<PAGE>
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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 quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 333-96217
----------------
NUANCE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 1994-3208477
(IRS Employer
(State of incorporation) Identification Number)
</TABLE>
1005 Hamilton Avenue
Menlo Park, California 94025
(650) 847-0000
(Address and telephone number of principal executive offices)
----------------
Indicate by check mark whether 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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
30,418,336 shares of the registrant's common stock, $0.01 par value, were
outstanding as of July 31, 2000.
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<PAGE>
NUANCE COMMUNICATIONS, INC. & SUBSIDIARIES
FORM 10-Q, June 30, 2000
----------------
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
----------- ----
<C> <S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
December 31, 1999 and June 30, 2000...................... 3
Condensed Consolidated Statements of Operations:
Three and six months ended June 30, 1999 and 2000........ 4
Condensed Consolidated Statements of Cash Flows:
Six months ended June 30, 1999 and 2000.................. 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 20
Item 2. Changes in Securities...................................... 20
Item 6. Exhibits and Reports on Form 8-K........................... 20
SIGNATURES.............................................................. 21
EXHIBIT INDEX........................................................... 22
</TABLE>
2
<PAGE>
NUANCE COMMUNICATIONS INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................... $ 18,073 $ 88,649
Short-term investments.............................. 23,353 12,125
Accounts receivable, net of allowance for doubtful
accounts of $571 and $783, respectively............ 4,892 9,810
Prepaid expenses and other current assets........... 3,027 4,726
-------- --------
Total current assets.............................. 49,345 115,310
Property and equipment, net........................... 4,276 7,095
Other assets.......................................... 101 11,610
-------- --------
Total assets...................................... $ 53,722 $134,015
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of debt............................. $ 1,043 $ 323
Accounts payable.................................... 3,024 2,775
Accrued liabilities................................. 7,034 10,915
Deferred revenue.................................... 4,337 6,724
-------- --------
Total current liabilities......................... 15,438 20,737
Long-term debt, less current portion ................. 1,333 --
-------- --------
Total liabilities................................. 16,771 20,737
-------- --------
Commitments
Stockholders' Equity:
Convertible preferred stock, $.001 par value,
aggregate liquidation preference of $70,059;
5,000,000 shares authorized at June 30, 2000;
19,725,986 shares and none issued and outstanding,
respectively....................................... 20 --
Common stock, $.001 par value, 50,000,000 shares
authorized at June 30, 2000; 3,240,349 shares and
30,447,879 shares issued and outstanding,
respectively....................................... 3 30
Additional paid-in capital.......................... 76,415 166,275
Deferred stock compensation......................... (5,614) (6,278)
Accumulated deficit................................. (33,873) (46,749)
-------- --------
Total stockholders' equity........................ 36,951 113,278
-------- --------
Total liabilities and stockholders' equity........ $ 53,722 $134,015
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
3
<PAGE>
NUANCE COMMUNICATIONS INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
---------------- -----------------
1999 2000 1999 2000
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenue:
License $ 2,792 $ 8,692 $ 6,932 $ 14,720
Service................................. 1,754 3,311 2,574 5,224
------- ------- ------- --------
Total revenue......................... 4,546 12,003 9,506 19,944
------- ------- ------- --------
Cost of revenue:
License................................. -- 13 -- 13
Service................................. 1,390 2,120 2,572 3,725
------- ------- ------- --------
Total cost of revenue................. 1,390 2,133 2,572 3,738
------- ------- ------- --------
Gross profit............................ 3,156 9,870 6,934 16,206
------- ------- ------- --------
Operating expenses:
Sales and marketing, net of $243 and
$460 of noncash compensation expense
for the three and six months ended
June 30, 2000, respectively............ 3,716 8,053 6,319 14,839
Research and development, net of $523
and $990 of noncash compensation
expense for the three and six months
ended June 30, 2000, respectively...... 2,531 4,727 4,676 9,123
General and administrative, net of $372
and $704 of noncash compensation
expense for the three and six months
ended June 30, 2000, respectively...... 842 2,627 1,530 4,298
Noncash compensation expense............ -- 1,138 -- 2,154
------- ------- ------- --------
Total operating expenses.............. 7,089 16,545 12,525 30,414
------- ------- ------- --------
Loss from operations...................... (3,933) (6,675) (5,591) (14,208)
Interest and other income, net.......... 129 1,154 267 1,478
------- ------- ------- --------
Loss before provision for income taxes.. (3,804) (5,521) (5,324) (12,730)
Provision for income taxes.............. -- 146 -- 146
------- ------- ------- --------
Net loss.............................. $(3,804) $(5,667) $(5,324) $(12,876)
======= ======= ======= ========
Basic and diluted net loss per share...... $ (1.33) $ (0.22) $ (1.91) $ (0.87)
======= ======= ======= ========
Shares used to compute basic and diluted
net loss per share....................... 2,869 25,936 2,792 14,800
======= ======= ======= ========
Pro forma basic and diluted net loss per
share.................................... $ (0.21) $ (0.20) $ (0.30) $ (0.49)
======= ======= ======= ========
Shares used to compute pro forma basic and
diluted net loss per share............... 18,095 28,783 18,018 26,137
======= ======= ======= ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
4
<PAGE>
NUANCE COMMUNICATIONS INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (5,324) $(12,876)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 469 1,060
Noncash compensation expense........................... -- 2,154
Provision for doubtful accounts........................ 98 212
Fair value of common stock options and warrants........ 167 --
Changes in operating assets and liabilities:
Accounts receivable.................................. (904) (5,130)
Prepaid expenses and other assets.................... (85) (2,265)
Accounts payable..................................... (197) (249)
Accrued liabilities.................................. 1,194 3,881
Deferred revenue..................................... 843 2,387
-------- --------
Net cash used in operating activities.............. (3,739) (10,826)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities........................ (18,286) (11,220)
Purchase of long-term investment......................... -- (10,943)
Maturities of marketable securities...................... 22,540 22,448
Purchases of property and equipment...................... (1,006) (3,879)
-------- --------
Net cash provided by (used in) investing
activities........................................ 3,248 (3,594)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock................... -- 80,341
Proceeds from exercise of stock options.................. 72 5,728
Proceeds from exercise of Series D warrant............... -- 1,000
Repayment of borrowings.................................. -- (2,053)
-------- --------
Net cash provided by financing activities.......... 72 85,016
-------- --------
Effect of exchange rate fluctuations..................... -- (20)
Net increase (decrease) in cash and cash equivalents..... (419) 70,576
Cash and cash equivalents, beginning of period........... 1,642 18,073
-------- --------
Cash and cash equivalents, end of period................. $ 1,223 $ 88,649
======== ========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ -- $ 78
Income taxes........................................... $ -- $ --
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
5
<PAGE>
NUANCE COMMUNICATIONS INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared
by the Company in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X. The condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments considered
necessary for a fair presentation, have been included. The results of
operations for the three and six month periods ended June 30, 2000 are not
necessarily indicative of the results to be expected for the full year or for
any future periods. The accompanying condensed consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements contained in the Company's Prospectus on Form S-1 filed
with the Securities and Exchange Commission on April 12, 2000.
2. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires certain accounting
and reporting standards for derivative financial instruments and hedging
activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The
Statement will be effective for the Company on January 1, 2001. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, management does not believe that the adoption of these
statements will have a material impact on the Company's financial position or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") and amended it in March and June 2000 with respect to
the effective date. The Company is currently reviewing the provisions of SAB
101 and is assessing the impact of its adoption. While SAB 101 does not
supercede the software industry specific revenue recognition guidance, which
the Company believes it is in compliance with, SAB 101 may change current
interpretations of software revenue recognition requirements, which would
result in the Company recording a cumulative effect of a change in accounting
principles in the fourth quarter of 2000, retroactive to January 1, 2000.
3. Net Loss Per Share
Historical net loss per share has been calculated under SFAS No. 128,
"Earnings Per Share." Basic net loss per share on a historical basis is
computed using the weighted average number of shares of common stock
outstanding. Diluted net loss per share is equal to basic net loss per share
for all periods presented since potential common shares from conversion of the
convertible preferred stock, stock options and warrants are antidilutive. The
total number of shares excluded from diluted net loss per share relating to
these securities was 4,992,000 shares at June 30, 2000.
Pro forma basic net loss per share has been calculated assuming the
conversion of convertible preferred stock into an equivalent number of common
shares, as if the shares had converted on the dates of their issuance.
6
<PAGE>
The following table presents the calculation of basic and pro forma basic
net loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
---------------- -----------------
1999 2000 1999 2000
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net loss................................... $(3,804) $(5,667) $(5,324) $(12,876)
======= ======= ======= ========
Basic:
Weighted average shares of common stock
outstanding............................. 2,910 26,841 2,860 15,252
Less: Weighted average shares of common
stock subject to repurchase............. (41) (905) (68) (452)
------- ------- ------- --------
Weighted average shares used in computing
basic and diluted net loss per share...... 2,869 25,936 2,792 14,800
======= ======= ======= ========
Basic and diluted net loss per share....... $ (1.33) $ (0.22) $ (1.91) $ (0.87)
======= ======= ======= ========
Net Loss................................... $(3,804) $(5,667) $(5,324) $(12,876)
======= ======= ======= ========
Pro forma:
Shares used above.......................... 2,869 25,936 2,792 14,800
Pro forma adjustment to reflect weighted
average effect of assumed conversion of
convertible preferred stock............... 15,226 2,847 15,226 11,337
------- ------- ------- --------
Weighted average shares used in computing
pro forma basic and diluted net loss per
share..................................... 18,095 28,783 18,018 26,137
======= ======= ======= ========
Pro forma basic and diluted net loss per
share..................................... $ (0.21) $ (0.20) $ (0.30) $ (0.49)
======= ======= ======= ========
</TABLE>
4. Deferred Stock Compensation
In connection with the grant of certain stock options to employees through
March 31, 2000, the Company recorded deferred stock compensation within
stockholders' equity of $8.7 million, representing the difference between the
estimated fair value of the common stock for accounting purposes and the option
exercise price of these options at the date of grant. Such amount is presented
as a reduction of stockholders' equity and is being amortized over the vesting
period of the applicable options using an accelerated method of amortization.
Under the accelerated method, each vested tranche of options is accounted for
as a separate option grant awarded for past services. Accordingly, the
compensation expense is recognized over the period during which the services
will be provided; however, the method results in a front-loading of the
compensation expense. The Company recorded amortization of deferred
compensation for the three and six months ended June 30, 2000 of $1.1 million
and $2.2 million, respectively. This deferred compensation related to 3,152,000
options with a weighted average exercise price of $8.58 granted through March
31, 2000.
5. Segment Reporting
The Company has two operating segments: licenses and services. Revenue and
cost of revenue for the segments are identical to those presented on the
accompanying condensed consolidated statements of operations. The Company does
not track operating expenses nor derive net profit or loss based on these
segments.
Sales of licenses and services through June 30, 2000 occurred through
partners and direct sales representatives located in the Company's headquarters
in Menlo Park, California, and in other locations. These sales were supported
through the Menlo Park location. The Company does not separately report costs
by region internally. Additionally, long-lived assets in locations other than
Menlo Park are not significant.
6. Initial Public Offering
On April 13, 2000, the Company completed its initial public offering of 5.2
million shares of common stock. The offering raised approximately $80 million,
net of offering expenses, for the Company. Upon the closing of the offering,
19,925,986 shares of preferred stock were converted into common stock.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes included elsewhere in this
report. The results shown herein are not necessarily indicative of the results
to be expected for the full year or any future periods.
This Report on Form 10-Q contains forward-looking statements, within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including but not limited to our expectations for results over the balance
of the year, regarding expense trends, cash positions and our outlook for the
Company, as well as our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this Report on
Form 10-Q are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. These
statements involve risks and uncertainties and actual results could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including, but not limited to, those set forth
in "Factors that affect future results" and elsewhere in this Report on Form
10-Q.
