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 MARCH 31, 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)
DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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 [ ]
26,364,235 shares of the registrant's Common Stock, $0.001 par value,
were outstanding as of April 30, 1999
================================================================================
<PAGE>
SCANSOFT, INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 1999
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Balance Sheets at March 31, 1999 and
December 31, 1998.........................................
b) Condensed Statements of Operations for the three month
periods ended March 31, 1999 and March 31, 1998...........
c) Condensed Statements of Cash Flows for the three month
periods ended March 31, 1999 and March 31, 1998...........
d) Notes to Condensed Financial Statements...................
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............
Item 6. Exhibits and Reports on Form 8-K...............................
Signatures..............................................................
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCANSOFT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................................... $ 6,544 $ 7,659
Short-term investments............................................ 290 202
Restricted cash................................................... -- 262
Accounts receivable, less allowances of $2,357 and $4,171......... 3,789 13,512
Inventory, net.................................................... 550 4,777
Prepaid insurance................................................. 236 45
Prepaid royalties................................................. 120 201
Prepaid expenses and other current assets......................... 561 683
------------- ---------------
Total current assets........................................... 12,090 27,341
Property and equipment, net....................................... 869 1,039
Acquired intangible assets, net................................... 10,938 --
Other assets...................................................... 240 65
------------- ---------------
TOTAL ASSETS $ 24,137 $ 28,445
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term bank borrowings........................................ $ -- $ 6,000
Accounts payable.................................................. 709 11,053
Accrued wages..................................................... 607 216
Accrued sales and marketing expenses.............................. 866 1,165
Accrued royalties................................................. 290 457
Deferred revenue.................................................. 114 843
Other accrued liabilities......................................... 1,127 1,038
------------- ---------------
Total current liabilities...................................... 3,713 20,772
------------- ---------------
Long term liabilities.................................................. -- 91
------------- ---------------
Stockholders' equity:
Non-voting Preferred stock, $0.001 par value; 3,562,238 shares
authorized, issued and outstanding............................. 4 --
Common stock, $0.001 par value; 50,000,000 shares authorized;
26,344,380 and 19,852,952 shares issued and outstanding,
respectively................................................... 26 20
Treasury stock, 331,740 shares.................................... (684) --
Additional paid in capital, Common................................ 100,857 87,995
Additional paid in capital, Preferred............................. 4,628 --
Deferred compensation relating to stock options................... -- (50)
Accumulated deficit............................................... (84,407) (80,383)
------------- ---------------
Total stockholders' equity..................................... 20,424 7,582
------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 24,137 $ 28,445
============= ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
SCANSOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Revenue................................................................ $ 4,508 $ 19,965
Costs and expenses:
Cost of revenue................................................... 1,125 14,169
Research and development.......................................... 1,255 1,132
Selling, general and administrative............................... 2,603 4,566
Restructuring charges............................................. 346 --
Gain on sale of hardware business, net............................ (882) --
Amortization of intangible assets................................. 158 --
Acquired in-process research and development...................... 3,944 --
----------------- -----------------
Total costs and expenses............................................... 8,549 19,867
Income (loss) from operations.......................................... (4,041) 98
Other income, net...................................................... 16 237
----------------- -----------------
Income (loss) before income taxes...................................... (4,025) 335
Provision for income taxes............................................. -- --
----------------- -----------------
Net income (loss)...................................................... $ (4,025) $ 335
================= =================
Net income (loss) per share: basic..................................... $ (0.18) $ 0.02
================= =================
Net income (loss) per share: diluted................................... $ (0.18) $ 0.02
================= =================
Weighted average common shares: basic.................................. 22,220 19,600
================= =================
Weighted average common and common equivalent shares: diluted.......... 22,220 21,845
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
SCANSOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------------
1999 1998
---------------- -----------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................................... $ (4,025) $ 335
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................... 94 514
