock options. Cash provided by financing activities during 1996 was $7.0
million. The majority of the cash resulted from the exercise of the
over-allotment option granted to the underwriters in the December 1995 initial
public offering. Proceeds, net of underwriting discounts and related expenses,
from the January 1996 exercise of the over-allotment option were $6.4 million.
Cash provided by financing activities during 1995 was $55.6 million. Proceeds
from the issuance of Preferred Stock was $12.2 million and proceeds from the
issuance of Common Stock, in conjunction with the Company's initial public
offering, was $43.5 million.
Due to the relatively long manufacturing lead times and inventory pipelines
associated with the Company's products, as the Company introduces and ramps up
production of its new products in subsequent quarters, its investment in
inventory will continue to represent a significant portion of working capital.
Therefore in June 1997, the Company negotiated a $7.5 million line of credit to
provide an additional source of liquidity. The facility is due to expire on June
25, 1998, bears an interest rate of 0.25% over the Prime Rate, and provides for
a $2.0 million sub-limit on letters of credit. In December 1997, the facility
was amended and temporarily increased to $9.9 million and the letter of credit
sub-limit was increased to $7.5 million until March 1, 1998. As of December 31,
1997, the Company had $2.8 million of short-term borrowings and $6.6 million of
letters of credit outstanding under the line of credit, and the Company was in
compliance with all financial covenants under the agreement. As of March 25,
1998, the Company was in the process of finalizing an amendment to extend the
line of credit to March 1999, increase the line of credit to $12.5 million and
extend the sub-limit on letters of credit to $12.5 million.
The Company's principal sources of liquidity as of December 31, 1997
consisted of approximately $14.5 million of cash, cash equivalents and
short-term investments and $0.5 million available under the Company's $9.9
million line of credit. The Company believes that its existing sources of
liquidity will provide adequate cash to fund its operations for at least the
next twelve months. Thereafter, 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, or increase or obtain additional
lines of credit. The sale of additional equity or convertible debt securities
may result in additional dilution to the Company's stockholders.
Year 2000
Many computer systems experience problems handling dates beyond the year
1999. The Company has assessed both the internal readiness of its computer
systems and the compliance of its scanner and software products sold to
customers for handling the year 2000. The Company does not believe that its
computer systems nor its products sold to customers are materially adversely
affected by this problem. In addition, the Company is currently assessing the
potential impact on the Company of the year 2000 problem at its manufacturing
partners and key vendors.
22
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Accountants......................... 24
Balance Sheets............................................ 25
Statements of Operations.................................. 26
Statements of Cash Flows.................................. 27
Statements of Stockholders' Equity........................ 28
Notes to Financial Statements............................. 29
Financial Statement Schedules:
Report of Independent Accountants on Financial Statement
Schedules.............................................. 38
Schedule II -- Valuation and Qualifying Accounts and
Reserves............................................... 39
</TABLE>
23
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Visioneer, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Visioneer, Inc. at December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Jose, California
January 22, 1998
24
<PAGE> 27
VISIONEER, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 11,361 $ 22,391
Short-term investments.................................... 3,029 8,747
Restricted cash........................................... 62 62
Accounts receivable, less allowances of $5,315 and
$3,931................................................. 12,295 10,780
Inventory................................................. 3,078 4,508
Prepaid expenses and other current assets................. 1,059 911
-------- --------
Total current assets.............................. 30,884 47,399
Property and equipment, net................................. 2,454 4,158
Other assets................................................ 212 228
-------- --------
$ 33,550 $ 51,785
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings................................ $ 2,821 $ --
Accounts payable.......................................... 12,837 11,449
Accrued sales and marketing incentives.................... 1,460 2,474
Accrued payable to sub-contractors........................ 1,500 1,100
Other accrued liabilities................................. 3,877 3,569
-------- --------
Total current liabilities......................... 22,495 18,592
-------- --------
Long-term liability......................................... 125 --
Commitments and contingencies (Notes 6 & 8)................. -- --
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares
authorized; 19,563,854 and 19,202,609 shares issued and
outstanding............................................ 20 19
Additional paid-in-capital................................ 87,682 86,951
Deferred compensation relating to stock options........... (150) (250)
Notes receivable from stockholders........................ (44) (329)
Accumulated deficit....................................... (76,578) (53,198)
-------- --------
Total stockholders' equity........................ 10,930 33,193
-------- --------
$ 33,550 $ 51,785
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 28
VISIONEER, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product revenues......................................... $ 50,523 $ 44,233 $ 34,734
Royalty and development revenues......................... 7,100 11,848 2,605
-------- -------- --------
Total net revenues............................... 57,623 56,081 37,339
-------- -------- --------
Cost of revenues:
Cost of product revenues................................. 49,838 42,164 25,664
Cost of royalty and development revenues................. 887 3,303 1,274
-------- -------- --------
Total cost of revenues........................... 50,725 45,467 26,938
-------- -------- --------
Gross profit............................................... 6,898 10,614 10,401
-------- -------- --------
Operating expenses:
Research and development................................. 8,115 10,938 8,975
Selling, general and administrative...................... 22,428 26,342 11,805
Non-recurring items (Note 7)............................. 675 -- 1,600
-------- -------- --------
Total operating expenses......................... 31,218 37,280 22,380
-------- -------- --------
Operating loss............................................. (24,320) (26,666) (11,979)
Interest income............................................ 984 2,344 523
Interest expense........................................... (44) (70) (97)
-------- -------- --------
Net loss................................................... $(23,380) $(24,392) $(11,553)
======== ======== ========
Net loss per share: basic and diluted...................... $ (1.20) $ (1.34) $ (4.28)
======== ======== ========
Weighted average common shares outstanding:
basic and diluted (Note 1)............................... 19,450 18,255 2,699
