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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED JUNE 28, 1998
COMMISSION FILE NUMBER 0-27038
VISIONEER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
34800 CAMPUS DRIVE
FREMONT, CA 94555
(510) 608-0300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares of the registrant's Common Stock, $0.001 par value,
outstanding as of July 31, 1998 was 19,742,938.
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VISIONEER, INC.
FORM 10-Q
THREE AND SIX MONTHS ENDED JUNE 30, 1998
INDEX
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<CAPTION>
PAGE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets at June 30, 1998 and
December 31, 1997................................ 2
b) Condensed Statements of Operations for the three
month and six month periods ended June 30, 1998
and June 30, 1997................................ 3
c) Condensed Statements of Cash Flows for the six
month periods ended June 30, 1998 and June 30,
1997............................................. 4
d) Notes to Condensed Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................... 15
Item 2. Changes in Securities............................... 15
Item 3. Defaults Upon Senior Securities..................... 15
Item 4. Submission of Matters to a Vote of Security
Holders............................................. 15
Item 5. Other Information................................... 15
Item 6. Exhibits and Reports on Form 8-K.................... 16
Signatures.................................................. 17
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VISIONEER, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 14,152 $ 11,423
Short-term investments.................................... 1,674 3,029
Accounts receivable, less allowances of $5,500 and
$5,315................................................. 14,237 12,295
Inventory................................................. 7,093 3,078
Prepaid expenses and other current assets................. 626 1,059
-------- --------
Total current assets.............................. 37,782 30,884
-------- --------
Property and equipment, net................................. 1,644 2,454
Other assets................................................ 64 212
-------- --------
$ 39,490 $ 33,550
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings................................ $ 7,985 $ 2,821
Accounts payable.......................................... 16,107 12,837
Other accrued liabilities................................. 5,490 6,837
-------- --------
Total current liabilities......................... 29,582 22,495
-------- --------
Long-term liability......................................... 91 125
-------- --------
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares
authorized; 19,742,011 and 19,563,854 shares issued and
outstanding............................................ 20 20
Additional paid-in-capital................................ 87,918 87,682
Deferred compensation relating to stock options........... (100) (150)
Notes receivable from stockholders........................ (16) (44)
Accumulated deficit....................................... (78,005) (76,578)
-------- --------
Total stockholders' equity........................ 9,817 10,930
-------- --------
$ 39,490 $ 33,550
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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VISIONEER, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net revenues....................................... $20,276 $10,433 $40,241 $ 20,481
Cost of revenues................................... 15,544 7,575 29,713 25,170
------- ------- ------- --------
Gross profit (loss).............................. 4,732 2,858 10,528 (4,689)
------- ------- ------- --------
Operating expenses:
Research and development......................... 1,214 2,374 2,346 5,404
Selling, general and administrative.............. 5,320 6,458 9,886 13,347
------- ------- ------- --------
Total operating expenses................. 6,534 8,832 12,232 18,751
------- ------- ------- --------
Operating loss..................................... (1,802) (5,974) (1,704) (23,440)
Interest and other income, net..................... 40 280 277 613
------- ------- ------- --------
Net loss......................................... $(1,762) $(5,694) $(1,427) $(22,827)
======= ======= ======= ========
Net loss per share: basic.......................... $ (0.09) $ (0.29) $ (0.07) $ (1.18)
======= ======= ======= ========
Net loss per share: diluted........................ $ (0.09) $ (0.29) $ (0.07) $ (1.18)
======= ======= ======= ========
Weighted average common shares and equivalents:
Basic and diluted.................................. 19,687 19,317 19,646 19,359
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VISIONEER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(1,427) $(22,827)
Adjustments to reconcile net profit (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 981 1,069
Accounts receivable allowances......................... 185 599
Other.................................................. 78 55
Changes in assets and liabilities:
Accounts receivable.................................. (2,127) 4,103
Inventory............................................ (4,015) 1,388
Prepaid expenses and other current assets............ 433 21
Other assets......................................... 148 73
Accounts payable..................................... 3,270 (2,788)
Other accrued liabilities............................ (1,381) 4,893
------- --------
Net cash used in operating activities....................... (3,856) (13,414)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of short-term investments....................... 1,355 6,315
Capital expenditures for property and equipment, net...... (170) (159)
------- --------
Net cash provided by investing activities................... 1,185 6,156
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank borrowings, net........................... 5,164 2,500
Proceeds from issuance of common stock, net............... 236 479
------- --------
Net cash provided by financing activities................... 5,400 2,979
------- --------
Net increase (decrease) in cash and cash equivalents........ 2,729 (4,279)
Cash and cash equivalents at beginning of period............ 11,423 22,453
------- --------
Cash and cash equivalents at end of period.................. $14,152 $ 18,174
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VISIONEER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION:
The accompanying unaudited condensed financial statements of Visioneer,
Inc. (the "Company" or "Visioneer") have been prepared in accordance with
generally accepted accounting principles. In the opinion of management, these
interim condensed financial statements reflect all adjustments, consisting of
normal recurring adjustments necessary to present fairly the financial position,
results of operations, and cash flows at June 30,1998, and for other periods
presented. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information normally included in financial statements and related
footnotes prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
The results for the three and six month periods ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998, or any future period.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The Company's fiscal year ends on the Sunday closest to December 31.