Accounts receivable allowances.................................. 767 (220)
Amortization of intangible asset................................ 158 --
Net gain on sale of hardware business........................... (882) --
Write off of acquired in-process research and development....... 3,944 --
Other........................................................... -- 36
Changes in assets and liabilities, net of effects from
acquisition of ScanSoft and sale of hardware assets:
Accounts receivable........................................... (2,034) (1,784)
Inventory..................................................... (18) (1,180)
Prepaid expenses and other current assets..................... (145) 426
Other assets.................................................. -- 148
Accounts payable.............................................. (54) (957)
Other accrued liabilities..................................... (416) (925)
---------------- -----------------
Net cash provided by (used in) operating activities.................... (2,611) (3,607)
---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of short-term investments............................... 174 355
Proceeds from sale of hardware business........................... 6,782 --
Cash associated with ScanSoft acquisition, net.................... 1,233 --
Capital expenditures for property and equipment................... (9) (46)
---------------- -----------------
Net cash provided by investing activities.............................. 8,180 309
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term bank borrowings, net................................... (6,000) 3,649
Buy back of Treasury Stock........................................ (684) 148
----------------- -----------------
Net cash provided by (used in) financing activities.................... (6,684) 3,797
---------------- -----------------
Net increase (decrease) in cash and cash equivalents................... (1,116) 499
Cash and cash equivalents at beginning of period....................... 7,659 11,423
---------------- -----------------
Cash and cash equivalents at end of period............................. $ 6,544 $ 11,922
================ =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
SCANSOFT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION:
The accompanying unaudited condensed 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 condensed 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 March
31, 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
financial statements and related footnotes prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
accompanying financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended January 3, 1999.
The results for the quarter ended March 31, 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.
NOTE 2. BALANCE SHEET COMPONENTS:
The following table summarizes key balance sheet components:
<TABLE>
<CAPTION>
March 31, December
1999 1998
---------------- --------------
<S> <C> <C>
Inventory:
Raw Materials............................ $ 390 $ 429
Work-in-process.......................... 1 2,261
Finish goods............................. 159 2,087
---------------- --------------
$ 550 $ 4,777
================ ==============
Accrued liabilities:
Restructuring accrual.................... $ 134 $ -
Accrued taxes payable.................... 183 158
Warranty accrual......................... 200 200
Other accrued liabilities................ 610 620
---------------- --------------
$ 1,127 $ 978
================ ==============
</TABLE>
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<PAGE>
NOTE 3. ACQUISITION OF SCANSOFT:
The Company acquired ScanSoft, a company that develops, markets,
distributes and supports systems and software that capture, communicate and
print documents at the desktop, effective March 2, 1999 for approximately 6.8
million shares of Common Stock of the Company, 3.6 million shares of non-voting
Preferred Stock of the Company and exchange of 1.7 million employee stock
options to purchase Common Stock of the Company in exchange for outstanding
employee stock options of ScanSoft. Additionally, 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 (IPRD, 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.
The allocation of the purchase price was as follows (in thousands):
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
=============
NOTE 4. IN-PROCESS RESEARCH AND DEVELOPMENT:
Management estimates that $3.9 million of the purchase price of
ScanSoft represents acquired in-process technology that has not yet reached
technological feasibility and has no alternative future use. Accordingly, this
amount was immediately charged to expense in the consolidated statements of
operations 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. Revenues are projected to be
generated in fiscal 1999 for each of the product
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<PAGE>
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.
NOTE 5. RESTRUCTURING:
Restructuring costs of $346,000 in the first quarter of 1999 include
$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." The
restructuring actions are intended to be executed to completion by March 31,
2000, one year from the date the reserve was taken.
NOTE 6. 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 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 quarter ended March 31, 1999.
NOTE 7. COMPREHENSIVE INCOME (LOSS):
Under the provision of Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," the Company is required to
report comprehensive income (loss). Comprehensive income (loss) includes foreign
currency translation gains and losses and other unrealized gains and losses that
have been previously excluded from net income (loss) and reflected instead in
equity. The Company's foreign subsidiary uses the dollar as its functional
currency and therefore the Company reports gains or losses due to foreign
currency fluctuations in the period that they occur. The Company also has no
other elements of comprehensive income (loss) and the net loss reported for the
quarter ended March 31, 1999 is the same as its comprehensive loss.