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 29
VISIONEER, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(23,380) $(24,392) $(11,553)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 2,052 1,982 726
Accounts receivable allowances...................... 1,384 1,400 2,231
Patent infringement settlement costs................ -- -- 1,500
Other............................................... 385 493 50
Changes in assets and liabilities:
Accounts receivable.............................. (2,899) (1,042) (12,054)
Inventory........................................ 1,430 (744) (2,709)
Prepaid expenses and other current assets........ (148) 631 (1,491)
Other assets..................................... 16 (99) (6)
Accounts payable................................. 1,388 1,237 9,403
Accrued sales and marketing incentives........... (1,014) 321 1,833
Accrued payable to sub-contractors............... 400 775 325
Other accrued liabilities........................ 433 574 1,256
-------- -------- --------
Net cash used in operating activities...................... (19,953) (18,864) (10,489)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of short-term investments.......... 5,718 (3,852) (2,731)
Transfer from (to) restricted cash....................... -- 1,300 (1,362)
Capital expenditures for property and equipment.......... (348) (3,086) (2,978)
-------- -------- --------
Net cash provided by (used in) investing activities........ 5,370 (5,638) (7,071)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank borrowings, net.......................... 2,821 -- --
Proceeds from issuance of preferred stock................ -- -- 12,217
Proceeds from issuance of common stock, net.............. 732 7,232 43,593
Payments on capitalized lease obligations................ -- (248) (209)
-------- -------- --------
Net cash provided by financing activities.................. 3,553 6,984 55,601
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (11,030) (17,518) 38,041
Cash and cash equivalents at beginning of year............. 22,391 39,909 1,868
-------- -------- --------
Cash and cash equivalents at end of year................... $ 11,361 $ 22,391 $ 39,909
======== ======== ========
NON CASH FINANCING AND INVESTING ACTIVITIES:
Issuance of Series C convertible preferred stock pursuant
to patent agreement................................... -- -- 1,200
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................ 44 71 97
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 30
VISIONEER, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- -------------------- PAID IN DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
----------- ------ ----------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994... 7,871,544 $ 8 2,324,277 $ 2 $21,433 $ -- $(137)
Issuance of Series C
convertible preferred
stock........................ 3,037,500 3 -- -- 12,114 -- --
Issuance of common stock
pursuant to exercise of stock
options...................... -- -- 203,895 -- 49 -- (3)
Issuance of restricted common
stock........................ -- -- 1,052,999 1 393 -- (372)
Repurchase of restricted common
stock........................ -- -- (334,168) -- (71) -- 66
Deferred compensation relating
to stock options............. -- -- -- -- 400 (350) --
Issuance of Series C
convertible preferred stock
pursuant to the settlement of
the patent matter............ 150,000 -- -- -- 1,200 -- --
Issuance of common stock
warrants..................... -- -- -- -- 300 -- --
Issuance of Series C
convertible preferred stock
pursuant to the exercise of
warrants..................... 65,000 -- -- -- 100 -- --
Conversion of convertible
preferred stock to common
stock........................ (11,124,044) (11) 11,124,044 11 -- -- --
Issuance of common stock
pursuant to initial public
offering (net of issuance
cost of $1,110,000).......... -- -- 4,000,000 4 43,526 -- --
Net loss....................... -- -- -- -- -- -- --
----------- ----- ----------- --- ------- ----- -----
Balance at December 31, 1995... -- -- 18,371,047 18 79,444 (350) (446)
Issuance of common stock
pursuant to exercise of the
over-allotment option granted
to underwriters.............. -- -- 600,000 1 6,415 -- --
Deferred compensation expense
related to stock options..... -- -- -- -- -- 100 --
Issuance of common stock
pursuant to stock option
exercises.................... -- -- 278,066 -- 513 -- --
Issuance of common stock
pursuant to employee stock
purchase plan................ -- -- 110,996 -- 637 -- --
Repurchase of restricted
stock........................ -- -- (157,500) -- (58) -- 117
Net loss....................... -- -- -- -- -- -- --
----------- ----- ----------- --- ------- ----- -----
Balance on December 31, 1996... -- -- 19,202,609 19 86,951 (250) (329)
Deferred compensation expense
related to stock options..... -- -- -- -- -- 100 --
Issuance of common stock
pursuant to stock option
exercises.................... -- -- 402,865 1 196 -- --
Issuance of common stock
pursuant to employee stock
purchase plan................ -- -- 188,797 -- 627 -- --
Repurchase of restricted
stock........................ -- -- (230,417) -- (92) -- 285
Net loss....................... -- -- -- -- -- -- --
----------- ----- ----------- --- ------- ----- -----
Balance on December 31, 1997... -- $ -- 19,563,854 $20 $87,682 $(150) $ (44)
=========== ===== =========== === ======= ===== =====
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- --------
<S> <C> <C>
Balance at December 31, 1994... $(17,253) $ 4,053
Issuance of Series C
convertible preferred
stock........................ -- 12,117
Issuance of common stock
pursuant to exercise of stock
options...................... -- 46
Issuance of restricted common
stock........................ -- 22
Repurchase of restricted common
stock........................ -- (5)
Deferred compensation relating
to stock options............. -- 50
Issuance of Series C
convertible preferred stock
pursuant to the settlement of
the patent matter............ -- 1,200
Issuance of common stock
warrants..................... -- 300
Issuance of Series C
convertible preferred stock
pursuant to the exercise of
warrants..................... -- 100
Conversion of convertible
preferred stock to common
stock........................ -- --
Issuance of common stock
pursuant to initial public
offering (net of issuance
cost of $1,110,000).......... -- 43,530
Net loss....................... (11,553) (11,553)
-------- --------
Balance at December 31, 1995... (28,806) 49,860
Issuance of common stock
pursuant to exercise of the
over-allotment option granted
to underwriters.............. -- 6,416
Deferred compensation expense
related to stock options..... -- 100
Issuance of common stock
pursuant to stock option
exercises.................... -- 513
Issuance of common stock
pursuant to employee stock
purchase plan................ -- 637
Repurchase of restricted
stock........................ -- 59
Net loss....................... (24,392) (24,392)
-------- --------
Balance on December 31, 1996... (53,198) 33,193
Deferred compensation expense
related to stock options..... -- 100
Issuance of common stock
pursuant to stock option
exercises.................... -- 197
Issuance of common stock
pursuant to employee stock
purchase plan................ -- 627
Repurchase of restricted
stock........................ -- 193
Net loss....................... (23,380) (23,380)
-------- --------
Balance on December 31, 1997... $(76,578) $ 10,930
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 31
VISIONEER, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and presentation
Visioneer, Inc. (the "Company") was incorporated in the state of California
on March 10, 1992 and was reincorporated in the state of Delaware on December 5,
1995.
