<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-27038
SCANSOFT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
9 CENTENNIAL DRIVE
PEABODY, MA 01970
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(978) 977-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [ ]
26,523,747 shares of the registrant's Common Stock, $0.001 par value,
were outstanding as of November 1, 1999.
<PAGE> 2
SCANSOFT, INC.
FORM 10-Q
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I: FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
a) Consolidated Statements of Income for the three and nine months
ended September 30, 1999 and September 30, 1998..................... 1
b) Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998................................................... 2
c) Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998..................... 3
d) Notes to Consolidated Financial Statements.......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 8
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................... 14
Signatures...................................................................... 15
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue ..................................................... $ 8,210 $ 19,238 $ 22,986 $ 59,479
Costs and expenses:
Cost of revenue ....................................... 1,994 14,419 5,427 44,132
Research and development .............................. 1,717 1,140 5,140 3,486
Selling, general and administrative ................... 3,234 4,323 10,288 14,209
Amortization of intangible assets ..................... 655 -- 1,288 --
Restructuring charges ................................. -- -- 346 --
Gain on sale of hardware business, net ................ -- -- (882) --
Acquired in-process research and development .......... -- -- 3,944 --
-------- -------- -------- --------
Total costs and expenses .................................... 7,600 19,882 25,551 61,827
-------- -------- -------- --------
Income (loss) from operations ............................... 610 (644) (2,565) (2,348)
Other income (expense), net ................................. 62 (40) 136 237
-------- -------- -------- --------
Income (loss) before income taxes ........................... 672 (684) (2,429) (2,111)
Provision for income taxes .................................. 200 -- 300 --
-------- -------- -------- --------
Net income (loss) ........................................... $ 472 $ (684) $ (2,729) $ (2,111)
======== ======== ======== ========
Net income (loss) per share: basic .......................... $ 0.02 $ (0.03) $ (0.11) $ (0.11)
======== ======== ======== ========
Net income (loss) per share: diluted ........................ $ 0.01 $ (0.03) $ (0.11) $ (0.11)
======== ======== ======== ========
Weighted average common shares: basic ....................... 26,472 19,776 25,220 19,689
======== ======== ======== ========
Weighted average common and common equivalent
shares: diluted.......................................... 31,937 19,776 25,220 19,689
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
SCANSOFT, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and investments ......................................................... $ 5,376 $ 7,861
Restricted cash .............................................................. -- 262
Accounts receivable, less allowances of $3,364 and $4,171 .................... 8,374 13,512
Inventory, net ............................................................... 805 4,777
Prepaid expenses and other current assets .................................... 1,062 929
--------- ---------
Total current assets ...................................................... 15,617 27,341
Property and equipment, net .................................................. 863 1,039
Acquired intangible assets, net .............................................. 13,642 --
Other assets ................................................................. 221 65
--------- ---------
TOTAL ASSETS ....................................................................... $ 30,343 $ 28,445
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term bank borrowings ................................................... $-- $ 6,000
Note payable ................................................................. 1,600 --
Accounts payable ............................................................. 1,159 11,053
Accrued sales and marketing expenses ......................................... 1,364 1,165
Deferred revenue ............................................................. 1,004 843
Other accrued expenses ....................................................... 3,377 1,711
--------- ---------
Total current liabilities ................................................. 8,504 20,772
--------- ---------
Other liabilities .................................................................. -- 91
--------- ---------
Stockholders' equity:
Non-voting Preferred stock, $0.001 par value; 3,562,238 and 0 shares
authorized, issued and outstanding, respectively .......................... 4 --
Common stock, $0.001 par value; 50,000,000 shares authorized; 26,510,168 and
19,852,952 shares issued and outstanding, respectively .................... 27 20
Treasury stock, 331,740 and 0 shares, respectively ........................... (684) --
Additional paid in capital, Common ........................................... 100,976 87,995
Additional paid in capital, Preferred ........................................ 4,628 --
Deferred compensation relating to stock options .............................. -- (50)
Accumulated deficit .......................................................... (83,112) (80,383)
--------- ---------
Total stockholders' equity ................................................ 21,839 7,582
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $ 30,343 $ 28,445