Accordingly, fiscal 1998 will end December 27, 1998 and will contain 52 weeks,
fiscal 1997 ended December 28, 1997 and also contained 52 weeks. The Company
reports quarterly results on thirteen-week quarterly periods, each ending on the
Sunday closest to month-end. For purposes of presentation, the Company has
indicated its accounting year as ending December 31 and its interim quarterly
periods as ending on the respective calendar month-end.
NOTE 2. BALANCE SHEET COMPONENTS:
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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Raw materials.......................................... $1,901 $1,536
Work-in-process........................................ 29 329
Finished goods......................................... 5,163 1,213
------ ------
$7,093 $3,078
====== ======
</TABLE>
NOTE 3. NET LOSS PER SHARE:
Net loss per share is calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128 -- "Earnings per Share"
(SFAS No. 128), effective beginning in 1997. SFAS No. 128 requires the Company
to report both basic earnings per share, which is based on the weighted average
number of common shares outstanding, and diluted earnings per share, which is
based on the weighted average number of common shares outstanding and dilutive
potential common shares outstanding. Options to purchase 3,171,931 shares of
common stock at a weighted average price of $2.08 per share were outstanding at
June 30, 1998 but were not included in the computation of diluted EPS because
their impact was anti-dilutive. For the quarter ended June 30, 1997, options
outstanding, aggregating 2,634,869 with a weighted average exercise
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VISIONEER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED
(UNAUDITED)
price of $3.95, were excluded from diluted earnings per share calculations
because they were also anti-dilutive in view of the losses incurred by the
Company.
The following details the computation for basic and diluted loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net loss........................................... $(1,762) $(5,694) $(1,427) $(22,827)
------- ------- ------- --------
Weighted average common shares outstanding
(basic).......................................... 19,687 19,317 19,646 19,359
Effect of dilutive options and warrants............ -- -- -- --
------- ------- ------- --------
Weighted average common shares outstanding
(diluted)........................................ 19,687 19,317 19,646 19,359
------- ------- ------- --------
Loss per share: basic.............................. $ (0.09) $ (0.29) $ (0.07) $ (1.18)
======= ======= ======= ========
Loss per share: diluted............................ $ (0.09) $ (0.29) $ (0.07) $ (1.18)
======= ======= ======= ========
</TABLE>
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued two new
Statements of Financial Accounting Standards. SFAS No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income within a financial statement. This Statement requires the
Company to report additional information on comprehensive income to supplement
the reporting of income. SFAS No. 130 is effective for the year ending December
31, 1998. Comparative financial statements provided for earlier periods are
required to be reclassified so that comprehensive income is displayed in a
comparative format for all periods presented. SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," establishes standards for
reporting information about operating segments in annual and interim financial
statements. This Statement also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997; interim
disclosure is not required in the year of adoption. The Company adopted SFAS No.
130 during the first quarter of 1998 and to-date, there are no differences
between the net loss and comprehensive net loss for the three and six month
periods ended June 30, 1998 and 1997. The Company will adopt SFAS No. 131 as of
the year ending December 31, 1998 and is currently studying its provisions.
NOTE 5. DEBT:
On March 19, 1998, the Company amended its $7.5 million line of credit
increasing the line to $12.5 million and extending the expiration date to March
1999. The line of credit is collateralized by a security interest in the
Company's assets. At June 30, 1998, the Company had bank borrowings of $8.0
million and outstanding letters of credit of $4.2 million. At June 30, 1998, the
Company was not in compliance with certain conditions of the loan covenants.
Subsequently, the Company was able to secure a waiver of covenant default from
its bank.