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NOTE 8. 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>
March 31, March 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Net income (loss)................................................ $ (4,025) $ 335
=============== ===============
Weighted average common shares outstanding (basic)............... 22,220 19,600
Effect of dilutive options and warrants.......................... -- 2,245
--------------- ---------------
Weighted average common and common equivalent shares outstanding
(diluted)..................................................... 22,220 21,845
Income (loss) per share: basic.................................. $ (0.18) $ 0.02
=============== ===============
Income (loss) per share: diluted................................ $ (0.18) $ 0.02
=============== ===============
</TABLE>
NOTE 9. BANK LINE OF CREDIT:
At December 31, 1998, the Company had bank borrowings of $6.0 million
under a line of credit with a bank. In connection with the sale of the hardware
business on January 6, 1999, the outstanding borrowings were paid and the line
of credit was terminated.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
UNAUDITED FINANCIAL STATEMENTS. CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY
REPORT ON FORM 10-Q, INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONTAINING THE
WORDS "EXPECTS", "INTENDS", "BELIEVES", "ANTICIPATES", "ESTIMATES", AND SIMILAR
EXPRESSIONS, CONSTITUTE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING
STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THOSE
MENTIONED IN THIS REPORT AND, IN PARTICULAR, THE FACTORS DESCRIBED UNDER
"ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS," AND THOSE MENTIONED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 3, 1999 UNDER
"BUSINESS" AND "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,
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<PAGE>
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 convince 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 reach
quarterly profitability or attain annual profitability in the near future. As of
March 31, 1999, we had an accumulated deficit of $84.4 million.
As a result of the sale of our hardware business in January, our
revenues declined significantly in the first quarter of 1999. This decline was
partially offset by the inclusion of sales of ScanSoft products subsequent to
the acquisition of ScanSoft on March 2, 1999. We expect our revenues to start
improving gradually from the first quarter 1999 levels, as revenues from
ScanSoft start impacting our operating results.
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<PAGE>
RESULTS OF OPERATIONS
The following table presents, as a percentage of net revenue, certain
selected financial data for the quarters ended March 31, 1999 and March 31,
1998.
SCANSOFT, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1999 1998
---------------- -------------
<S> <C> <C>
Revenue.......................................................... 100.0% 100.0%
Costs and expenses:
Cost of revenue............................................... 25.0% 71.0%
Research and development...................................... 27.8% 5.7%
Selling, general and administrative........................... 57.7% 22.9%
Restructuring charges......................................... 7.7% 0.0%
Gain on sale of hardware business, net........................ (19.6%) 0.0%
Amortization of intangible assets............................. 3.5% 0.0%
Acquired in-process research and development.................. 87.5% 0.0%
---------------- -------------
Total costs and expenses......................................... 189.6% 99.5%
---------------- -------------
Income (loss) from operations.................................... (89.6%) 0.5%
Other income, net................................................ 0.3% 1.2%
---------------- -------------
Income (loss) before income taxes................................ (89.3%) 1.7%
Provision for income taxes....................................... 0.0% 0.0%
---------------- -------------
Net income (loss)................................................ (89.3%) 1.7%
---------------- -------------
</TABLE>
NET REVENUE
Net revenue of $4.5 million in the first quarter of 1999 is decreased
$15.5 million, or 77% from the first quarter of 1998. This decrease is due to
the sale of the hardware business on January 6, 1999, which contributed $15.8
million of net revenue in the first quarter of 1998. Excluding the loss of
hardware revenue, total net revenue has increased due to the acquisition of
ScanSoft on March 2, 1999.