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ............................................................................... $ (2,729) $ (2,111)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ..................................................... 239 1,444
Accounts receivable allowances .................................................... 2,024 (1,495)
Amortization of intangible assets ................................................. 1,288 --
Net gain on sale of hardware business ............................................. (882) --
Write off of acquired in-process research and development ......................... 3,944 --
Other ............................................................................. -- 102
Changes in assets and liabilities, net of effects from acquisitions and sale of
hardware business assets .................................................... (6,263) (4,035)
-------- --------
Net cash used in operating activities .................................................... (2,379) (6,095)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of short-term investments ................................................. 397 2,828
Proceeds from sale of hardware business ............................................. 6,782 --
Cash received in ScanSoft acquisition, net .......................................... 1,233 --
Cash used for MetaCreations acquisition ............................................. (1,669) --
Capital expenditures for property and equipment ..................................... (148) (181)
-------- --------
Net cash provided by investing activities ................................................. 6,595 2,647
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term bank borrowings, net ..................................................... (6,000) 4,551
Acquisition of Treasury stock ....................................................... (684) --
Proceeds from issuance of common stock, net ......................................... 118 297
-------- --------
Net cash provided by (used in) financing activities ....................................... (6,566) 4,848
-------- --------
Net increase (decrease) in cash and cash equivalents ...................................... (2,350) 1,400
Cash and cash equivalents at beginning of period .......................................... 7,659 11,423
-------- --------
Cash and cash equivalents at end of period ................................................ 5,309 12,823
Investments ............................................................................... 67 3,029
-------- --------
Cash and investments ...................................................................... $ 5,376 $ 15,852
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
SCANSOFT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
Prior to 1999, the results of the Company represented the activity of
Visioneer, Inc., which marketed and sold hardware and software. On January 6,
1999, the Company sold its hardware business to Primax Electronics, Ltd. On
March 2, 1999, the Company acquired Xerox Corporation's ScanSoft subsidiary and
subsequently renamed the Company ScanSoft, Inc.
The accompanying unaudited consolidated financial statements of
ScanSoft, Inc. (the "Company" or "ScanSoft") have been prepared in accordance
with generally accepted accounting principles. In the opinion of management,
these interim consolidated financial statements reflect all adjustments,
consisting of normal recurring adjustments necessary to present fairly the
financial position, results of operations, and cash flows at September 30, 1999,
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 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 January 3, 1999.
The results for the three and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999, 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.
Effective in the first quarter of 1999, the Company changed its year
and quarter ends. The Company's fiscal year now ends on December 31. The Company
reports quarterly results on the last day of the calendar quarter. The Company
previously used the Sunday closest to the calendar month end.
-4-
<PAGE> 7
BALANCE SHEET COMPONENTS
The following table summarizes key balance sheet components (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Inventory:
Raw Materials ................................ $ 279 $ 429
Work-in-process .............................. -- 2,261
Finished goods ............................... 526 2,087
------ ------
$ 805 $4,777
====== ======
Other accrued liabilities:
Accrued wages ................................ $ 727 $ 216
Accrued royalties ........................... 486 457
Accrued taxes payable ........................ 589 158
Accrued warranty ............................. 250 200
Estimated liability, acquired products ....... 281 --
Other accrued liabilities .................... 1,044 680
------ ------
$3,377 $1,711
====== ======
</TABLE>
ACQUISITION OF SCANSOFT
Effective March 2, 1999, the Company acquired Xerox Corporation's
ScanSoft subsidiary, a company that develops, markets, distributes and supports
software that captures, communicates and prints documents at the desktop, for
approximately 6.8 million shares of Common Stock, 3.6 million shares of
non-voting Preferred Stock and the exchange of 1.7 million employee stock
options to purchase Common Stock of the Company in exchange for outstanding
employee stock options of ScanSoft. In conjunction with the acquisition, the
Company incurred approximately $1.1 million of acquisition related costs. The
purchase price of ScanSoft, including acquisition costs, was $18.6 million, and
was allocated to the assets acquired and liabilities assumed based on the fair
value of ScanSoft's current assets, property and equipment, and liabilities. The
excess of the purchase price over the fair value of tangible assets acquired has
been allocated to intangible assets (acquired in-process research and
development, core technology, trade mark and trade name, and assembled
workforce) acquired based on an independent appraisal.