Overview:
Nuance Communications, Inc. (the "Company") was incorporated in July 1994 in
the state of California, and subsequently reincorporated in March 2000 in the
state of Delaware, to develop, market and support a voice interface software
platform that makes the content and services of the Internet,
telecommunications networks and enterprises accessible from any telephone. The
software platform consists of a software server that run on industry-standard
hardware and perform speech recognition, natural language understanding and
voice authentication. The Company sells its products through a combination of
value-added resellers, original equipment manufacturers, systems integrators
and directly to end users.
Results of Operations:
The following table sets forth, for the periods indicated, the percentage of
net revenue represented by certain items in our statements of operations for
the three and six months ended June 30, 1999 and 2000.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
License......................... 61% 72% 73% 74%
Service......................... 39 28 27 26
------- ------- ------- -------
Total revenue.................. 100 100 100 100
Cost of revenue:
License......................... -- -- -- --
Service......................... 31 18 27 19
------- ------- ------- -------
Total cost of revenue.......... 31 18 27 19
------- ------- ------- -------
Gross Margin...................... 69 82 73 81
Operating expenses:
Sales and marketing............. 82 67 67 74
Research and development........ 56 39 49 46
General and administrative...... 18 22 16 21
Noncash compensation expense.... -- 10 -- 11
------- ------- ------- -------
Total operating expenses....... 156 138 132 152
------- ------- ------- -------
Loss from operations......... (87) (56) (59) (71)
Interest and other income, net.... 3 10 3 7
------- ------- ------- -------
Loss before provision for income
taxes............................ (84) (46) (56) (64)
Provision for income taxes........ -- 1 -- 1
------- ------- ------- -------
Net loss..................... (84)% (47)% (56)% (65)%
======= ======= ======= =======
</TABLE>
8
<PAGE>
Comparison of the Three and Six Months Ended June 30, 1999 and 2000
Revenue
Total revenue increased from $4.5 million in the three months ended June 30,
1999 to $12.0 million in the three months ended June 30, 2000, an increase of
167%. Total revenue increased from $9.5 million in the six months ended June
30, 1999 to $19.9 million in the six months ended June 30, 2000, an increase of
109%.
License revenue increased from $2.8 million in the three months ended June
30, 1999 to $8.7 million in the three months ended June 30, 2000, an increase
of 211%, and from $6.9 million in the six months ended June 30, 1999 to $14.7
million in the six months ended June 30, 2000, an increase of 113%. This
increase in license revenue was due to an increased acceptance of our products
in the marketplace. License revenue represented 61% and 73% of total revenue
for the three and six months ended June 30, 1999, respectively, and 72% and 74%
of total revenue for the three and six months ended June 30, 2000,
respectively.
Service revenue increased from $1.8 million for the three months ended June
30, 1999 to $3.3 million in the three months ended June 30, 2000, an increase
of 83%, and from $2.6 million for the six months ended June 30, 1999 to $5.2
million in the six months ended June 30, 2000, an increase of 100%. This
increase in service revenue was due primarily to growth in license revenue and
revenue for certain non-recurring engineering work performed in the second
quarter of 2000. Service revenue represented 39% and 27% of total revenue for
the three and six months ended June 30, 1999, respectively, and 28% and 26% of
total revenue for the three and six months ended June 30, 2000, respectively.
Cost of Revenue
Cost of service revenue increased from $1.4 million in the three months
ended June 30, 1999 to $2.1 million in the three months ended June 30, 2000, an
increase of 50%, and from $2.6 million in the six months ended June 30, 1999 to
$3.7 million in the six months ended June 30, 2000, an increase of 42%. This
increase was due to hiring additional personnel in the professional services,
technical support and training groups. Cost of service revenue as a percentage
of service revenue was 79% and 100% for the three and six months ended June 30,
1999, respectively, and 64% and 71% for the three and six months ended June 30,
2000, respectively. We anticipate that cost of service revenue will increase in
absolute dollars, although cost of service revenue will vary as a percentage of
service and total revenue from period to period.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist of compensation
and related costs for sales and marketing personnel and promotional
expenditures, including public relations, advertising, trade shows and
marketing materials. Sales and marketing expenses increased from $3.7 million
in the three months ended June 30, 1999, to $8.1 million in the three months
ended June 30, 2000, an increase of 119%. Sales and marketing expenses
increased from $6.3 million in the six months ended June 30, 1999 to $14.8
million in the six months ended June 30, 2000, an increase of 135%. This
increase was attributable to the addition of approximately 40 sales and
marketing personnel which added approximately $6.0 million in expense, an
increase in sales commissions associated with the growth in revenue which added
approximately $1.6 million to expenses and higher marketing costs due to
expanded promotional activities which added approximately $900,000 in expenses.
As a percentage of total revenue, sales and marketing expenses were 82% and 67%
in the three and six months ended June 30, 1999, respectively, and 67% and 74%
in the three and six months ended June 30, 2000, respectively. We expect to
continue to increase our marketing and promotional efforts and hire additional
sales personnel. Accordingly, we anticipate that sales and marketing expenses
will increase in absolute dollars, but will vary as a percentage of total
revenue from period to period.
Research and Development. Research and development expenses consist of
compensation and related costs for research and development personnel and
contractors. Research and development expenses increased from $2.5 million in
the three months ended June 30, 1999, to $4.7 million in the three months ended
June 30,
9
<PAGE>
2000, an increase of 88%. Research and development expenses increased from $4.7
million in the six months ended June 30, 1999 to $9.1 million in the six months
ended June 30, 2000, an increase of 94%. This increase was attributable to the
addition of approximately 50 personnel associated with product development
activities, which added approximately $4.1 million in expenses, including 30
employees hired as part of establishing the Company's Canadian based research
and development group in September 1999, and the costs of technical
contractors, which added approximately $300,000 in expenses. As a percentage of
total revenue, research and development expenses were 56% and 49% in the three
and six months ended June 30, 1999, respectively, and 39% and 46% in the three
and six months ended June 30, 2000, respectively. We expect to continue to make
substantial investments in research and development and anticipate that
research and development expenses will continue to increase in absolute
dollars, but will vary as a percentage of total revenue from period to period.