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
FINANCIAL STATEMENTS. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN,
THE MATTERS DISCUSSED IN THIS DOCUMENT ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS
AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THOSE MENTIONED IN THIS REPORT
AND, IN PARTICULAR, THE FACTORS DESCRIBED UNDER "ADDITIONAL FACTORS THAT MAY
AFFECT FUTURE RESULTS," AND THOSE MENTIONED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 UNDER "BUSINESS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
OVERVIEW
Visioneer was incorporated in California in March 1992, and commenced
shipment of its initial product in the first quarter of 1994. In December 1995,
the Company reincorporated in Delaware in conjunction with its initial public
offering which raised $49.9 million, net of issuance costs. The Company has
experienced sequential growth in annual net revenues since the first year of
product shipments. The dramatic annual growth rates from 1994 to 1996 were
directly attributed to dramatic growth within the sheetfed scanner and document
management software markets, the development of OEM relationships and new
product introductions. In contrast, the slower growth from 1996 to 1998 was
attributed to several factors. First, the grayscale sheetfed scanner market
declined sharply with the advent of color sheetfed scanners. The transition of
the market from grayscale to color occurred at a much faster rate than the
Company had anticipated and, as a result, the Company recorded significant
charges relating to grayscale inventory reserves, purchase order commitments and
price protection charges in the first half of 1997. Second, the Company was late
in introducing a color scanner product and, as a result, did not capture planned
market share. Third, the Company's slower growth was further affected by
increased competition which caused overall sheetfed scanner average selling
prices to drop significantly. And finally, the growth of the sheetfed scanner
market, despite its earlier significant growth rates, has leveled off, and, in
fact, recent independent market reports show the sheetfed scanner market
declining in size.
A key component of the Company's business strategy is to penetrate the much
larger and rapidly growing flatbed market by leveraging off of its award winning
software. Historically, the Company has bundled its PaperPort software with its
scanner products, which has provided significant product differentiation. In the
second quarter of 1997, the Company decided to continue to leverage the merits
of its software in an attempt to penetrate the flatbed scanner market. The
PaperPort flatbed scanner line was introduced in September 1997. Despite an
intensely competitive market, the Company's initial efforts have been
successful. In addition, the Company introduced two new scanner lines in the
quarter ended June 30, 1998: the PaperPort OneTouch, and the PaperPort 6100
series that both feature increased functionality. Recent PC Data reports
indicate the Company holds approximately 10% share of the U.S. flatbed market.
There can be no assurance that the Company will be able to increase or maintain
its share of the flatbed scanner market.
In addition, the Company will continue to focus research and development
resources on software development. The ease of use and intelligent user
interface of the Company's software products have been, and will continue to be,
a key differentiator within the scanner and document and image management
market.
The success of the Company will depend on its ability to improve gross
margins and generate sales of PaperPort products significantly in excess of
sales during recent quarters. These in turn will depend in part on the ability
of the Company and its distributors, resellers and OEM partners to convince
end-users to adopt paper and image input systems for the desktop and to educate
end-users about the benefits of the Company's products. There can be no
assurance that the market for the Company's products will develop or that the
Company will achieve market acceptance of its products. Despite experiencing a
number of quarters of profitability throughout its brief history, the Company
has incurred annual net losses since inception. There can be no assurance that
the Company will be able to maintain quarterly profitability or attain annual
profitability in the near future. As of June 30, 1998, the Company had an
accumulated deficit of $78.0 million.
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Although the Company has experienced revenue growth during the recent past
quarters, these growth rates may not be sustainable and are not necessarily
indicative of future operating results.
RESULTS OF OPERATIONS
The following table presents, as a percentage of net revenues, certain
selected financial data for the three month and six month periods ended June 30,
1998 and June 30, 1997.