This acquisition has been accounted for under the purchase method of
accounting and the results of operations of ScanSoft have been included in the
consolidated statements of operations of the Company from the date of
acquisition. The Company recorded a one time write-off of approximately $3.9
million in the quarter ended March 31, 1999 relating to the value of in-process
research and development acquired as part of the purchase.
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<PAGE> 8
The allocation of the purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment.......................................... $ 909
Current and other assets........................................ 4,813
Liabilities assumed............................................. (2,166)
Identified intangible assets.................................... 11,096
Acquired in-process research and development.................... 3,944
-------
$18,596
=======
</TABLE>
IN-PROCESS RESEARCH AND DEVELOPMENT
Management estimates that $3.9 million of the purchase price of
ScanSoft represents acquired in-process technology that had not yet reached
technological feasibility and had no alternative future use. Accordingly, this
amount was immediately charged to expense in the consolidated statements of
income upon consummation of the acquisition. The value assigned to acquired
in-process technology was determined by identifying research projects in areas
for which technological feasibility has not been established. These include
projects (primarily major version upgrades) in each of ScanSoft's major
products, including ScanWorks, Pagis, TextBridge and API. The value was
determined by estimating the revenue contribution of each of these products and
the amount of the revenues attributable to the core/developed technology, the
in-process - completed, the in-process - to be completed and the future
yet-to-be-defined elements. The net cash flows for the in-process - completed
were then discounted utilizing a weighted average cost of capital of 25%. This
discount rate takes into consideration the inherent uncertainties surrounding
the successful development of the in-process research and development, the
profitability levels of such technology and the uncertainty of technological
advances which could potentially impact the estimates described above. The
allocation between the in-process - completed and the in-process - to be
completed amounts were estimated based on the time and related costs incurred in
development before the close of the acquisition and estimated to be incurred
after the close of the acquisition. The average percentage of completion of the
projects ranged from 73% to 95% at the date of the acquisition. Revenue is
projected to be generated in fiscal 1999 for each of the product versions in
development at the acquisition date. If these projects are not successfully
developed, future revenue and profitability of ScanSoft may be adversely
affected. Additionally, the value of other intangible assets acquired may become
impaired.
RESTRUCTURING
Pursuant to the disposal of the hardware business and acquisition of
the software business, the Company initiated restructuring actions in the first
quarter of 1999 and recorded a charge of $346,000 for such actions. Included in
the charge was $188,000 related to a workforce reduction. The workforce
reduction costs primarily include severance costs related to the involuntary
termination of employment for approximately 10 employees from research and
development in California. The terminations were necessary in order to
consolidate the Company's research and development efforts to the new corporate
headquarters in Massachusetts. Also included was approximately $46,000 in fixed
assets and $82,000 in non-refundable commitments associated with the California
operation which were no longer required once the headquarters were moved to
Massachusetts, and $30,000 in other exit costs. Severance costs and other exit
costs were determined in accordance with EITF No. 94-13, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity."
SALE OF HARDWARE BUSINESS
On December 3, 1998, the Company entered into an agreement to sell
its hardware assets, liabilities and intellectual property to Primax
Electronics, LTD ("Primax") for approximately $6.8 million
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<PAGE> 9
in cash. The terms of the agreement also granted to Primax a software license
agreement that allows them to "bundle," market and sell the Company's PaperPort
software with Primax hardware products. The agreement requires the payment of
certain royalties by Primax to the Company.
On January 6, 1999 the agreement with Primax was completed.
Accordingly, in the quarter ended March 31, 1999, the Company reported a
non-operating gain of approximately $882,000 related to the sale of the hardware
business. The most significant assets and liabilities at January 3, 1999, of the
hardware business were receivables, inventories and accounts payable in the
approximate amounts of $12.7 million, $4.6 million and $10.7 million,
respectively. In addition, Primax assumed the lease of the Company's corporate
facilities in California. The Company entered into an agreement with Primax to
pay Primax rent for the Company's use of this facility until the move of the
corporate offices to Peabody, Massachusetts after the acquisition of ScanSoft on
March 2, 1999.
As a result of the sale of the hardware business on January 6, 1999,
the Company derived no revenues and incurred no material operating expenses
related to the hardware business during the nine months ended September 30,
1999.