General and Administrative. General and administrative expenses consist of
compensation and related costs for administrative personnel, legal services,
accounting services and other general corporate expenses. General and
administrative expenses increased from $842,000 in the three months ended June
30, 1999, to $2.6 million in the three months ended June 30, 2000, an increase
of 209%. General and administrative expenses increased from $1.5 million in the
six months ended June 30, 1999 to $4.3 million in the six months ended June 30,
2000, an increase of 187%. The increase was due to the addition of
approximately 30 administrative personnel, which added approximately $2.2
million in expenses, increased legal fees associated with patent application
filings, which added approximately $300,000 in expenses, and costs associated
with our new status as a public company, including insurance, accounting and
legal fees, which added approximately $300,000 in expenses. As a percentage of
total revenue, general and administrative expenses were 18% and 16% in the
three and six months ended June 30, 1999, respectively, and 22% and 21% in the
three and six months ended June 30, 2000, respectively. We expect that general
and administrative expenses will increase in absolute dollars as we continue to
add personnel and incur additional costs related to the anticipated growth of
our business. However, we expect that these expenses will vary as a percentage
of total revenue from period to period.
Non-cash compensation. Non-cash compensation expenses consist of
compensation charges related to stock options granted to employees between
September 1999 and February 2000. The compensation expense was $1.1 million in
the three months ended June 30, 2000 and $2.2 million in the six months ended
June 30, 2000. This expense is being recognized over the vesting period of the
stock options.
Interest and Other Income, Net
Interest and other income, net, consists of interest earned on cash and
short-term investments, offset by interest expense related to a note payable.
Interest and other income, net was $129,000 in the three months ended June 30,
1999 and $1.2 million in the three months ended June 30, 2000. Interest and
other income, net, was $267,000 in the six months ended June 30, 1999 and $1.5
million in the six months ended June 30, 2000. The increase was due to interest
income earned on higher average cash balances, primarily the result of cash
proceeds raised in the Company's initial public offering in April 2000.
Provision for Income Taxes. Our provision for income taxes of $146,000 for
the three and six months ended June 30, 2000 relates to income tax liabilities
in certain foreign jurisdictions.
Liquidity and Capital Resources
From inception through March 31, 2000, we financed our operations primarily
from private sales of convertible preferred stock totaling $70.0 million and,
to a lesser extent, from bank financing. In April 2000, the Company raised
approximately $80 million through the completion of its initial public offering
of common stock. As of June 30, 2000, we had cash and cash equivalents
aggregating $88.6 million and short-term investments totaling $12.1 million.
10
<PAGE>
Our operating activities used cash of $3.7 million for the six months ended
June 30, 1999, and $10.8 million during the six months ended June 30, 2000.
This negative operating cash flow in the six months ended June 30, 2000
resulted principally from our net losses as we invested in all areas of our
business. The cash flow during the period was also impacted by increases in
accounts receivable and prepaid expenses and other assets. These factors were
partially offset by increases in accrued liabilities and deferred revenue. The
negative operating cash flow for the six months ended June 30, 1999, was
primarily caused by our net losses and an increase in accounts receivable,
which were partially offset by an increase in accrued liabilities and deferred
revenue.
Our investing activities consisted of purchases and maturities of short-term
investments, and purchases of property and equipment to support our growth.
Investing activities used cash of $3.6 million during the six months ended June
30, 2000, and provided cash of $3.2 million during the six months ended June
30, 2000. During the six month period ended June 30, 2000, the Company invested
$10.9 million in a long-term time deposit held by a major bank as security for
a letter of credit on a newly signed facility lease.
Our financing activities generated cash of $72,000 during the six months
ended June 30, 1999, and $85.0 million for the six months ended June 30, 2000.
The cash provided by financing activities for the six months ended June 30,
2000 was primarily the result of proceeds from the Company's initial public
offering and the exercise of employee stock options. This amount was slightly
offset by the repayment of the Company's term loan with Silicon Valley Bank.
The cash generated by financing activities for the six months ended June 30,
1999 was a result of the exercise of stock options.
Our Canadian subsidiary carries a revolving line of credit under which it
can borrow up to $600,000 in Canadian dollars. The revolving line of credit,
secured by a letter of credit from our primary bank, bears interest at the
lender's prime rate plus .5% per annum (8.0% at June 30, 2000). The line of
credit remains in effect as long as the underlying letter of credit remains in
place. As of June 30, 2000 there was a $323,000 U.S. dollar balance outstanding
against this line of credit.
Our capital requirements depend on numerous factors. We expect to devote
substantial resources to continue our research and development efforts, expand
our sales, support, marketing and product development organizations, establish
additional facilities worldwide and build the infrastructure necessary to
support our growth. We have experienced substantial increases in our
expenditures since our inception consistent with growth in our operations and
personnel, and we anticipate that our expenditures will continue to increase in
the future. We believe that the proceeds from our initial public offering,
together with our current cash and cash equivalents and our borrowing capacity,
will be sufficient to fund our activities for the next 18 months. In addition,
although there are no present understandings, commitments or agreements with
respect to any acquisition of other businesses, products or technologies, we
may, from time to time, evaluate potential acquisitions of other businesses,
products and technologies. We may also consider additional equity or debt
financing, which could be dilutive to existing investors.
FACTORS THAT AFFECT FUTURE RESULTS
We have a history of losses. We expect to continue to incur losses and we may
not achieve or maintain profitability.
We have incurred losses since our inception, including a loss of
approximately $12.9 million in the six months ended June 30, 2000. As of June
30, 2000, we have an accumulated deficit of approximately $46.7 million. We
expect to have net losses and negative cash flow for at least the next 18
months. We expect to spend significant amounts to enhance our products and
technologies, expand international sales and operations and fund research and
development. As a result, we will need to generate significant additional
revenue to achieve profitability. Even if we achieve profitability, we may not
be able to sustain or increase profitability on a quarterly or annual basis.
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Voice interface software may not achieve widespread acceptance by businesses
and telecommunications carriers, which could limit our ability to grow our
business.