The Company's fiscal year ends on the Sunday closest to December 31.
Accordingly, 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 on December 31 or its
interim quarterly periods as ending on the respective calendar month-end.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
Revenue from product sales to customers is generally recognized when the
product is shipped, provided no significant obligations remain and
collectibility is probable. Revenues from sales to distributors and authorized
resellers are subject to agreements allowing price protection and certain rights
of return. Accordingly, reserves for estimated future returns, exchanges and
credits for price protection are provided for upon revenue recognition. The
Company has limited control over the extent to which products sold to
distributors and resellers are sold through to end users. Accordingly, a portion
of the Company's sales may from time to time result in increased inventory at
its distributors and resellers. The Company provides sales returns reserves for
distributor and reseller inventories. These reserves are based on the Company's
estimates of inventory held by its distributors and resellers and the expected
sell through of its products by its distributors and resellers. Actual results
could differ from these estimates.
The Company earns royalty and custom software development revenue pursuant
to certain license agreements and records revenue when earned. Payments received
from customers prior to revenue recognition and gross profits on shipments to
customers prior to related revenue recognition are reported as "deferred
revenues".
Cash, cash equivalents and short-term investments
Cash equivalents are short-term, highly liquid instruments with original
maturities of 90 days or less. The Company has classified all its securities as
"available for sale." These securities are comprised primarily of commercial
paper with maturities within one year. At December 31, 1997 and 1996 the fair
market value of these securities approximated cost.
Inventory
Inventory is stated at the lower of cost or market, cost being determined
on a first-in, first-out basis.
29
<PAGE> 32
VISIONEER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which is generally one to five years. Leasehold
improvements are amortized over the term of the related lease or the useful
life, if shorter.
Software development costs
Software development costs incurred prior to establishment of technological
feasibility are expensed as incurred. The Company defines establishment of
technological feasibility as the completion of a working model. Software
development costs incurred subsequent to the establishment of technological
feasibility through the period of general market availability of products will
be capitalized, if material. To date, all software development costs have been
expensed.
Warranty costs
The Company provides for the estimated cost which may be incurred under its
product warranties upon product shipment.
Income taxes
The Company accounts for income taxes in accordance with the provisions of
Financial Accounting Standards No. 109 (SFAS 109). SFAS 109 is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's Financial Statements or income tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactments of changes in the tax laws or rates.
Concentration of credit risk, major customers and geographic information
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
short-term investments and trade accounts receivable.
The Company invests in a wide variety of financial instruments, such as
certificates of deposits, commercial paper, municipal debt and U.S. government
agency debt. The Company, by policy, limits the amount of credit exposures to
any one financial institution.
The Company primarily sells its products in North America to distributors
and resellers. The Company derived approximately 10%, 13% and 6% of its total
net revenues from customers outside the United States, primarily in Europe and
Japan, in the years ended December 31, 1997 1996 and 1995, respectively. During
1997, one customer accounted for 21% of total net revenues. Two customers
accounted for 37% and 14%, respectively, of total net revenues in 1996. In 1995,
one customer accounted for 62% of total net revenues. The Company performs
ongoing credit evaluations of the customers' financial conditions and maintains
an allowance for uncollectible receivables based upon expected collectibility of
accounts receivable. At December 31, 1997, 1996 and 1995 the Company's top two
customers in aggregate accounted for 42%, 40% and 72% respectively, of accounts
receivable.
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 for 1997. SFAS No. 128 requires the Company to report
both basic loss per share, which is based on the weighted average number of
common shares outstanding, and diluted loss per share, which is based on the
weighted average number of common shares outstanding and dilutive potential
common shares outstanding. However, as the Company has been in a
30
<PAGE> 33
VISIONEER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
net loss position on an annual basis since 1995, the effects of potential common
shares outstanding have been excluded as they would be anti-dilutive in the loss
per share calculation. All options outstanding during 1997, 1996 and 1995 (see
Note 5) were excluded from diluted loss per share calculations because they were
anti-dilutive in view of the losses incurred by the Company.
Employee stock plans
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Compensation." SFAS 123 establishes an accounting
method based on the fair value of equity instruments awarded to employees as
compensation. The Company has elected to retain its current application of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company has adopted, as required, the disclosure provisions
of SFAS No. 123.
Recently issued accounting standards
In June 1997, the Financial Accounting Standards Board issued two new
Statements of Financial Accounting Standards ("SFAS"). 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 both interim and annual
periods beginning after December 15, 1997. 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 financial
statements for periods beginning after December 15, 1997. The Company will adopt
SFAS No 130 for the first quarter of 1998 and does not expect its provisions to
have a material effect on the Company's presentation of its financial
statements. The Company will adopt SFAS No. 131 as of the year ending December
31, 1998 and is currently studying its provisions.
NOTE 2. BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Inventory:
Raw materials............................................. $ 1,536 $ 1,433
Work-in-process........................................... 329 1,453
Finished goods............................................ 1,213 1,622
------- -------
$ 3,078 $ 4,508
======= =======
Property and equipment:
Machinery and equipment................................... $ 3,672 $ 5,129
Software.................................................. 1,377 1,259
Leasehold improvements.................................... 289 368
Furniture and fixtures.................................... 688 607
------- -------
6,026 7,363
Accumulated depreciation and amortization................. (3,572) (3,205)
------- -------
$ 2,454 $ 4,158
======= =======
</TABLE>
31
<PAGE> 34
VISIONEER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INCOME TAXES:
No provision for federal or state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1997.
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Federal and state loss and credit carryforwards........... $ 21,774 $ 13,695
Capitalized start-up and development costs................ 1,255 1,183
Other asset valuation reserves............................ 3,473 4,295
Other..................................................... 1,849 2,748
-------- --------
Gross deferred tax assets................................. 28,351 21,921
Deferred tax liabilities.................................. (119) (223)
Valuation allowance....................................... (28,232) (21,698)
-------- --------
Net deferred tax assets........................... $ -- $ --
======== ========
</TABLE>
Management believes that based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the lack of significant history of profits, the fact that
the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, and the lack of carryback capacity
to realize these assets. Based on this absence of objective evidence management
is unable to assert that it is more likely than not that the Company will
generate sufficient taxable income to realize the Company's deferred tax assets.