ACQUISITION OF PRODUCT LINES
On June 30, 1999, the Company completed a definitive asset purchase
agreement (the "Purchase Agreement") and license agreement (the "License") to
acquire and license certain assets and intellectual property relating to the
photo imaging software products business of MetaCreations Corporation which
include Kai's Photo Soap 1.0, Kai's Photo Soap 2.0, Kai's SuperGoo 1.0, Kai's
PowerGoo 1.0 and Kai's Power Show 1.1 (the "Products") from MetaCreations
Corporation (the "Products").
Pursuant to the Purchase Agreement, the Company purchased all of the
inventory, intangibles, books and records, marketing materials and
MetaCreations' website content relating to the Products. The Company paid
MetaCreations $600,000 plus assumed the obligations to fulfill sales orders
relating to the Products, all liabilities under all original equipment
manufacturer and other agreements pertaining to the Products, and up to $950,000
of product return liability relating to Products sold prior to the date of the
Purchase Agreement. In addition, the Purchase Agreement includes contingent
financial performance incentive payments under which the Company could pay
MetaCreations up to $1,000,000, based on the sale of the Products and certain
other technology licensed in the License Agreement.
Under the License Agreement, MetaCreations granted the Company a
non-exclusive, royalty free license to use, reproduce, license, sell and
distribute the intellectual property relating to the Products and other related
software technology. Pursuant to the License Agreement, for a period of two
years, MetaCreations and the Company have agreed that neither will market,
license, reproduce, distribute or sell the intellectual property subject to the
License Agreement in any manner or for any purpose that would compete with
current MetaCreations products or Company products. The Company paid
MetaCreations $400,000 in cash and signed a promissory note in the principal
amount of $1,600,000 for the License. The promissory note accrues interest at
the rate of seven percent (7%) and is due on June 30, 2000.
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<PAGE> 10
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated in accordance with the
provisions of Statement of Financial Accounting Standards No. 128 - "Earnings
per Share" (SFAS No. 128). The following details the computation for basic and
diluted income (loss) per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) .......................... $ 472 $ (684) $ (2,729) $ (2,111)
Basic:
Weighted average common shares outstanding . 26,472 19,776 25,220 19,689
======== ======== ======== ========
Net income (loss) per share ................ $ 0.02 $ (0.03) $ (0.11) $ (0.11)
======== ======== ======== ========
Diluted:
Weighted average common shares outstanding . 26,472 19,776 25,220 19,689
Effect of dilutive options and warrants .... 5,465 -- -- --
-------- -------- -------- --------
Weighted average common shares outstanding . 31,937 19,776 25,220 19,689
======== ======== ======== ========
Net income (loss) per share ................ $ 0.01 $ (0.03) $ (0.11) $ (0.11)
======== ======== ======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
During 1997 we implemented a strategy to focus our research and
development efforts on software development rather than hardware development and
to leverage the engineering resources of our manufacturing partners to design
future hardware products. In furtherance of this strategy, on January 6, 1999,
we sold our hardware business and the Visioneer brand name to Primax, and
acquired Xerox Corporation's ScanSoft subsidiary on March 2, 1999. Following the
sale to Primax and the acquisition of ScanSoft, our business now focuses on
software products that capture, communicate, and print documents including the
PaperPort, TextBridge and Pagis product lines.
Our success in the future will depend on our ability to maintain
software gross margins and increase sales of our software products. This will
depend in part on our ability and the ability of our distributors, resellers and
OEM partners to persuade end-users to adopt paper and image input systems for
the desktop and to educate end-users about the benefits of our products. There
can be no assurance that the market for our products will develop or that we
will achieve market acceptance of our products. We have incurred annual net
losses since inception. There can be no assurance that we will be able to attain
annual profitability in the near future. As of September 30, 1999, we had an
accumulated deficit of $83.1 million.
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<PAGE> 11
RESULTS OF OPERATIONS
Revenue of $8,210,000 for the three months ended September 30, 1999
decreased 58% from $19,238,000 from the comparable period in 1998. Revenue of
$22,986,000 for the nine months ended September 30, 1999 decreased 62% from the
comparable period in 1998. These decreases were due to the sale of the hardware
business on January 6, 1999, which contributed $16,182,000 and $49,150,000 of
revenue for the three and nine months ended September 30, 1998, respectively.