The market for voice interface software is relatively new and rapidly
evolving. Our ability to increase revenue in the future depends on the
acceptance by both our customers and their end users of voice interface
software. The adoption of voice interface software could be hindered by the
perceived costs of this new technology, as well as the reluctance of
enterprises that have invested substantial resources in existing call centers
or touch-tone-based systems to replace their current systems with this new
technology. Accordingly, in order to achieve commercial acceptance, we will
have to educate prospective customers, including large, established
telecommunications companies, about the uses and benefits of voice interface
software in general and our products in particular. If these efforts fail, or
if voice interface software platforms do not achieve commercial acceptance, our
business could be harmed.
The continued development of the market for our products also will depend
upon the:
. widespread deployment of voice interface applications by third parties,
which is driven by consumer demand for services having a voice user
interface;
. demand for new uses and applications of voice interface technology,
including adoption of voice user interfaces by companies that operate web
sites;
. adoption of industry standards for voice interface and related
technologies; and
. continuing improvements in hardware technology that may reduce the costs
of voice interface software solutions.
Our ability to accurately forecast our quarterly sales is limited, our costs
are relatively fixed in the short term and we expect our business to be
affected by seasonality. As a result, our quarterly operating results may
fluctuate.
Our quarterly operating results have varied significantly in the past and we
expect that they will vary significantly from quarter to quarter in the future.
These quarterly variations are caused by a number of factors, including:
. delays in customer orders due to the complex nature of large telephony
systems and the associated implementation projects;
. timing of product deployments and completion of project phases,
particularly for large orders;
. delays in recognition of software license revenue in accordance with
applicable accounting principles;
. our ability to develop, introduce, ship and support new and enhanced
products, such as our voice browser and new versions of our software
platform, that respond to changing technology trends in a timely manner
and our ability to manage product transitions;
. the amount and timing of increases in expenses associated with our
growth; and
. the utilization rate of our professional services personnel.
Due to these factors, and because the market for our voice interface
software platform is new and rapidly evolving, our ability to accurately
forecast our quarterly sales is limited. In addition, most of our costs are for
personnel and facilities, which are relatively fixed in the short term. If we
have a shortfall in revenue in relation to our expenses, we may be unable to
reduce our expenses quickly enough to avoid lower quarterly operating results.
We do not know whether our business will grow rapidly enough to absorb the
costs of these employees and facilities. As a result, our quarterly operating
results could fluctuate significantly and unexpectedly from quarter to quarter.
In addition, we expect to experience seasonality in the sales of our
products. For example, we anticipate that sales may be lower in the first
quarter of each year due to patterns in the capital budgeting and purchasing
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cycles of our current and prospective customers. We also expect that sales may
decline during summer months, particularly in Asian and European markets. These
seasonal variations in our sales may lead to fluctuations in our quarterly
operating results. Because we have limited operating results, it is difficult
for us to evaluate the degree to which this seasonality may affect our
business.
Our products can have a long sales and implementation cycle and, as a result,
our quarterly operating results may fluctuate.
The sales cycles for our products have typically ranged from three to twelve
months, depending on the size and complexity of the order, the amount of
services to be provided by us and whether the sale is made directly by us or
indirectly through a value added reseller or systems integrator.
Purchase of our products requires a significant expenditure by a customer.
Accordingly, the decision to purchase our products typically requires
significant pre-purchase evaluation. We may spend significant time educating
and providing information to prospective customers regarding the use and
benefits of our products. During this evaluation period, we may expend
substantial sales, marketing and management resources.
In addition, during any quarter we may receive a number of orders that are
large relative to our total revenues for that quarter or subsequent quarters.
After purchase, it may take substantial time and resources to implement our
software and to integrate it with our customers' existing systems. If we are
performing significant professional services in connection with the
implementation, we do not recognize software revenue until after system
acceptance or deployment. In cases where the contract specifies milestones or
acceptance criteria, we may not be able to recognize services revenue until
these conditions are met. We have in the past and may in the future experience
unexpected delays in recognizing revenue. Consequently, the length of our sales
and implementation cycles and the varying order amounts for our products make
it difficult to predict the quarter in which revenue recognition may occur and
may cause license and services revenue and operating results to vary
significantly from period to period.
Our failure to respond to rapid change in the market for voice interface
software could cause us to lose revenue and harm our business.
The voice interface software industry is relatively new and rapidly
evolving. Our success will depend substantially upon our ability to enhance our
existing products and to develop and introduce, on a timely and cost-effective
basis, new products and features that meet changing end-user requirements and
incorporate technological advancements. If we are unable to develop new
products and enhanced functionalities or technologies to adapt to these
changes, or if we cannot offset a decline in revenue from existing products
with sales of new products, our business would suffer.
Commercial acceptance of our products and technologies will depend, among
other things, on:
. the ability of our products and technologies to meet and adapt to the
needs of our target markets;
. the performance and price of our products and our competitors' products;
and
. our ability to deliver customer service directly and through our
resellers.
Our products are not 100% accurate at recognizing speech and we could be
subject to claims related to the performance of our products. Any claims,
whether successful or unsuccessful, could result in significant costs and could
damage our reputation.
Speech recognition, natural language understanding and authentication
technologies, including our own, are not 100% accurate. Our customers,
including several financial institutions, use our products to provide important
services to their customers, including transferring funds to accounts and
buying and selling securities.
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Any misrecognition of voice commands or incorrect authentication of a user's
voice in connection with these financial or other transactions could result in
claims against us or our customers for losses incurred. Although our contracts
typically contain provisions designed to limit our exposure to liability
claims, a claim brought against us for misrecognition or incorrect
authentication, even if unsuccessful, could be time-consuming, divert
management's attention, result in costly litigation and harm our reputation.
Moreover, existing or future laws or unfavorable judicial decisions could limit
the enforceability of the limitation of liability, disclaimer of warranty or
other protective provisions contained in our contracts.
Any software defects in our products could harm our business and result in
litigation.
Complex software products such as ours may contain errors, defects and bugs.