At December 31, 1997, the Company had federal net operating loss
carryforwards and tax credit carryforwards of approximately $56 million and $18
million, respectively, of which $700,000 and $300,000 relate to tax deductions
from stock compensation, respectively. The tax benefit related to the stock
compensation benefit, when realized, will be accounted for as an addition to
additional paid in capital rather than as a reduction of the provision for
income tax. Research credit carryforwards as of December 31, 1997 were
approximately $1.7 million and will expire beginning in 2007, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization. At December 31, 1997 the federal net operating loss
carryforwards of the Company were not subject to any material annual
limitations.
The federal net operating loss carryforwards differ from the accumulated
deficit principally due to temporary differences in the recognition of certain
expense items for financial statement and federal tax reporting purposes,
consisting primarily of certain reserves and allowances not currently deductible
for tax purposes and certain start-up and development costs capitalized for tax
purposes.
NOTE 4. STOCKHOLDERS' EQUITY:
Preferred Stock
As of December 31, 1994, the Company had issued 7,871,544 shares of
Convertible Preferred Stock. During 1995, the Company issued an additional
3,037,500 shares of Convertible Preferred Stock for cash. In connection with a
technology licensing arrangement the Company issued 150,000 shares of its Series
C Convertible Preferred Stock in the quarter ended December 31, 1995. The
Company has valued these shares
32
<PAGE> 35
VISIONEER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
at $8.00 per share (See Note 7). Upon the closing of the Company's initial
public offering on December 11, 1995, all of the Convertible Preferred Stock
automatically converted into Common Stock.
Restricted Common Stock
In February 1993, the Company's board of directors adopted the 1993
Restricted Stock Purchase Plan (the "Purchase Plan") which provided for the sale
of Common Stock to employees and consultants. Restricted shares purchased under
the Purchase Plan are subject to a repurchase right by the Company. This
repurchase right generally lapses over a 48-month period. This plan was
terminated on October 16, 1995. As of December 31, 1997, 18,344 shares subject
to repurchase under the Purchase Plan.
Series C Convertible Preferred Stock warrants
At December 31, 1994, the Company had 101,500 Series C Convertible
Preferred Stock warrants outstanding which were exercisable at $4 per share. In
conjunction with the Company's initial public offering, 85,000 of these warrants
were exercised on a net issuance basis for 65,000 Common shares. The remaining
16,500 warrants automatically converted into Common Stock warrants upon the
completion of the Company's initial public offering. These warrants expire on
June 30, 2004.
During the quarter ended December 31, 1995 the Company issued a warrant to
purchase 110,000 shares of its Series C Convertible Preferred Stock in
connection with a technology licensing arrangement (See Note 7). The warrant
expires on November 1, 1999 and is exercisable at $9 per share. The Company has
assigned a value of $300,000 to this warrant. The warrant automatically
converted into a Common Stock warrant upon the completion of the Company's
initial public offering.
Deferred compensation relating to stock options
Based on an independent consultant's valuation report, management believes
that the exercise price for certain options granted during 1995 was below the
estimated fair value of the Company's Common Stock at the dates of grants. The
Company recorded deferred compensation expense of $400,000 related to these
grants which is being amortized over related vesting periods of the options. As
of December 31, 1997 the Company had recorded an expense of $250,000 related to
this compensation.
Notes receivable from stockholders
In exchange for the issuance of Common Stock in fiscal 1995 and 1994 under
the 1993 Restricted Stock Purchase Plan, the Company received notes receivable
from Stockholders which bear interest at rates varying from 4.86% to 7.2% per
annum. Principal and interest are due and payable on the fifth anniversary of
the date of issuance. The outstanding loan balance has been shown as a reduction
to stockholders' equity.
NOTE 5. STOCK COMPENSATION PLANS:
1993 Incentive Stock Option Plan
In February 1993, the Company's board of directors adopted the 1993
Incentive Stock Option Plan (the "Option Plan"). Under the Option Plan, the
Board of Directors are authorized to issue options for up to 3,870,000 shares of
Common Stock to employees and consultants of the Company at grant prices
determined by the board of directors on the date of grant. The Option Plan
allows for incentive stock options to be granted to employees and non-statutory
stock options to be granted to employees and consultants.
Options granted under the Option Plan expire no later than ten years from
the date of grant (no later than five years for 10% shareholders). The exercise
price shall be at least 100% and 85% of the fair value of the stock subject to
the option on the date the option is granted as determined by the board of
directors for
33
<PAGE> 36
VISIONEER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
incentive stock options and non-statutory stock options, respectively (110% of
the fair value for 10% shareholders). The options generally become exercisable
in increments over a period of four years from the date of grant, with the first
increment vesting after one year. At the discretion of the Board of Directors,
options may be granted with different vesting terms.
The following table summarizes activity under the option plan:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES ----------------------------
AVAILABLE NUMBER PRICE PER
FOR GRANT OF SHARES SHARE
---------- ---------- --------------
<S> <C> <C> <C>
Balance at December 31, 1994................ 801,390 1,107,851 $ 0.15 - $0.40
Additional shares authorized................ 870,000 --
Options granted............................. (1,025,000) 1,025,000 $ 0.40 - $7.00
Options exercised........................... -- (203,895) $ 0.15 - $4.25
Options canceled............................ 269,939 (269,939) $ 0.15 - $0.40
---------- ----------
Balance at December 31, 1995................ 916,329 1,659,017 $ 0.15 - $7.00
Options granted............................. (1,825,600) 1,825,600 $0.40 - $10.75
Options exercised........................... -- (278,066) $0.15 - $10.75
Options canceled............................ 1,167,841 (1,167,841) $0.15 - $10.75
---------- ----------
Balance at December 31, 1996................ 258,570 2,038,710 $0.15 - $10.75
Additional shares authorized................ 1,000,000 --
Options granted............................. (1,878,200) 1,878,200 $ 2.69 - $4.19
Options exercised........................... -- (404,323) $ 0.15 - $3.50
Options canceled............................ 1,134,922 (1,134,922) $0.15 - $10.75
---------- ----------
Balance at December 31, 1997................ 515,292 2,377,665 $0.15 - $10.75
========== ==========
</TABLE>
At December 31, 1997, options to purchase 424,158 shares were exercisable.