VISIONEER, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ----- ------
<S> <C> <C> <C> <C>
Net revenues......................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................................... 76.7% 72.6% 73.8% 122.9%
----- ----- ----- ------
Gross loss......................................... 23.3% 27.4% 26.2% (22.9)%
Operating expenses:
Research and development........................... 6.0% 22.8% 5.8% 26.4%
Selling, general and administrative................ 26.2% 61.9% 24.6% 65.2%
----- ----- ----- ------
Total operating expenses................... 32.2% 84.7% 30.4% 91.6%
----- ----- ----- ------
Operating loss....................................... (8.9)% (57.3)% (4.2)% (114.4)%
Interest and other income, net....................... 0.2% 2.7% 0.7% 3.0%
----- ----- ----- ------
Net loss............................................. (8.7)% (54.6)% (3.5)% (111.5)%
===== ===== ===== ======
</TABLE>
Net Revenues
Total net revenues increased 94% to $20.3 million for the three month
period ended June 30, 1998, from $10.4 million for the comparable period in
1997, due primarily to an increase in product revenues, partially offset by a
decrease in royalty and development revenues. The increase in product revenues
was attributable to significant increases in hardware sales. However, the
percentage increase in unit volume exceeded the percentage increase in revenue
as prices continued to erode in the increasingly competitive flatbed scanner
market. Royalty and development revenues decreased as a result of the reduction
in royalty revenues from Hewlett-Packard. The growth in hardware sales was led
by the strong demand for the Company's flatbed scanners introduced in September
1997. In addition, the Company introduced two new flatbed scanners in the
quarter ended June 30, 1998: the PaperPort OneTouch, and the PaperPort 6100
series that both feature increased functionality. Total net revenues, for the
six month period ended June 30, 1998, increased 97% to $40.2 million from $20.5
million for the comparable period in 1997. This increase is attributed to the
strong demand and growth of the flatbed scanner market offset by the decrease in
royalty and development revenue from Hewlett-Packard. However, the percentage
increase in unit volume exceeded the percentage increase in revenue as prices
continued to erode in the increasingly competitive flatbed scanner market. The
Company's software sales for the three month period ended June 30, 1998,
decreased by 18% to $2.5 million compared to $3.1 million for the comparable
period in 1997. The Company's software sales declined in units and dollars due
to soft retail market and the price reduction of the Company's PaperPort Deluxe
software from an ASP (Actual Sales Price) of $79.99 to $49.99. However, for the
six month period ended June 30, 1998, software sales increased 43% to $5.5
million compared to $3.9 million for the comparable period in 1997. This was
primarily due to strong first quarter 1998 sales of the Company's PaperPort
Deluxe. In addition, the Company commenced shipment of three new software
products in the quarter ended June 30, 1998: PaperPort ScannerSuite, PaperPort
Deluxe 5.3, and Visioneer Visual Explorer. Overall, average selling prices of
scanners and software continued their downward trend in an increasingly
competitive market. Due to these competitive
8
<PAGE> 10
pressures, the Company has planned a price reduction on August 1, 1998 on its
flatbed scanners. This price reduction may have an adverse impact on the
Company's quarterly and annual revenues if unit volumes are not correspondingly
increased. The Company expects that the price reduction will result in lower
gross margins with regard to the Company's hardware products.
Despite declining average retail prices, net revenues from international
sales held essentially flat for the three month and six month periods ended June
30, 1998 as compared to the same period in 1997. In order to increase
profitability for its international operations, in April 1997, the Company
terminated its local sales operations for Europe and the Asia-Pacific regions
and began searching for distribution partners who have established sales outlets
and local country expertise. This strategy, designed to minimize expenses and
maximize profitability for the regions, has not been fully implemented, and it
is unlikely that the Company will be able to realize significant increases in
the near future, in absolute terms, in revenues from international operations.
The introduction of major new products and enhancements of existing
products, such as PaperPort flatbed scanners and PaperPort ScannerSuite as well
as the latest version of PaperPort Deluxe software, are expected to have a
positive impact on the Company's quarterly and annual revenues. As is
characteristic of the initial stages of personal computer product life cycles,
the Company expects that sales volumes of new products will initially increase
in the months following introduction due to the purchase of initial inventory by
the Company's distribution channels. Thereafter, revenues may decline or
stabilize until the end of a product life cycle, at which time revenues are
likely to decline significantly, as a result of the reduction in unit sales and
prices. At the end of a product life cycle the Company may experience higher
rates of return and/or increased price protection charges as a result of price
reductions. This could have a material adverse impact on the Company's net
revenues and operating results. Although the Company has sought to mitigate the
effect of such transitions by controlling inventory levels at its distributors
and resellers, channel inventory levels are very difficult to accurately
quantify. The Company may experience higher than normal rates of return and may
incur significant price protection charges on its older version products in
connection with its planned release of new products and price reductions in
1998. Due to the inherent uncertainties of product development and new product
introductions, the Company cannot accurately predict the exact quarter in which
a new product or version will be ready to ship. Any delay in the scheduled
release of major new products could have a material adverse impact on the
Company's net revenues and operating results.
As of June 30, 1998, the Company had substantial channel inventory of
flatbed scanners. Due to continuing price pressure in the flatbed scanner
market, additional price reductions on this inventory could have an adverse
impact on the Company's quarterly and annual revenues.
Cost of Revenues
Cost of revenues as a percentage of net revenues was 76.7% for the three
month period ended June 30, 1998, as compared to 72.6% for the comparable period
in 1997. This increase in cost of revenues is attributable to the decrease in
product margins due to price pressure in the flatbed scanner market. Cost of
revenues as a percentage of total net revenues was 73.8% for the six month
period ended June 30, 1998 compared to 122.9% for the comparable period in 1997.