With the planned release of any product, we may discover these errors, defects
and bugs and, as a result, our products may take longer than expected to
develop. In addition, we may discover that remedies for errors or bugs may be
technologically unfeasible. Delivery of products with undetected production
defects or reliability, quality, or compatibility problems could damage our
reputation. Errors, defects or bugs could also cause interruptions, delays or a
cessation of sales to our customers. We could be required to expend significant
capital and other resources to remedy these problems. In addition, customers
whose businesses are disrupted by these errors, defects and bugs could bring
claims against us which, even if unsuccessful, would likely be time-consuming
and could result in costly litigation and payment of damages.
Our current and potential competitors, some of whom have greater resources and
experience than we do, may develop products and technologies that may cause
demand for, and the prices of, our products to decline.
A number of companies have developed, or are expected to develop, products
that compete with our products. Competitors in the voice interface software
market include IBM, ITT Industries, Lernout and Hauspie Speech Products, Locus
Dialogue, Lucent Technologies, Philips Electronics, SpeechWorks International
and T-NETIX. We expect additional competition from other companies such as
Microsoft, who has recently made investments in, and acquired, voice interface
technology companies. Furthermore, our competitors may combine with each other,
and other companies may enter our markets by acquiring or entering into
strategic relationships with our competitors. Current and potential competitors
have established, or may establish, cooperative relationships among themselves
or with third parties to increase the abilities of their advanced speech and
language technology products to address the needs of our prospective customers.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than we
do. Our present or future competitors may be able to develop products
comparable or superior to those we offer, adapt more quickly than we do to new
technologies, evolving industry trends and standards or customer requirements,
or devote greater resources to the development, promotion and sale of their
products than we do. Accordingly, we may not be able to compete effectively in
our markets, competition may intensify and future competition may harm our
business.
We depend on resellers for a significant portion of our sales. The loss of a
key reseller would limit our ability to sustain and grow our revenue.
In 1998, 31% of our revenue was achieved by indirect sales through
resellers. The percentage of revenue through indirect sales increased to 56% in
1999 and to 66% for the six months ended June 30, 2000. We intend to continue
to rely on resellers for a substantial portion of our sales in the future. As a
result, we are dependent upon the continued viability and financial stability
of our resellers, as well as upon their continued interest and success in
selling our products. The loss of a key reseller or our failure to develop new
and viable reseller relationships could limit our ability to sustain and grow
our revenue. Significant expansion of our internal sales force to replace the
loss of a key reseller would require increased management attention and higher
expenditures.
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Our contracts with resellers generally do not require a reseller to purchase
our products. We cannot guarantee that any of our resellers will continue to
market our products or devote significant resources to doing so. In addition,
we may, from time to time, terminate some of our relationships with resellers.
Any termination could have a negative impact on our business and result in
threatened or actual litigation. Finally, these resellers possess confidential
information concerning our products, product release schedules and sales,
marketing and reseller operations. Although we have nondisclosure agreements
with our resellers, we cannot guarantee that any reseller would not use our
confidential information in competition with us or otherwise. If our resellers
do not successfully market and sell our products for these or any other
reasons, our sales could be adversely affected and our revenue could decline.
We depend on a limited number of customer orders for a substantial portion of
our revenue during any given period. Loss of, or delays in, a key order could
substantially reduce our revenue in any given period and harm our business.
We derive a significant portion of our software license revenue in each
quarter from a limited number of customers. For example, in the three months
ended June 30, 2000, five customers made up 61% of our total revenue, and three
of those customers exceeded 10% of our total revenue.
We expect that a limited number of customers and customer orders will
continue to account for a substantial portion of our revenue in a given period.
Generally, customers who make large purchases from us are not expected to make
subsequent, equally large purchases in the short term. As a result, if we do
not acquire a major customer, if a contract is delayed, cancelled or deferred,
or if an anticipated sale is not made, our revenue could be adversely affected.
Sales to customers outside the United States account for a significant portion
of our revenue, which exposes us to risks inherent in international operations.
International sales represented approximately 18% of our revenue in 1998,
21% in 1999 and 41% in the six months ended June 30, 2000. We are subject to a
variety of risks associated with conducting business internationally, any of
which could harm our business. These risks include:
. difficulties and costs of staffing and managing foreign operations;
. the difficulty in establishing and maintaining an effective international
reseller network;
. the burden of complying with a wide variety of foreign laws, particularly
with respect to intellectual property and license requirements;
. political and economic instability outside the United States;
. import or export licensing and product certification requirements;
. tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers imposed by foreign countries;
. potential adverse tax consequences, including higher marginal rates;
. unfavorable fluctuations in currency exchange rates; and
. limited ability to enforce agreements, intellectual property rights and
other rights in some foreign countries.
In order to increase our international sales, we must develop localized
versions of our products. If we are unable to do so, we may be unable to grow
our revenue and execute our business strategy.
We intend to expand our international sales, which requires us to invest
significant resources to create and refine different language models for each
particular language or dialect. These language models are required to
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create versions of our products that allow end users to speak the local
language or dialect and be understood and authenticated. If we fail to develop
localized versions of our products, our ability to address international market
opportunities and to grow our business will be limited.
If the standards we have selected to support are not adopted as the standards
for voice interface software, businesses might not use our voice interface
software platform for delivery of applications and services.
The market for voice interface software is new and emerging and industry
standards have not been established yet. We may not be competitive unless our
products support changing industry standards. The emergence of industry
standards, whether through adoption by official standards committees or
widespread usage, could require costly and time consuming redesign of our
products. If these standards become widespread and our products do not support
them, our customers and potential customers may not purchase our products.
Multiple standards in the marketplace could also make it difficult for us to
insure that our products will support all applicable standards, which could in
turn result in decreased sales of our products.
We may encounter difficulties in managing our growth, which could prevent us
from executing our business strategy.
Our rapid growth has placed, and continues to place, a significant strain on
our resources. To accommodate this growth, we must implement or upgrade a
variety of operational and financial systems, procedures and controls,
including the improvement of our accounting and other internal management
systems. For example, in the first half of 2000 we began implementing new
financial and human resource software systems. The implementation has required,
and may continue to require, significant company resources. In addition, we
have had to hire additional employees to accommodate this growth in business
and product development activity. This has resulted in increased
responsibilities for our management. Our systems, procedures and controls may
not be adequate to support our operations. If we fail to improve our
operational, financial and management information systems, or to hire, train,
motivate or manage our employees, our business could be harmed.