1995 Directors' Stock Option Plan
In October 1995, the Company instituted a directors' stock option plan and
reserved a total of 200,000 shares of the Company's Common Stock for issuance of
stock options thereunder. On October 3, 1997, at the Company's Annual Meeting of
Stockholders, an amendment was approved to increase the options available in
this plan by 120,000 to an aggregate of 320,000. The Plan allows for granting of
stock options to members of the Board of Directors who are not employees of the
Company. The options generally become exercisable in increments over a period of
four years from the date of grant, with the first increment vesting after one
year. The price of the options are equal to the fair market value of the
Company's Stock on the date of the grant. During 1995, options to purchase
100,000 shares of common stock were granted to Directors at an exercise price of
$12 per share. During 1996, no options were granted, no options were exercised
and 20,000 options were canceled. During 1997, 40,000 options were granted at
exercise prices ranging from $3.75 to $4.50, no options were exercised, and
25,000 options were canceled.
1995 Employee Stock Purchase Plan
In October 1995, the Company instituted an employee stock purchase plan
(the "1995 Purchase Plan") and reserved a total of 300,000 shares of the
Company's Common Stock for issuance thereunder. On October 3, 1997, at the
Company's Annual Meeting of Stockholders, an amendment was approved to increase
the shares available in this plan by 400,000 to an aggregate of 700,000. The
1995 Purchase Plan permits employees to acquire shares of the Company's Common
Stock through payroll deductions and became
34
<PAGE> 37
VISIONEER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
effective upon completion of the initial public offering of the Company's Common
Stock. During 1996 and 1997, shares issued under this plan aggregated 110,996
and 188,797 respectively.
1997 Employee Stock Option Plan
In February 1997, the Board of Directors adopted the 1997 Employee Stock
Option Plan (the "1997 Option Plan") to provide for the granting of
non-statutory stock options only to eligible employees and consultants who are
not officers or directors of the Company, with the exception to officers who
were not previously employed by the Company and for whom an option grant is an
inducement essential to such officers' entering into an employment relationship
or contract with the Company. The 1997 Option Plan was adopted in response to
the non-availability of options for future grant under the 1993 Option Plan. The
Company has reserved a total of 1,300,000 shares under this plan. During 1997,
options to purchase 723,000 shares were granted at an exercise price of $2.63,
none were exercised and 84,213 were canceled.
Options granted under the 1997 Option Plan expire no later than ten years
from the date of grant (no later than five years for 10% shareholders). The
exercise price shall be at least 100% and 85% of the fair value of the stock
subject to the option on the date the option is granted as determined by the
board of directors for incentive and non-statutory stock options, respectively
(110% of the fair value for 10% shareholders). The options generally become
exercisable in increments over a period of four years from the date of grant. At
the discretion of the Board of Directors, options may be granted with different
vesting terms.
Non-Statutory Option Grant to a Director
On April 9, 1997, the Company's Board of Directors granted non-statutory
stock options for 30,000 shares of Common Stock to Mr. Jeffrey Heimbuck, in
conjunction with him becoming a member of the Company's Board. The option grants
were made outside of the 1995 Directors' Stock Option Plan at an exercise price
of $3.50 per share. All such options become exercisable in annual installments
of 25% of the total number of shares subject to each option on each anniversary
of the date of grant. On December 31, 1997, all 30,000 options remained
unexercisable.
As of December 31, 1997, the Company has five stock-based compensation
plans as described above. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for these stock option plans. Had compensation cost for
options granted in 1997, 1996 and 1995 under the Company's option plans been
determined based on fair market value at the grant dates, as prescribed by SFAS
No. 123, the Company's net loss and pro forma net loss (in thousands) and the
Company's net loss and pro forma net loss per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss -- as reported: basic and diluted......... $(23,380) $(24,392) $(11,553)
Net loss -- pro forma: basic and diluted........... $(25,247) $(26,172) $(11,883)
Net loss per share -- as reported: basic and
diluted.......................................... $ (1.20) $ (1.34) $ (4.28)
Net loss per share -- pro forma: basic and
diluted.......................................... $ (1.30) $ (1.43) $ (4.40)
</TABLE>
The weighted average fair market value of options granted was $3.87, per
share, $3.80 per share and $1.31 per share for the years ended December 31,
1997, 1996 and 1995, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the applicable period: expected volatility of
70% for all periods, risk-free interest rate of 5.71% for options granted in
1997 and 6.19% for options granted in 1996 and 1995, and a weighted average
expected option term of 5.0 years for all periods. The Company has not paid
dividends and assumed no dividend yield.
35
<PAGE> 38
VISIONEER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
under the 1993 Incentive Stock Option Plan, the 1997 Employee Stock Option Plan,
the 1995 Directors' Stock Option Plan and the Non-Statutory Option Grant to
Director at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED AVG.
NUMBER REMAINING LIFE WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.15 - $0.50 201,429 6.92 $0.38 127,569 $0.34
$ 2.63 - $4.00 2,280,099 9.53 $3.41 240,116 $3.55
$ 4.19 - $6.50 489,174 8.53 $5.78 165,637 $6.04
$6.75 - $12.00 165,750 8.15 $8.73 75,453 $8.94
--------- ---- ----- ------- -----
$0.15 - $12.00 3,136,452 9.14 $3.86 608,775 $4.22
========= ==== ===== ======= =====
</TABLE>
For the Employee Stock Purchase Plan, the fair value of each purchase right
is estimated at the beginning of the offering period using the Black-Scholes
option-pricing model with the following weighted-average assumptions used in
1997, 1996, and 1995: expected volatility of 70% for all three years; risk-free
interest rate of 5.71%, 5.17% and 5.33% for 1997, 1996 and 1995, respectively;
and expected lives of 6 months for all three years. The Company has not paid
dividends and assumed no dividend yield. The weighted-average fair value of all
purchase rights granted in 1997, 1996, and 1995 was $2.14, $2.89, and $3.90,
respectively.