Excluding hardware revenue in 1998, revenue increased 169% and 123% for the
three and nine months ended September 30, 1999, respectively. These increases
result from the incremental revenue generated from the acquisition of ScanSoft
on March 2, 1999.
Revenue for the three month period ended September 30, 1999,
decreased $2,058,000 or 20% compared to the three month period ended June 30,
1999. The decrease is due to seasonal trends in the retail distribution channel.
In addition, slower scanner hardware growth for the three month period ended
September 30, 1999, contributed to slower scanner software sales in the quarter.
These decreases were partially offset by increased revenue from an expanded OEM
customer base.
Cost of revenue consists primarily of material costs, third party
royalties, fulfillment, and salaries for product support personnel. Cost of
revenue for the three months ended September 30, 1999 was $1,994,000 or 25% of
revenue, compared to $14,419,000 or 75% in the comparable period of 1998. The
variance in absolute dollars and percentage of revenue is primarily attributable
to the sale of the hardware business which incurred $13,592,000 in cost of
revenue in the three months ended September 30, 1998. Excluding the hardware
business from the 1998 revenue and cost of revenue, cost of revenue for the
three months ended September 30, 1998 was $827,000 or 27% of revenue. Cost of
revenue for the nine months ended September 30, 1999 was $5,427,000 or 24% of
revenue, compared to $44,132,000 or 75% in the comparable period of 1998. The
variance in absolute dollars and percentage of revenue is primarily attributable
to the sale of the hardware business which incurred $41,337,000 in cost of
revenue in the nine months ended September 30, 1998. Excluding the hardware
business from the 1998 revenue and cost of revenue, cost of revenue for the nine
month period ended September 30, 1998 was $2,795,000 or 27% of revenue.
Research and development expenses consist primarily of salary and
benefit costs of engineers. Research and development costs were $1,717,000 or
21% of revenue in the three months ended September 30, 1999, an increase of
$577,000 from the corresponding period in 1998. Research and development costs
for the nine months ended September 30, 1999 were $5,140,000 or 23% of revenue,
an increase of $1,654,000 from the same period in 1998. The increase in research
and development spending for both the three and nine month periods is due to the
added software engineering headcount from the acquisition of ScanSoft on March
2, 1999.
Selling expenses include salaries, commissions, advertising, direct
mail, public relations, trade shows, travel and other related sales and
marketing expenses. General and administrative expenses include personnel costs
for administration, finance, human resources, information systems, and general
management in addition to legal and accounting expenses and other professional
services. Selling, general and administrative expenses in the three months ended
September 30, 1999 were $3,234,000 or 40% of revenue, a decrease of $1,089,000
from the comparable period of 1998. Selling, general and administrative expenses
for the nine months ended September 30, 1999 were $10,288,000 or 45% of revenue,
a decrease of $3,921,000 from the comparable period of 1998. The decrease in
selling, general, and administrative expenses from 1998 to 1999 for both the
three and nine month periods ended September 30, 1999, is due primarily from
lower administrative expenses from the transition of the hardware and software
business to a "software only" business and include lower compensation costs,
depreciation and other operational expenses. This transition occurred when the
hardware business was sold on January 6, 1999, and ScanSoft was acquired on
March 2, 1999.
-9-
<PAGE> 12
Restructuring charges of $346,000 for the nine months ended September
30, 1999 relate to the acquisition of ScanSoft and the subsequent consolidation
of research and development operations and the move of the Company's
headquarters to Massachusetts.
On January 6, 1999, the Company sold its hardware business to Primax
Electronics, Ltd., for approximately $7 million, and reported a non-operating
gain of approximately $882,000.
Amortization of intangible assets of $655,000 and $1,288,000 for the
three and nine months ended September 30, 1999, respectively, reflect the
amortization of identified intangible assets from the ScanSoft acquisition and
the asset purchase agreement with MetaCreations. The useful lives of the
intangible assets used for amortization range from three to seven years.
The in-process research and development charge of $3,944,000 for the
nine months ended September 30, 1999, reflects that portion of the purchase
price of ScanSoft representing acquired in-process technology that had not yet
reached technological feasibility and had no alternative future use.