The decrease was a result of significant charges taken in the three month period
ended March 31, 1997 for write-offs, increased reserves relating to excess and
obsolete inventory, and cancellation of certain purchase commitments relating to
grayscale scanner products. In addition, the Company anticipates that gross
margins will decrease from the 23.3% experienced for the three month period
ended June 30, 1998, due to pricing pressure in the flatbed scanner market.
The computer and peripherals industry has been characterized by ongoing
rapid price erosion and resulting pressure on gross margins. The Company expects
that, based on historical trends in the computer and peripherals industry and,
in particular, based on the Company's recent observations and experiences in the
sheetfed and flatbed scanner markets, prices will continue to decline in the
future and competitors will offer products which meet or exceed performance and
capabilities of the Company's products. The Company intends to introduce new
hardware designs, software products and software upgrades, accessory products
and new software features, in part, to respond to anticipated competitive price
pressures and new product
9
<PAGE> 11
introductions. If prices fall faster than expected by the Company, or if the
Company reduces its prices in order to become or remain competitive or for any
other reason, the Company may be unable to respond with significant cost
reductions, and its gross profit could be materially adversely affected. In
addition, the Company's gross profit will depend in part on other factors
including the ability of its manufacturing partners to meet their manufacturing
commitments, the success of the Company's product transition, competition, the
timing and amount of royalties received under its OEM arrangements, the ability
of the Company to accurately forecast the mix and levels of its inventory
requirements, and general economic conditions.
Fluctuations in gross profit could have a material adverse affect on the
Company's financial condition and operating results.
Research and Development Expenses
Research and development expense decreased 48% to $1.2 million in the three
month period ended June 30, 1998 from $2.4 million in the comparable period in
1997. The significant decrease in spending was the result of the Company's
implementation of a strategy to focus on software development, and leverage the
engineering resources of its manufacturing partners to design future hardware
products. Research and development expenses decreased 56% to $2.3 million in the
six month period ended June 30, 1998 from $5.4 million in the comparable period
in 1997. This decrease further illustrates the Company's strategy to focus on
software development. The ease of use and intelligent user interface of the
Company's software products have been, and 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
expenses may fluctuate from quarter to quarter depending on a variety of factors
including the status of various development projects. To date, the Company has
not capitalized any development costs and does not anticipate capitalizing any
such costs in the foreseeable future.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 17% to $5.3 million
in the three month period ended June 30, 1998 from $6.5 million in the
comparable period in 1997. The decrease was primarily attributable to the
Company's abandonment of its previous strategy of investing heavily in the
promotion of its brand name and the establishment of the sheetfed scanner
category, which was in conjunction with the Company's restructuring plan in May
1997. The plan included a decrease of approximately 40% of total employee and
consultant headcount and a significant reduction in variable sales and marketing
expenditures. Although the spending cuts were designed to decrease the Company's
on-going operating expenses, there can be no assurance that the spending cuts
will not adversely affect future revenue levels, which would have an adverse
affect on the Company's financial condition and future operating results.
Selling, general and administrative expenses decreased 25% to $9.9 million in
the six month period ended June 30, 1998 from $13.3 million in the comparable
period in 1997. The decrease in spending is the result of the restructuring plan
implemented in May 1997. Although the Company has adopted rigid spending
controls, selling, general and administrative expenses may fluctuate from
quarter to quarter based on a variety of factors, including the timing of the
introduction of any new products, expansion of the Company's distribution
channels, general advertising related to product introductions, variable channel
marketing programs, and a new international sales and marketing strategy.
Interest and Other Income, Net
Interest and other income, net, consists primarily of interest earned on
cash equivalents and short-term investments. Interest and other income, net was
$40,000 for the three month period ended June 30, 1998 compared to $280,000 for
the three month period ended June 30, 1997. Interest and other income, net was
$277,000 for the six month period ended June 30, 1998 compared to $613,000 for
the comparable period in 1997. The decrease, in both the three and six month
periods ended June 30,1998, was the result of a decrease in interest income from
decreased cash equivalents and short-term investments in the respective periods.
10
<PAGE> 12
Taxation
The Company had no tax provision during the three and six month periods
ended June 30, 1998 due to availability of loss carryforwards and tax credits.
There was no tax provision for the three and six month periods ended June 30,
1997 due to the net losses incurred.
Liquidity and Capital Resources
As of June 30, 1998, the Company had cash, cash equivalents and short-term
investments of $15.8 million and working capital of $8.2 million, as compared to
$20.6 million of cash, cash equivalents and short-term investments and $7.5
million of working capital at June 30, 1997.