NOTE 6. COMMITMENTS:
Operating and capital leases
The Company leases its facility in California and certain equipment under
noncancelable operating leases. As of December 31, 1997, the Company had no
leases classified as capital leases. Total rent expense under operating leases
for the years ended December 31, 1997, 1996, and 1995 was $657,000, $546,000,
and $305,000, respectively.
On August 1997, the Company entered into an agreement with a third party to
sublease 17,928 square feet within its leased facility in Fremont, California.
The term of the sublease is forty-six months. The income is used to offset the
Company's rent expense.
Future minimum lease payments under the Company's current operating leases
and expected sublease income as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING SUBLEASE
LEASES INCOME
----------- -----------
(THOUSANDS) (THOUSANDS)
<S> <C> <C>
Years ending December 31:
1998...................................................... $ 698 $ 373
1999...................................................... 715 383
2000...................................................... 740 394
2001...................................................... 436 235
2002 and thereafter....................................... -- --
------ ------
Total............................................. $2,589 $1,385
====== ======
</TABLE>
Letters of credit
As of December 31, 1997, the Company had three commercial letters of credit
and one standby letter of credit outstanding, totaling $6.6 million. The letters
of credit were secured by the Company's line of credit and
36
<PAGE> 39
VISIONEER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
were issued primarily for the procurement of inventory. In addition, as of
December 31, 1997, one additional standby letter of credit for $62,000 was
outstanding to secure the last month's deposit on the Company's facilities in
Fremont, California. The letter of credit is secured by a certificate of deposit
which is presented as restricted cash at December 31, 1997.
NOTE 7. NON-RECURRING ITEMS:
The Company implemented a restructuring plan of all its organizations in
May 1997 which included a decrease of approximately 40% of total employee and
consultant headcount. A one-time restructuring charge of $675,000 was recorded
in the three month period ended June 30, 1997, representing severance paid to
terminated employees.
During the year ended December 31, 1995, the Company recorded an expense of
$1,600,000 representing the fair value of securities issued and cash paid in
connection with the settlement of a patent matter. In addition, the Company also
agreed to pay certain annual minimum and per unit royalties which are being
recognized as expense in periods in which related revenues are recognized.
NOTE 8. LITIGATION AND PATENT INFRINGEMENT CLAIMS:
On November 1, 1996, Millennium, L.P. ("Millennium"), a Cayman Island
limited partnership, filed an infringement action against Compaq alleging that
Compaq's scanner keyboard system, which utilized certain technology licensed
from the Company, and used in its products, infringed certain patent claims. The
Company indemnified Compaq with respect to the claims that Millennium has
asserted against Compaq to the extent required by the Company's OEM agreement
with Compaq. On September 17, 1997, Millennium and the Company entered into a
Settlement and License Agreement pursuant to which the Company licensed the
patents held by Millennium and the litigation was settled. The payments to
Millennium, called for by the settlement, were not material.
37
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of Visioneer, Inc.
Our audits of the financial statements referred to in our report dated
January 22, 1998, appearing on page 24 in the 1997 Annual Report on Form 10-K
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Jose, California
January 22, 1998
38
<PAGE> 41
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period................ $ 3,931 $ 2,531 $ 300
Additions charged to costs and expenses....... 7,122 4,469 3,348
Deductions and write-offs..................... (5,738) (3,069) (1,117)
------- ------- -------
Balance at end of period...................... $ 5,315 $ 3,931 $ 2,531
======= ======= =======
</TABLE>
INVENTORY
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period................ $ 5,698 $ 662 $ 100
Additions charged to costs and expenses....... 5,766 7,901 810
Deductions and write-offs..................... (8,384) (2,865) (248)
------- ------- -------
Balance at end of period...................... $ 3,080 $ 5,698 $ 662
======= ======= =======
</TABLE>
39
<PAGE> 42
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in the Registrant's
definitive proxy statement or an amendment to this Report, which the Registrant
will file with the Commission no later than April 27, 1998 (120 days after the
Registrant's fiscal year end covered by this Report) and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Registrant's
definitive proxy statement or an amendment to this Report, which the Registrant
will file with the Commission no later than April 27, 1998 (120 days after the
Registrant's fiscal year end covered by this Report) and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required for this item is contained in the Registrant's
definitive proxy statement or an amendment to this Report, which the Registrant
will file with the Commission no later than April 27, 1998 (120 days after the
Registrant's fiscal year end covered by this Report) and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for this item is contained in the Registrant's
definitive proxy statement or an amendment to this Report, which the Registrant
will file with the Commission no later than April 27, 1998 (120 days after the
Registrant's fiscal year end covered by this Report) and is incorporated herein
by reference.
40
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements -- See Index to Financial Statements at Item 8
of this Report.
(2) Financial Statements Schedules -- The following financial statement
schedule for the Company's fiscal years ended December 31, 1997,
1996 and 1995 is contained in Item 8 of this Report:
II -- Valuation and Qualifying Accounts and Reserves
Report of Price Waterhouse LLP, Independent Accountants. Refer to
Item 8 above.
Any other necessary financial statement schedules required by Item 8
of the Report have been incorporated into the Financial Statements
included as part of this Report.
(3) Exhibits -- Refer to Item 14(c) below.
(b) Reports on Form 8-K.
(c) Exhibits.
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<S> <C>
3.2(1) Bylaws of Registrant.
3.4(1) Amended and Restated Certificate of Incorporation of
Registrant.
4.1(1) Form of Common Stock Certificate.
4.2(6) Preferred Shares Rights Agreement, dated as of October 23,
1996, between the Registrant and U.S. Stock Transfer
Corporation, including the Certificate of Designation of
Rights, Preferences and Privileges of Series A Participating
Preferred Stock, the form of Rights Certificate and Summary
of Rights attached thereto as Exhibits A, B and C,
respectively.
10.1(1) Form of Indemnification Agreement.
10.2(1)** 1993 Incentive Stock Option Plan and form of Option
Agreement.