Any inability to adequately protect our proprietary technology could harm our
ability to compete.
Our future success and ability to compete depends in part upon our
proprietary technology and our trademarks, which we attempt to protect with a
combination of patent, copyright, trademark and trade secret laws, as well as
with our confidentiality procedures and contractual provisions. These legal
protections afford only limited protection and may be time-consuming and
expensive to obtain and/or maintain. Further, despite our efforts, we may be
unable to prevent third parties from infringing upon or misappropriating our
intellectual property.
Although we have filed multiple U.S. patent applications, we do not
currently have any issued patents. There is no guarantee that patents will be
issued with respect to our current or future patent applications. Any patents
that are issued to us could be invalidated, circumvented or challenged. If
challenged, our patents might not be upheld or their claims could be narrowed.
Our intellectual property may not be adequate to provide us with competitive
advantage or to prevent competitors from entering the markets for our products.
Additionally, our competitors could independently develop non-infringing
technologies that are competitive with, equivalent to, and/or superior to our
technology. Monitoring infringement and/or misappropriation of intellectual
property can be difficult, and there is no guarantee that we would detect any
infringement or misappropriation of our proprietary rights. Even if we do
detect infringement or misappropriation of our proprietary rights, litigation
to enforce these rights could cause us to divert financial and other resources
away from our business operations. Further, we license our products
internationally, and the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States.
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Third parties could obtain licenses from SRI International relating to voice
interface technologies and develop technologies to compete with our products,
which could cause our sales to decline.
Upon our incorporation in 1994, we received a license from SRI International
to a number of patents and other proprietary rights, including rights in
software, relating to voice interface technologies developed by SRI
International. This license was exclusive until December 1999, when we chose to
allow the exclusivity to lapse. As a result, SRI International may license
these patents and proprietary rights to our competitors. If a license from SRI
International were to enable third parties to enter the markets for our
products and services or to compete more effectively, we could lose market
share and our business could suffer.
Our products may infringe the intellectual property rights of others, and
resulting claims against us could be costly and require us to enter into
disadvantageous license or royalty arrangements.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of intellectual property rights. Although we attempt to avoid
infringing known proprietary rights of third parties we may be subject to legal
proceedings and claims for alleged infringement by us or our licensees of
third-party proprietary rights, such as patents, trade secrets, trademarks or
copyrights, from time to time in the ordinary course of business. Any claims
relating to the infringement of third-party proprietary rights, even if not
successful or meritorious, could result in costly litigation, divert resources
and management's attention or require us to enter into royalty or license
agreements which are not advantageous to us. In addition, parties making these
claims may be able to obtain injunctions, which could prevent us from selling
our products. Furthermore, former employers of our employees may assert that
these employees have improperly disclosed confidential or proprietary
information to us. Any of these results could harm our business. We may be
increasingly subject to infringement claims as the number of, and number of
features of, our products grow.
If we are unable to hire and retain technical, sales and marketing and
operational personnel, our business could be harmed.
We intend to continue to hire a significant number of additional personnel,
including software engineers, sales and marketing personnel and operational
personnel. Competition for these individuals is intense, especially in the San
Francisco Bay Area where we are headquartered, and we may not be able to
attract, assimilate, or retain additional highly qualified personnel in the
future. The failure to attract, integrate, motivate and retain these employees
could harm our business.
We rely on the services of our key personnel, whose knowledge of our business
and technical expertise would be difficult to replace.
We rely upon the continued service and performance of a relatively small
number of key technical and senior management personnel. Our future success
depends on our retention of these key employees, such as Ronald Croen, our
Chief Executive Officer. None of our key technical or senior management
personnel are bound by employment agreements, and, as a result, any of these
employees could leave with little or no prior notice. If we lose any of our key
technical and senior management personnel, our business could be harmed. We do
not have key person life insurance policies covering any of our employees.
Our stock price could be extremely volatile.
In recent years, the stock market in general, and The Nasdaq National Market
and the securities of technology companies in particular, has experienced
extreme price and trading volume fluctuations. These fluctuations have often
been unrelated or disproportionate to the operating performance of individual
companies. These broad market fluctuations may materially adversely affect our
stock price, regardless of our operating results.
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Certain stockholders may disagree with how Nuance uses the proceeds from the
initial public offering.
Management will retain broad discretion over the use of proceeds from the
Company's April 2000 initial public offering. Stockholders may not deem these
uses desirable and our use of the proceeds may not yield a significant return
or any return at all. Because of the number and variability of factors that
determine our use of the net proceeds from the offering, we cannot guarantee
that these uses will not vary substantially from our currently planned uses.
Some of our existing stockholders can exert control over Nuance and may not
make decisions that are in the best interests of all stockholders.
Since our initial public offering on April 13, 2000, our executive officers
and directors, their affiliates and other current principal stockholders
together control approximately 56% of our outstanding common stock. As a
result, these stockholders, if they act together, are able to exert a
significant degree of influence over our management and affairs and over
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. In addition, this concentration
of ownership may delay or prevent a change in control of Nuance, even when a
change in control may be in the best interests of other stockholders. Moreover,
the interests of this concentration of ownership may not always coincide with
our interests or the interests of other stockholders and, accordingly, these
controlling stockholders could cause us to enter into transactions or
agreements which we would not otherwise consider.
Our charter and bylaws and Delaware law contain provisions which may delay or
prevent a change of control of Nuance.