The Company used $3.9 million of cash for operating activities in the six
month periods ended June 30, 1998. The use of cash was primarily to fund losses
and a $4.0 million increase in inventory and a $2.1 million increase in accounts
receivable offset by a $3.3 million increase in accounts payable. The balance of
the activity was attributable to changes in other working capital and non-cash
charges. Cash used in the six month period ended June 30, 1997 was $13.4
million. The 1997 negative cash flows from operating activities was attributed
to net loss of $22.8 million, offset by non-cash charges and changes in working
capital.
Cash provided by investing activities for the six month periods ended June
30, 1998 and June 30, 1997 was $1.2 million and $6.2 million, respectively, as
the Company had a net decrease in short-term investments for the periods.
Cash provided by financing activities for the six month period ended June
30, 1998 was $5.4 million. The Company increased short-term bank borrowings by
$5.2 million to $8.0 million from $2.8 million at December 31, 1997, and an
additional $236,000 was raised from the issuance of new Common Stock in
connection with the Company's employee stock purchase plan. Cash provided by
financing activities was $3.0 million for the six month period ended June 30,
1997. The cash provided was the result of $2.5 million in short-term bank
borrowings and $500,000 from the issuance of Common Stock in connection with the
Company's employee stock purchase plan and the exercise of employee stock
options.
As the Company introduces and ramps up production of its new products in
subsequent quarters, its investment in inventory, especially flatbed scanner
inventory, and accounts receivable will continue to represent a significant
portion of working capital. In order to increase liquidity, in March 1998, the
Company renegotiated its $7.5 million line of credit and increased it to $12.5
million. At June 30, 1998, the Company was not in compliance with certain
conditions of the loan covenants. Subsequently, the Company was able to secure a
waiver of covenant default from its bank. As of June 30, 1998, the Company's
principal sources of liquidity consisted of $15.8 million of cash, cash
equivalents and short-term investments. The Company believes that its existing
sources of liquidity, including current cash balances and its line of credit,
will provide adequate cash to fund its operations for at least the next twelve
months. 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. The sale of additional equity or
convertible debt securities would result in additional dilution to the Company's
stockholders.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company intends to take advantage of the "Safe Harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that the following important factors, as well as other
factors, could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future
quarters to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company in this report.
Dependence on Developing Market; Product Concentration
The market for paper input systems and, in particular, for the Company's
PaperPort products, is new and rapidly evolving. The Company currently derives
substantially all of its revenues from its PaperPort products and expects that
revenues from these products will continue to account for a substantial portion
of all of its
11
<PAGE> 13
revenues for the foreseeable future. Broad market acceptance of PaperPort
products is critical to the Company's future success. This success will depend
in part on the ability of the Company, its distributors and other suppliers of
paper input scanners to convince end users to adopt paper input systems for the
desktop, and the Company's ability to educate end users about the benefits of
its products. This success will also depend in part on the Company's ability to
offer competitive hardware and software features in its PaperPort products in a
limited period of time.
Difficulties and Risks Associated with New Product Introduction and
Development
The market for the Company's products is characterized by rapidly changing
technology and frequent new product introductions. The Company's success will
depend to a substantial degree upon its ability to develop and introduce in a
timely fashion new products and enhancements to its existing products that meet
changing customer requirements and emerging industry standards, including the
Company's recent introduction of its color flatbed scanner products, including
the PaperPort OneTouch, and new software introductions that include Visioneer
ProOCR100, PaperPort ScannerSuite, PaperPort Deluxe 5.3 and Visioneer Visual
Explorer. The development of new, technologically-advanced products and product
enhancements is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. In this respect, the Company believes there will be a significant market
demand for color sheetfed and flatbed scanner products. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market or support new products and product enhancements successfully, that any
new products or product enhancements will gain market acceptance, or that the
Company will be able to respond effectively to technological changes, emerging
industry standards or product announcements by competitors. New product
announcements by the Company could cause customers to defer purchasing existing
products or cause the Company to lower prices of its older products, resulting
in distributors claiming price protection credits or returning such products to
the Company. Any of these events could have a material adverse effect on the
Company's business, operating results and financial condition.
The introduction of major new products and enhancements of existing
products, such as PaperPort 3000 and PaperPort 6000, introduced in the third
quarter of 1997 and Visioneer ProOCR100 introduced in the first quarter of 1998,
as well as the new products introduced in the second quarter of 1998, such as
PaperPort OneTouch, PaperPort 6100, PaperPort ScannerSuite, PaperPort Deluxe
5.3, and Visioneer Visual Explorer have had, and will continue to have, a
significant impact on the Company's quarterly and annual revenues. As is
characteristic of the initial stages of personal computer product life cycles,
the Company expects that sales volumes of any new product may increase in the
first few months following introduction due to the purchase of initial inventory
by the Company's distributors and resellers. Thereafter, revenues may decline or
stabilize until the end of a product life cycle, at which time revenues are
likely to decline significantly.