10.3(1)** 1995 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.4(1)** 1995 Directors' Option Plan and form of Option Agreement.
10.5(1) Third Amended and Restated Registration Rights Agreement
dated May 9, 1995 among the Registrant and certain security
holders of the Registrant.
10.7(1) OEM Agreement dated November 2, 1994 between the Registrant
and Hewlett-Packard Company, as amended by Amendment No. 1
dated August 1, 1995.
10.8(1) Distribution Agreement dated January 31, 1994 between the
Registrant and Ingram Micro Inc.
10.9(1) Distribution Agreement dated February 24, 1994 between the
Registrant and Merisel Americas, Inc.
10.10(1) Manufacturing Contract dated March 30, 1995 between the
Registrant and Flextronics Technologies, Inc.
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<S> <C>
10.11(1) Manufacturing Services Agreement dated June 20, 1995 between
the Registrant and International Business Machines
Corporation.
10.12(1)* * Loan Agreement dated March 31, 1994 between the Registrant
and Todd Basche.
10.13(1) LZW Paper Input System Patent License Agreement dated
October 20, 1995 between the Registrant and Unisys
Corporation.
10.14(1) Patent License agreement dated November 13, 1995 between the
Registrant and Wang Laboratories, Inc..
10.15(1) Loan and Security Agreement dated November 28, 1995 between
the Registrant and Silicon Valley Bank.
10.16(2) Amendment No. 2 dated December 15, 1995 to OEM Agreement
dated November 2, 1994 between the Registrant and
Hewlett-Packard Company.
10.17(2) Amendment No. 3 dated January 31, 1995 to OEM Agreement
dated November 2, 1994 between the Registrant and
Hewlett-Packard Company.
10.18(3) OEM Agreement dated June 30, 1995 between the Registrant and
Compaq Computer Corporation.
10.19(4) Building Lease dated May 21, 1996 between the Registrant and
John Arrillaga, Trustee, or his Successor Trustee, UTA dated
7/20/77 (Arrillaga Family Trust) as amended, and Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Richard T. Peery, Separate Property Trust) as amended.
10.20(5) Software License Agreement dated August 14, 1996 between the
Registrant and Hewlett-Packard Company.
10.21(7) Form of Employment Agreement between the Registrant and each
of its Executive Officers.
10.22(8)* * 1997 Employee Stock Option Plan.
10.23(8)* * Director 1997 Compensation Plan.
10.24(9) Manufacturing Agreement dated May 8, 1997 between the
Registrant and NMB Technologies, Inc..
10.25(9) Loan and Security Agreement dated June 26, 1997 between the
Registrant and Silicon Valley Bank.
10.26(9)* * Letter Agreements dated April 1, 1997 and July 7, 1997
between the Registrant and J. Larry Smart.
10.27(9)* * Letter Agreement dated April 9, 1997 between the Registrant
and Jeff Heimbuck, and Nonstatutory Stock Option Agreements
dated April 9, 1997 between the Registrant and Jeff
Heimbuck.
10.31(10) Amendment No. 1 dated September 30, 1997 to Loan and
Security Agreement dated June 26, 1997 between the
Registrant and Silicon Valley Bank.
10.32** Letter Agreement dated October 6, 1997 between the
Registrant and J. Larry Smart.
23.1 Consent of Price Waterhouse LLP.
24.1 Power of Attorney. See page 44.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (No. 33-98356) filed with the Commission on October 19, 1995.
(2) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996.
42
<PAGE> 45
(4) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996.
(5) Incorporated by reference from Exhibit 10.19 of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 1996.
(6) Incorporated by reference from Exhibit 4.1 of the Registrant's current
Report on Form 8-K dated October 30, 1996.
(7) Incorporated by reference from the Registrant's Annual Report on Form
10-K/A-2 for the fiscal year ended December 31, 1996.
(8) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1997.
(9) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1997.
(10) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1997.
** Management compensatory plan or arrangement.
43
<PAGE> 46
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont, State of
California, on March 27th, 1998.
VISIONEER, INC.
By: /s/ J. LARRY SMART
------------------------------------
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints J. Larry Smart and Geoffrey C. Darby, and
each of them, his attorneys-in-fact and agents, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therein, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. LARRY SMART President, Chief Executive March 27, 1998
- ----------------------------------------------------- Officer and Director (Principal
J. Larry Smart Executive Officer)
/s/ GEOFFREY C. DARBY Vice President of Finance and March 27, 1998
- ----------------------------------------------------- Administration and Chief
Geoffrey C. Darby Financial Officer (Principal
Financial and Accounting
Officer)
/s/ WILLIAM J. HARDING Director March 27, 1998
- -----------------------------------------------------
William J. Harding
/s/ JEFFREY HEIMBUCK Director March 27, 1998
- -----------------------------------------------------
Jeffrey Heimbuck
/s/ DAVID F. MARQUARDT Director March 27, 1998
- -----------------------------------------------------
David F. Marquardt
/s/ VINCENT WORMS Director March 27, 1998
- -----------------------------------------------------
Vincent Worms
</TABLE>
44
<PAGE> 1
Exhibit 10.32
October 6, 1997
Mr. J. Larry Smart
21245 Comet Drive
Saratoga, California 95070
Dear Larry:
The Board of Directors of Visioneer, Inc. (the "Company") is pleased to
offer you a full time employment position starting October 6, 1997 as permanent
President and CEO of Visioneer. You will report directly to the Board and all
Visioneer officers will report to you. Commencing on the date of this agreement,
your base salary will be $293,500 per year, payable in accordance with
Visioneer's standard payroll policy. You will be required to devote all of your
business time and attention to Visioneer's business, except that you may serve
on boards of directors of companies not competitive to Visioneer.
You will be paid a bonus for the third-quarter of 1997 of $30,000. In
addition, commencing in the fourth quarter of 1997, you will be eligible for
quarterly bonuses based on the fulfillment of certain performance objectives
agreed to between you and the Board on a quarterly basis. The amount of such
quarterly bonuses paid during any twelve month period will not exceed 50% of
your base salary during such twelve month period. In addition, you will receive
up to $5,000 per year for expenses incurred in purchasing private medical (which
will be paid on a quarterly basis) and disability insurance coverage at a cost
greater than the Company's current medical and disability benefits plans.