Net revenue in the first quarter includes three months of activity for
the PaperPort product line and only one month of the acquired TextBridge and
Pagis product lines. Net revenue on a pro forma basis would have been
approximately $7.4 million and $8.8 million in the first quarters of 1999 and
1998, respectively. Contributing to the decline in net revenue is the lack of
Hewlett Packard royalties in the first quarter of 1999, compared to $516,000
recognized in the first quarter of 1998. Another contributor is the timing of
new product introductions, in particular TextBridge Pro 98, which commenced
shipping in the fourth quarter of 1997, driving increased retail sell through
and re-orders in the first quarter of 1998. The current release of TextBridge,
TextBridge Pro 9.0, commenced shipping in April 1999.
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<PAGE>
New products shipped in the first quarter include PaperPort Deluxe 6.0
and PaperPort ScannerSuite 2.0, both of which shipped in the latter half of the
quarter. The breakdown of recorded net revenue by channel in the first quarter
of 1999 is 43% retail, 17% direct and web, and 40% OEM.
COST OF REVENUE
Cost of revenue consists primarily of material costs, third party
royalties, fulfillment, and salaries for product support personnel. Cost of
revenue in the first quarter of 1999 was $1.1 million or 25% of total revenue,
compared to $14.1 million or 71% in the first quarter of 1998. The variance in
absolute dollars and percentage of revenue is primarily attributable to the sale
of the hardware business which contributed $13.0 million in cost of revenues or
65% of total revenues in the first quarter of 1998.
On a pro forma basis, cost of revenue would have been approximately
$1.9 million and 25% of net revenue in the first quarter 1999, compared to $2.5
million and 28% of net revenue in the first quarter 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salary and
benefit costs of engineers. Research and development costs were $1.3 million or
28% of revenue in the first quarter of 1999, an increase of $123,000 for the
corresponding period in 1998. The costs for the first quarter 1999 represent
three months of research and development effort from the former Visioneer team
in California and one month from the ScanSoft team, and also include
approximately $187,000 in costs associated with the consolidation to the East
Coast. The benefit of the research and development consolidation to the East
Coast will not be fully realized until the third quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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 first quarter of
1999 were $2.6 million or 58% of revenue compared to $4.6 million or 23% of
revenue in the first quarter 1998. Included in the first quarter 1999 results
are approximately $375,000 relating to non-recurring charges in connection with
the acquisition and relocation of the Company's headquarters to the East Coast.
The decline in absolute dollars is due in part to the sale of the hardware
business, which contributed $3.6 million in first quarter 1998 costs.
RESTRUCTURING CHARGES
Restructuring charges of $346,000 in the first quarter of 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, which resulted in the termination of 10 employees in California.
The major components of these costs are approximately $188,000 in severance
costs for the 10 employees and approximately $46,000 for disposed West Coast
equipment. Also included is $82,000 in non-refundable commitments associated
with the West Coast development team, as well as $30,000 in other exit costs.
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<PAGE>
GAIN ON SALE OF THE HARDWARE BUSINESS
In the quarter ended March 31, 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. 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.
AMORTIZATION OF IDENTIFIED INTANGIBLE ASSETS
The acquisition of ScanSoft included approximately $11.0 million in
identified intangible assets. These assets consist of core developed technology,
trade marks and trade names, and the assembled workforce, which will be
amortized over six, seven and three years, respectively.
IN-PROCESS RESEARCH AND DEVELOPMENT
Management estimates that $3.9 million of the purchase price of
ScanSoft represents acquired in-process technology that has not yet reached
technological feasibility and has no alternative future use. Accordingly, this
amount was immediately charged to expense in the consolidated statements of
operations 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. Revenues are 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.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, consists primarily of interest earned
on cash equivalents and short-term investments. Interest and other income, net
was $16,000 for the three month period ended March 31, 1999 compared to $237,000
for the three month period ended March 31, 1998. The decrease was the result of
a decrease in interest income from decreased cash equivalents and short-term
investments in the respective periods.