The Company must successfully manage the transition to new products and new
versions of existing products. At the end of a product life cycle the Company
may experience higher rates of return on its older products and may have to
lower the prices of such products, which would result in increased price
protection charges and could have a material adverse impact on the Company's net
revenues and operating results. The Company experienced higher than normal rates
of return of its grayscale scanner products over the last several quarters and
incurred significant price protection charges in connection with the Company's
release of the PaperPort Strobe color sheetfed scanner. Due to the inherent
uncertainties of product development and new product introductions, the Company
cannot accurately predict the exact timing in which a new product or version
will be ready to ship. Any delay in the scheduled release of major new products
would have a material adverse impact on the Company's net revenues and operating
results.
Fluctuations in Operating Results
The Company has experienced and may continue to experience significant
fluctuations in revenues and operating results from quarter to quarter and from
year to year due to a combination of factors, many of which are outside of the
Company's direct control. These factors include development of the paper input
systems market, demand for the Company's products, the Company's success in
developing, introducing and shipping new products and product enhancements, the
market acceptance of such products, the Company's ability to
12
<PAGE> 14
respond to new product introductions and price reductions by its competitors,
which the Company expects will continue through the foreseeable future, the
timing, cancellation or rescheduling of significant orders, the purchasing
patterns and potential product returns from the Company's distribution channels,
the Company's relationships with its OEM partners and distributors, the
performance of the Company's manufacturing partners and component suppliers, the
availability of key components and changes in the cost of materials for the
Company's products, the Company's ability to attract, retain and motivate
qualified personnel, the timing and amount of research and development and
selling, general and administrative expenditures, and general economic
conditions.
Revenues and operating results in any quarter depend, to a large extent, on
the volume, timing and ability to fulfill customer orders, the receipt of which
is difficult to forecast. A significant portion of the Company's operating
expenses is relatively fixed in advance, based in large part on the Company's
forecasts of future sales. If sales are below expectations in any given period,
the adverse effect of a shortfall in sales on the Company's operating results
may be magnified by the Company's inability to adjust operating expenses to
compensate for such shortfall. Accordingly, any significant shortfall in
revenues relative to the Company's expectations would have an immediate material
adverse impact on the Company's business, operating results and financial
condition. The Company may also be required to reduce prices in response to
competition or to increase its spending to pursue new product or market
opportunities. In the event of significant price competition in the market for
the Company's products, which is anticipated, the Company will be required to
decrease costs at least proportionately and the Company will be at a significant
disadvantage with respect to its competitors that have substantially greater
resources. Such competitors may more readily withstand an extended period of
downward pricing pressure. In such event, the Company will also incur price
protection charges from its distributors and resellers. Any price protection
charges in excess of recorded allowances would have a material adverse effect on
the Company's business, operating results and financial condition.
Due to the foregoing factors, it is likely that at some point in the future
the Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. Accordingly, the Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies participating in new and rapidly evolving
markets. There can be no assurance that the Company will be successful in
addressing such risks.
Dependence on Manufacturing Partners
The Company currently has four manufacturing partners which manufacture
virtually all of its hardware and software products. All hardware manufacturing
partners are located in the Far East, and therefore, the Company is exposed to
the political and economic risks associated with doing business in this region,
which could have a material adverse effect on the Company's business, operating
results and financial condition. Furthermore, commencement of production of
products at new or existing facilities involves certain start-up risks, such as
those associated with the procurement of materials and training of production
personnel, which may result in delays and quality issues. The unanticipated loss
of any of the manufacturing partners could cause delays in the Company's ability
to fulfill orders while the Company identifies a replacement manufacturer. Such
an event could have a material adverse effect on the Company's business,
operation results and financial condition.
The Company's manufacturing policies are designed to take advantage of
lower manufacturing costs overseas, which may, in certain instances, result in
excess or insufficient inventory if orders do not match forecasts. To date, the
Company's inventory reflects purchases based on forecasted sales. There can be
no assurance that actual sales will match sales forecasts. To the extent the
Company has excess inventory, the Company may experience inventory write-downs
or may have to lower product prices which would result in substantial price
protection charges and a negative impact on gross margins. In this regard, the
Company experienced a significant excess inventory situation during the quarter
ended March 31, 1997, and recorded significant inventory write-down and price
protection charges. Although the Company has made significant progress in
reducing its inventory risk over the last several quarters, there can be no
assurance that the Company will be successful in its continuing efforts and will
not experience similar excess inventory situations.