Provisions of our charter and bylaws may make it more difficult for a third
party to acquire, or discourage a third party from attempting to acquire,
control of Nuance. These provisions could limit the price that investors might
be willing to pay in the future for shares of our common stock. These
provisions include:
. the division of the board of directors into three separate classes;
. the elimination of cumulative voting in the election of directors;
. prohibitions on our stockholders from acting by written consent and
calling special meetings;
. procedures for advance notification of stockholder nominations and
proposals; and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, our board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The issuance of
preferred stock, while providing flexibility in connection with possible
financings or acquisitions or other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
Since the completion of our initial public offering on April 13, 2000, we
have been subject to the antitakeover provisions of the Delaware General
Corporation Law, including Section 203, which may deter potential acquisition
bids for our company. Under Delaware law, a corporation may opt out of Section
203. We do not intend to opt out of the provisions of Section 203.
We may incur a variety of costs to engage in future acquisitions of companies,
products or technologies, and the anticipated benefits of those acquisitions
may never be realized.
As a part of our business strategy, we may make acquisitions of, or
significant investments in, complementary companies, products or technologies,
although no acquisitions or investments are currently pending. Any future
acquisitions would be accompanied by risks such as:
. difficulties in assimilating the operations and personnel of acquired
companies;
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. diversion of our management's attention from ongoing business concerns;
. our potential inability to maximize our financial and strategic position
through the successful incorporation of acquired technology and rights
into our products and services;
. additional expense associated with amortization of acquired assets;
. maintenance of uniform standards, controls, procedures and policies; and
. impairment of existing relationships with employees, suppliers and
customers as a result of the integration of new management personnel.
We cannot guarantee that we will be able to successfully integrate any
business, products, technologies or personnel that we might acquire in the
future, and our failure to do so could harm our business.
Our facilities are located near known earthquake fault zones, and the
occurrence of an earthquake or other natural disaster could cause damage to our
facilities and equipment which could require us to curtail or cease operations.
Our facilities are located in the San Francisco Bay Area near known
earthquake fault zones and are vulnerable to damage from earthquakes. In
October 1989, a major earthquake that caused significant property damage and a
number of fatalities struck this area. We are also vulnerable to damage from
other types of disasters, including fire, floods, power loss, communications
failures and similar events. If any disaster were to occur, our ability to
operate our business at our facilities could be seriously, or potentially
completely, impaired. The insurance we maintain may not be adequate to cover
our losses resulting from disasters or other business interruptions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the risk factors section of this Quarterly
Report on Form 10-Q.
Foreign Currency Exchange Rate Risk
To date, all of our recognized revenues have been denominated in U.S.
dollars and primarily from customers in the United States, and our exposure to
foreign currency exchange rate changes has been immaterial. We expect, however,
that future product license and services revenues may also be derived from
international markets and may be denominated in the currency of the applicable
market. As a result, our operating results may become subject to significant
fluctuations based upon changes in the exchange rates of certain currencies in
relation to the U.S. dollar. Furthermore, to the extent that we engage in
international sales denominated in U.S. dollars, an increase in the value of
the U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. Although we will continue to monitor our
exposure to currency fluctuations, and when appropriate, may use financial
hedging techniques to minimize the effect of these fluctuations, we cannot
assure you that exchange rate fluctuations will not adversely affect our
financial results in the future.
Interest Rate Risk
As of June 30, 2000, we had cash and cash equivalents of $88.6 million which
consisted of cash and highly liquid short-term investments. Declines of
interest rates over time would reduce our interest income from our short-term
investments. Based upon our balance of cash and cash equivalents, a decrease in
interest rates of 0.5% would cause a corresponding decrease in our annual
interest income by approximately $0.4 million. As of June 30, 2000, we had
short-term debt outstanding in the amount of $323,000 at an interest rate of
8.0%.
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NUANCE COMMUNICATIONS INC. & SUBSIDIARIES
FORM 10-Q, June 30, 2000
PART II: OTHER INFORMATION
Item 1. Legal Proceedings:
We are not currently a party to any legal proceedings.
Item 2. Changes in Securities:
The effective date of our registration statement on Form S-1 filed under the
Securities Act of 1933 (No. 333-96217) relating to the initial public offering
of our common stock, was April 12, 2000. A total of 5,175,000 shares of our
common stock, including 675,000 shares related to the exercise of the
underwriters' over-allotment option, were sold by us to an underwriting
syndicate led by Goldman, Sachs & Co., Thomas Weisel Partners LLC, Dain
Rauscher Wessels and Wit Soundview. The offering commenced on April 13, 2000
and closed on April 18, 2000. At the time of the offering, 19,925,986 shares of
preferred stock were converted into common stock.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits. The exhibits listed in the accompanying Exhibit Index are
filed or incorporated by reference as part of this Report.
(b) No reports on Form 8-K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Nuance Communications
/s/ Graham Smith
By: _________________________________
Graham Smith
Vice President and Chief Financial
Officer
Date: August 14, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation of Registrant, as
currently in effect.(1)
3.2 Form of Certificate of Incorporation of Registrant, to be in
effect upon the reincorporation of Registrant into Delaware.(1)
4.1 Form of Registrant's Common Stock Certificate.(1)
4.2 Amended and Restated Investors' Rights Agreement, dated as of
October 1, 1999, among the Registrant and the parties named
therein.(1)
4.3 Warrant to Purchase Stock dated April 1, 1996 issued to Phoenix
Leasing.(1)
10.1 Form of Indemnification Agreement to be entered into by Registrant
with each of its directors and executive officers.(1)
10.4 2000 Stock Plan.(1)
10.5 2000 Employee Stock Purchase Plan and related subscription
agreement.(1)
10.7 Form of Stock Option Agreement, as amended, between Registrant and
each executive officer other than Brian Danella, Paul Scott and
Donna Allen Taylor.(1)
10.9 Memorandum of Agreement of Lease, 2000 Peel Street, Suite 900,
Montreal, Quebec, dated January 1, 2000, by and between Registrant
and Cite De L'Ile Development Inc.(1)
10.13 Form of Stock Option Agreement entered into between Registrant and
Brian Danella, Paul Scott and Donna Allen Taylor.(1)
10.15 Lease agreement dated May 5, 2000, and related agreements by and
between Registrant and Pacific Shores Development LLC.
27.1 Financial Data Schedule.
</TABLE>
--------
(1) Incorporated by reference from the Registrant's Registration
Statement on Form S-1 filed with the Commission on February 4,
2000.
22