Accordingly, this amount was immediately charged to expense in the consolidated
statements of income upon consummation of the acquisition. The value assigned to
acquired in-process technology was determined by identifying research projects
in areas for which technological feasibility has not been established. These
include projects (primarily major version upgrades) in each of ScanSoft's major
products, including ScanWorks, Pagis, TextBridge and API. The value was
determined by estimating the revenue contribution of each of these products and
the amount of the revenues attributable to the core/developed technology, the
in-process - completed, the in-process - to be completed and the future
yet-to-be-defined elements. The net cash flows for the in-process - completed
were then discounted utilizing a weighted average cost of capital of 25%. This
discount rate takes into consideration the inherent uncertainties surrounding
the successful development of the in-process research and development, the
profitability levels of such technology and the uncertainty of technological
advances which could potentially impact the estimates described above. The split
between the in-process - completed and the in-process - to be completed amounts
were estimated based on the time and related costs incurred in development
before the close of the acquisition and estimated to be incurred after the close
of the acquisition. The average percentage of completion of the projects ranged
from 73% to 95% at the date of the acquisition. Revenue is projected to be
generated in fiscal 1999 for each of the product versions in development at the
acquisition date. If these projects are not successfully developed, future
revenue and profitability of ScanSoft may be adversely affected. Additionally,
the value of other intangible assets acquired may become impaired.
Other income, net, consists primarily of interest earned on cash
investments. Other income, net was $62,000 for the three months ended September
30, 1999 compared to an expense of $40,000 for the comparable period in 1998.
Other income, net was $136,000 for the nine months ended September 30, 1999
compared to $237,000 for the comparable period in 1998. The decrease from 1998
to 1999 for the nine months ended September 30, is due primarily to less
interest income as a result of lower investment balances in the respective
periods.
The provision for taxes for the three and nine months ended September
30, 1999, was $200,000 and $300,000, respectively, and substantially lower than
a provision at statutory rates would yield. The lower tax provision reflects the
usage of net operating losses to reduce our taxable income.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had cash and investments of $5,376,000,
compared to $7,861,000 of cash and investment balances at December 31, 1998.
-10-
<PAGE> 13
Cash and investments as of September 30, 1999, increased $191,000
from June 30, 1999. The increase was primarily due to cash generated from
operations of $779,000 less acquisition related payments to MetaCreations of
$652,000.
We used $2,379,000 in cash for operating activities in the nine
months ended September 30, 1999. The cash was used to fund payment of salary and
personnel costs, the prepayment of annual insurance policies, and other normal
operating costs.
Cash provided by investing activities in the nine months ended
September 30, 1999 was $6,595,000. Approximately $6,782,000 was received in
connection with the sale of the hardware business in the January, 1999.
Cash used in financing activities for the nine month period ended
September 30, 1999 was $6,566,000. The cash was used to buy back common stock
from existing stockholders in connection with the acquisition of ScanSoft and to
pay off outstanding short term bank borrowings of approximately $6,000,000.
We believe that our current cash and investments balance, together
with cash generated from operations will satisfy our working capital and capital
expenditures needs through 1999.
YEAR 2000 COMPLIANCE
We are aware of the potential business risks associated with the
"Year 2000" millennium issue. Based upon this potential business risk, we have
developed a strategy to examine the potential effect of this issue. The
following strategy outlines the process by which we are trying to minimize the
potential risk associated with the "Year 2000" millennium issue.
We have assessed the potential affects of the "Year 2000" millennium
change on our business systems and processes, including facilities, software and
components used by our employees, as well as our outsourcing vendors and
critical suppliers. Our Year 2000 project is proceeding on schedule. The project
goal is to ensure that our business is not adversely impacted by the date
transitions associated with the Year 2000.
Our Year 2000 project plan is coordinated by a team that reports to
senior management. The project team is evaluating the Year 2000 compliance of
our business systems and processes, including facilities, software and
components used by our employees, as well as our outsourcing vendors and
critical suppliers who provide services relating to our business. Our Year 2000
project is comprised of the following phases:
- Phase 1 - Inventory all business systems and processes,
including facilities, software and components used by our
employees, in order to assign priorities to potentially
impacted systems and services. This phase was completed by
January 31, 1999 and a complete inventory was compiled.