If at any time prior to January 6, 1998, your employment relationship
with Visioneer is terminated by the Company other than for Cause (as defined
below), you will continue to be paid your base salary from the date of
ten-nination until January 6, 1998. "Cause" for purposes of this letter shall
mean unsatisfactory performance by you of your duties as detennined by the Board
in its sole discretion, breaches of Visioneer policies or agreements, the
conviction of a felony, committing an act of dishonesty, fraud or intentional
illegal conduct against Visioneer, the misappropriation of Visioneer property,
the breach by you of any other arrangement or relationship between you and
another entity which the Board determines in its sole discretion to be injurious
to Visioneer in a material manner.
In addition to the above severance payment, which is applicable until
January 6, 1998, if at any time during the period of your employment
relationship with Visioneer, your relationship is terminated by the Company
other than for Cause, you will be entitled to a lump sum severance payment equal
to six months of your base salary existing at the time of such termination.
The Company granted you on October 6, 1997 an option to purchase
500,000 shares of Visioneer Common Stock at the price of $3 7/8 per share (the
"October Option"). The October Option is in addition to the options granted to
you in April and June of 1997 (the "April Option" and "June Option,"
respectively). The shares granted under the October Option will be incentive
stock options under the Company's 1993 Incentive Stock Option Plan (the "Plan")
to the maximum extent permitted by applicable IRS rules, with the balance of
such options being nonstatutory stock options. These options will vest at the
rate of 1/48th of the shares subject to the option per month commencing October
6, 1997 for so long as you remain President and CEO of Visioneer.
Upon the occurrence of a Change of Control (as defined below), 125,000
of the shares subject to the October Option which have not otherwise vested as
of the effective date of the Change of Control shall immediately vest and may be
exercised in accordance with the provisions of the October Option and the Plan
(the "Automatic Accelerated Shares"). "Change of Control" for purposes of this
letter shall mean a merger or consolidation of the Company in which the voting
securities of the Company outstanding immediately prior thereto represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) less than fifty percent (50%) of the total voting power
represented by the
<PAGE> 2
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, the complete liquidation of the
Company, or the sale or disposition by the Company of all or substantially all
of the Company's assets.
In addition, if your relationship with Visioneer is terminated by the
Company other than for Cause in connection with a Change of Control, the greater
of (i) one-half of the unvested shares subject to the October Option that are
not vested as of the effective date of the Change of Control, after vesting of
the Automatic Accelerated Shares, or (ii) that number of shares subject to the
October Option that would have vested if you had remained President and CEO of
the Company for one year after the date of such termination, shall immediately
vest and may be exercised in accordance with the provisions of the October
Option and the Plan.
In addition, the Board has determined that you have achieved the
performance milestones agreed to between you and the Board based on your
perforinance through September 30, 1997, and therefore, in accordance with the
July 7, 1997 letter agreement between you and Visioneer, the Board has
accelerated vesting under the June Option (as defined in the July 7, 1997 letter
agreement) with respect to 45,000 shares. You acknowledge that all other
provisions of the June Option, which provided for the acceleration of vesting of
an additional 90,000 shares under the June Option under certain conditions are
hereby terminated, and the June Option and July 7, 1997 letter agreement are
hereby amended accordingly.
As with the April Option (also as defined in the July 7, 1997 letter
agreement) and the June Option, the October Option will be subject to the
execution by you of an Option Agreement setting forth in detail these terms.
Under such Option Agreement you will be entitled to exercise the October Option
with respect to the shares that have vested as of the date of termination for 90
days after such date. Except as set forth in this letter agreement, you will not
be entitled to any acceleration of vesting under the April Option, June Option
or October Option. You will also not be entitled to any severance payment in
connection with your employment relationship with the Company or any termination
thereof except as set forth in this agreement. The salary and severance
provisions set forth in the April 1, 1997 letter agreement between you and
Visioneer shall no longer apply.
To the extent any severance and other benefits provided for in this
letter agreement constitute "parachute payments" within the meaning of Section
28OG of the Internal Revenue Code (the "Code"), you will be entitled to either
(i) such benefits in MI, or (ii) such lesser amount which would result in no
portion of such benefits being subject to excise tax under Section 4999 of the
Code, whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and such excise tax result in the receipt
by you on an after-tax basis, of the greatest amount of severance and other
benefits under this agreement.
Your employment relationship with Visioneer will continue to be "at
will" and will be terminable by either you or Visioneer at any time for any
reason.
We all look forward to a mutually profitable and enjoyable relationship
as we build Visioneer into a premier data input device company together.
Regards,
/s/ JEFF HEIMBUCK
Jeff Heimbuck
For the Board of Directors of
Visioneer, Inc.
I agree to the above terms: /s/ J. LARRY SMART Date: October 6, 1997
-----------------------------
J. Larry Smart
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-45425) of Visioneer, Inc. of our report dated
January 22, 1998 appearing on page 24 of Visioneer, Inc.'s Annual Report on Form
10-K. We also consent to the incorporation by reference of our report on the
Financial Statement Schedule, which appears on page 38 of this Annual Report on
Form 10-K.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Jose, California
March 27, 1998
45
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED STATEMENT OF OPERATIONS AND CONDENSED STATEMENT OF CASH FLOWS INCLUDED
IN THE COMPANY'S FORM 10-K FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,360
<SECURITIES> 3,091
<RECEIVABLES> 17,610
<ALLOWANCES> 5,315
<INVENTORY> 3,078
<CURRENT-ASSETS> 30,884
<PP&E> 6,026
<DEPRECIATION> 3,572
<TOTAL-ASSETS> 33,550
<CURRENT-LIABILITIES> 22,495
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 10,910
<TOTAL-LIABILITY-AND-EQUITY> 33,550
<SALES> 50,523
<TOTAL-REVENUES> 57,623
<CGS> 49,838
<TOTAL-COSTS> 50,725
<OTHER-EXPENSES> 31,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (940)
<INCOME-PRETAX> (23,380)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,380)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