13
<PAGE> 15
Dependence on Distributors and Resellers
To date, the Company has derived a substantial portion of its revenues from
sales through its independent distributors and resellers. Although the Company
has established several strategic OEM partnerships, the Company expects that
sales through its independent distributors and resellers will continue to
account for a substantial portion of its revenues in the foreseeable future.
Sales to the top five independent distributors and resellers accounted for 66%
of the Company's net revenues in the first six months of 1998. The Company
anticipates that its dependence on any one independent distributor or reseller
will decrease in the future because of efforts to expand distribution channels.
The Company's agreements with distributors and resellers are not exclusive, and
each of the Company's distributors and resellers can cease marketing the
Company's products with limited notice and with little or no penalty. There can
be no assurance that the Company's independent distributors and resellers will
continue to offer the Company's products or that the Company will be able to
recruit additional or replacement distributors or resellers. The loss of one or
more of the Company's major distributors or resellers could have a material
adverse effect on the Company's business, operating results and financial
condition. Many of the Company's distributors and resellers offer competitive
products manufactured by third parties. There can be no assurance that the
Company's distributors or resellers will give priority to the marketing of the
Company's products. Any reduction or delay in sales of the Company's products by
its distributors and resellers could have a material adverse effect on the
Company's business, operating results and financial condition.
Intensely Competitive Market
The computer and peripherals industry has been characterized by ongoing
rapid price erosion and resulting pressure on gross margins. As an example, the
suggested retail price of PaperPort Strobe, when it was introduced in June 1997,
was $299, the suggested retail price as of May 1, 1998 is $199. The Company
expects that, based on historical trends in the computer and peripherals
industry and, in particular, on the Company's recent observations and
experiences in the paper management systems market, prices will continue to
decline in the future and that competitors will offer products which meet or
exceed performance and capabilities of the Company's products. The Company
intends to introduce new hardware designs, software products, software upgrades,
accessory products and software features, to respond to anticipated competitive
price pressures and new product introductions. If prices fall faster than
expected by the Company, or if the Company reduces its prices in order to become
or remain competitive or for any other reason, the Company may be unable to
respond with significant cost reductions and its gross margin could be
materially adversely affected. In addition, the Company's gross margin will
depend in part on other factors outside of the Company's control, including the
availability and prices of key components, the success of the Company's product
transition, competition, the timing and amount of royalties received under its
OEM arrangements and general economic conditions. Fluctuations in gross margin
could have a material adverse effect on the Company's financial condition and
operating results.
14
<PAGE> 16
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 22, 1998. There
was present at the meeting, in person or represented by proxy, holders of
15,583,057 shares of Common Stock, which represented approximately 79.3% 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: 15,519,465
Against: 0
Abstain: 63,592
William J. Harding.................... For: 15,519,465
Against: 0
Abstain: 63,592
Jeffrey Heimbuck...................... For: 15,519,465
Against: 0
Abstain: 63,592
David F. Marquardt.................... For: 15,519,465
Against: 0
Abstain: 63,592
Vincent Worms......................... For: 15,519,465
Against: 0
Abstain: 63,592
</TABLE>
2. The ratification of the reappointment of Price Waterhouse LLP as
the Company's independent accountants for the fiscal year ending December
27, 1998. There were 15,523,591 shares of Common Stock voting in favor,
37,912 shares of Common Stock voting against, and 21,554 shares of Common
Stock abstaining.
ITEM 5. OTHER INFORMATION
None.
15
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this Report on Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont, State of
California, on August 11, 1998.
VISIONEER, INC.
By: /s/ GEOFFREY C. DARBY
------------------------------------
Geoffrey C. Darby
Vice President of Finance and
Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer)
17
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET, CONDENSED STATEMENT OF OPERATIONS AND CONDENSED
STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE THREE MONTH
PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 14,152
<SECURITIES> 1,674
<RECEIVABLES> 19,737
<ALLOWANCES> 5,500
<INVENTORY> 7,093
<CURRENT-ASSETS> 37,782
<PP&E> 5,992
<DEPRECIATION> 4,347
<TOTAL-ASSETS> 39,490
<CURRENT-LIABILITIES> 29,582
<BONDS> 91
20
0
<COMMON> 0
<OTHER-SE> 9,797
<TOTAL-LIABILITY-AND-EQUITY> 39,490
<SALES> 20,276
<TOTAL-REVENUES> 20,276
<CGS> 15,544
<TOTAL-COSTS> 15,544
<OTHER-EXPENSES> 6,534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (40)
<INCOME-PRETAX> (1,762)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,762)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,762)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