- Phase 2 - Assess the Year 2000 compliance of all inventoried
business systems and processes, including facilities, software
and components used by our employees, and determine whether to
renovate or replace any non-Year 2000 compliant systems and
services. This phase was completed by March 31, 1999.
- Phase 3 - Complete remediation, if any is required, of any
non-compliant business systems and processes, including
facilities, software and components used by our employees and
outsourcing vendors. Conduct procurements to replace any other
non-Year 2000 compliance business systems and processes,
including facilities, software and components used by our
employees and outsourcing vendors that won't be remediated.
This phase was completed by June 30, 1999.
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<PAGE> 14
- Phase 4 - Test and validate remediated and replacement
systems, if any such remediation or replacement is required,
to ensure inter-system compliance and mission critical system
functionality. This phase was completed by July 31, 1999.
- Phase 5 - Deploy and implement remediated and replacement
systems, if any deployment or implementation is required,
after the completion of successful testing and validation.
This phase was completed by September 30, 1999.
- Phase 6 - Design contingency plan and business continuation
plans in the event of the failure of business systems and
processes, facilities, data networking infrastructure,
software and components used by our employees due to the Year
2000 millennium change. We expect that the initial contingency
and business continuation plan will be in place by November
30, 1999.
Based on our inventory and assessment to date, we believe that our
internal mission critical systems are Year 2000 compliant and that our
facilities are Year 2000 compliant. In addition, we are seeking assurances from
our facilities' landlords and equipment vendors and data circuit providers
regarding the Year 2000 compliance of their facilities and equipment.
At this time, we believe that our incremental remediation costs, if
any, needed to make our current business systems and processes, including
facilities, software and components used by our employees and outsourcing
vendors, are not material. While we are incurring some incremental costs, our
incurred costs through September 30, 1999 were less than $60,000. Our expected
total costs, including remediation and replacement costs, if any, are estimated
to be between $75,000 and $100,000 over the life of the Year 2000 project.
We are contacting our hardware and software vendors, other
significant suppliers, manufacturers, outsourcing service providers and other
contracting parties to determine the extent to which we are vulnerable to any
one of their failures to achieve Year 2000 compliance for their own systems. At
the present time, we do not expect Year 2000 issues of any such third parties to
materially affect our business.
Should we fail to solve a Year 2000 compliance problem to our
critical business systems and processes, the result could be a failure or
interruption to normal business operations.
Despite the assurances of our third-party suppliers, hardware and
software vendors, and outsourcing service providers regarding Year 2000
compliance of their products and services, the potential exists that a Year 2000
problem relating to such third-party suppliers, vendors and outsourcing service
providers products and services could have a material impact on our business. We
are conducting monthly discussions with our critical outsourcing service
providers to determine the progress of their Year 2000 compliance programs.
Despite extensive preparation and effort to ensure Year 2000
compliance, implementation of our business continuation contingency plan for a
very short time may be required while we remediate the Year 2000 problem.
Despite our belief that our mission critical computer software
applications and systems are Year 2000 compliant and our expectation that our
enhancement effort will result in Year 2000 compliant systems, we are currently
developing a business continuation contingency plan. We expect to finalize our
initial contingency plan to complete the testing of all existing systems by
November 30, 1999.
The information in this section is a "Year 2000 Readiness Disclosure"
as defined in the Year 2000 Information Readiness and Disclosure Act of 1998
enacted on October 19,1998.
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<PAGE> 15
The foregoing Year 2000 discussion contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements, including without limitation, anticipated costs and
the dates by which certain actions are expected to be completed, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of certain
resources, representations received from third parties and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
ability to identify and remediate all relevant systems, results of Year 2000
testing, adequate resolution of Year 2000 issues by governmental agencies,
businesses and other third parties who are outsourcing service providers
suppliers and vendors, unanticipated system costs, the adequacy of and ability
to implement contingency plans and similar uncertainties. The "forward-looking
statements" made in the foregoing Year 2000 discussion speak only as of the date
on which such statements are made, and management does not undertake any
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business operates in an intensely competitive
environment and operations are subject to risks and uncertainties. Such risks
and uncertainties include, but are not limited to (1) the loss of, or a
significant curtailment of purchases by, any one or more principal customers;
(2) the cyclicality of the retail software industry; (3) inability to protect
the Company's proprietary technology and intellectual property; (4) inability
to attract or retain skilled employees; (5) technological obsolescence of
current products and the inability to develop new products (6) inability to
respond to competitive technology and competitive pricing pressures; and (7)
quarterly operating results that fluctuate and differ materially from one
quarter to the next which could have an impact on the Company's stock price.
For further discussion regarding these and other risks, refer to the Company's
Annual Report on Form 10-K for the year ended January 3, 1999.
FORWARD LOOKING STATEMENTS
Certain Statements made in this report (including statements
regarding the Year 2000 issue), as well as oral statements made by the Company
from time to time, which are prefaced with words such as "expects",
"anticipates", "believes", "projects", "intends", "plans", and similar words and
other statements of similar sense, are forward looking statements. These
statements are based on the Company's current expectations and estimates as to
prospective events and circumstances, which may or may not be in the Company's
control and as to which there can be no firm assurance given. These
forward-looking statements, like any other forward-looking statements, involve
risks and uncertainties that could cause actual results to differ materially
from those projected or anticipated. Such risks and uncertainties are outlined
in the preceding paragraph and should not be construed as exhaustive. The
Company disclaims any obligation to subsequently revise forward-looking
statements or to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
Further discussions of risk factors are also available in the Company's
registration statements filed with the Securities and Exchange Commission. The
Company wishes to caution readers not to place undue reliance upon such
forward-looking statements, which speak only as of the date made.
-13-
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index hereto are filed
or incorporated by reference (as stated therein) as part of
this report on Form 10-Q.
(b) Reports on Form 8-K
<TABLE>
<S> <C> <C>
April 9, 1999 Item 8. Reported change in fiscal year to calendar year end.
July 14, 1999 Item 2. Reported June acquisition of assets from and license agreement with
MetaCreations Corporation
</TABLE>
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<PAGE> 17
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 Peabody, State of
Massachusetts, on November 12, 1999.
SCANSOFT, INC.
By:
---------------------------------------
John J.Rogers, Jr.
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
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<PAGE> 18
EXHIBIT INDEX
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
- ----------- -----------------------
<S> <C>
2.1(1) Agreement and Plan of Merger dated December 2, 1998, between Visioneer,
Inc., a Delaware corporation, and ScanSoft, Inc., a Delaware
corporation.
3.1(2) Bylaws of Registrant.
3.2(3) Amended and Restated Certificate of Incorporation of Registrant.
4.1(3) Specimen Common Stock Certificate.
4.2(4) 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.
4.3(5) Voting Agreement dated March 2, 1999 between Xerox, Xerox Imaging
Systems, Inc., Visioneer, Inc. and several holders of Visioneer common
stock.
27.1 Financial Data Schedule.
</TABLE>
- --------------
(1) Incorporated by reference from the Registrant's Registration Statement
on From S-4 (No. 333-70603) filed with the Commission on January 14,
1999.
(2) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (No. 333-98356) filed with the Commission on October 19,
1995.
(3) Incorporated by reference from the Registrant's Registration Statement
on Form S-8 (No. 333-74343) filed with the Commission on March 12,
1999.
(4) Incorporated by reference from the Registrant's current Report on Form
8-K dated October 30, 1996.
(5) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the fiscal year ended January 3, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet, statement of income and statement of cash flows included in the Company's
Form 10-Q for the nine months ended September 30, 1999, and is qualified in its
entirety by reference to such financial statements and the notes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,376
<SECURITIES> 0
<RECEIVABLES> 11,738
<ALLOWANCES> 3,364
<INVENTORY> 805
<CURRENT-ASSETS> 15,617
<PP&E> 2,981
<DEPRECIATION> (2,118)
<TOTAL-ASSETS> 30,343
<CURRENT-LIABILITIES> 8,504
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0
4
<COMMON> 27
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<TOTAL-LIABILITY-AND-EQUITY> 30,343
<SALES> 22,986
<TOTAL-REVENUES> 22,986
<CGS> 5,140
<TOTAL-COSTS> 5,140
<OTHER-EXPENSES> 20,124
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<INCOME-PRETAX> (2,429)
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</TABLE>