INCOME TAXES
We had no tax provision during the three month periods ended March 31,
1999 and 1998, due to availability of loss carryforwards and tax credits.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, we had cash, cash equivalents and short-term
investments of $6.8, as compared to $14.6 million of cash, cash equivalents and
short-term investments at March 31, 1998.
We used $2.6 million in cash for operating activities in the quarter
ended March 31, 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 used in the quarter ended March 31, 1998 was $3.6 million.
Cash provided by investing activities in the quarter ended March 31,
1999 and March 31, 1998 was $8.2 million and $309,000, respectively.
Approximately $6.8 million was received in connection with the sale of the
hardware business in the quarter ended March 1999.
Cash used in financing activities for the quarter ended March 31, 1999
was $6.7 million. 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 $6.0 million.
We believe that our current cash and cash equivalents and cash
generated from operations will satisfy our working capital and capital
expenditures needs through fiscal 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 effects 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 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:
o 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.
o 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.
o Phase 3 - Complete remediation, if any is required, of any
non-compliant business systems and processes, including
facilities, software and components used by our
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<PAGE>
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.
We expect to complete all remediation efforts, if any are
required, by June 30, 1999.
o 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. We expect to complete testing and validation
efforts, if any are required, by July 31, 1999.
o Phase 5 - Deploy and implement remediated and replacement
systems, if any deployment or implementation is required, after
the completion of successful testing and validation. We expect to
complete the deployment and implementation of the remediated or
replacement systems, if any is required, by September 30, 1999.
o 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 can be 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 March 31, 1999 were less than $60,000. Our expected total
costs, including remediation and replacement costs, if any, are estimated to be
between $100,000 and $200,000 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.
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<PAGE>
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.
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 AFFECTING RESULTS
DIFFICULTIES OF INTEGRATING TWO COMPANIES. The anticipated benefits
merging with ScanSoft will depend in part on whether we can integrate our
operations and products in an efficient and effective manner. We cannot
guarantee that this will occur. Successful integration will require integration
of each company's products and coordination of each company's operating
procedures, financial controls, development efforts and sales and marketing
efforts. This integration may be difficult to accomplish smoothly or
successfully, and may take longer than we expect. If serious difficulties are
encountered during integration, management will have to divert its attention
from normal business operations to address these issues, which could have an
adverse effect on the surviving corporation's business. In addition, the merger
may cause potential customers to cancel or delay orders as the result of
uncertainty over the successful integration of the two companies. Furthermore,
there could be an adverse effect on employee morale and on the ability of the
surviving corporation to retain key personnel. Failure to effectively accomplish
the integration of the two companies' operations could have a material adverse
effect on the surviving corporation's business, operating results and financial
condition.
FAILURE TO ACHIEVE SYNERGIES COULD LEAD TO DECLINE IN STOCK PRICE. The
market price of our common stock may decline significantly if:
o the integration of the combined companies is not successful;
o we do not experience business synergies as quickly or to the
extent expected by financial analysts; or
o the effect of the merger on earnings per share and operating
results is not in line with the expectations of financial
analysts.
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<PAGE>
DEPENDENCE ON DEVELOPING MARKET; RAPID TECHNOLOGICAL CHANGE. The market
for digital imaging software and, in particular, for our products, is new and
rapidly evolving. It is dependent on market demand for color sheetfed and
flatbed scanners, as well as for other paper input systems. It is characterized
by transforming technology and frequent new product introductions. Developing
new products and product enhancements is a complex and uncertain process
requiring high levels of innovation, as well as the accurate anticipation of
technological and market trends. Our PaperPort, Pagis and TextBridge software
products account for most of our revenues. We expect that these products will
continue to account for most of our revenues for the foreseeable future. Broad
market acceptance of these products is therefore critical to our future success
and will depend in part on the following:
o Our ability and that of our distributors and other industry
suppliers to convince end users to adopt paper input systems and
digital imaging software for the desktop.
o Our ability to educate end users about the benefits of digital
imaging products generally and the specific benefits of our
products.
o Our ability to adapt to emerging industry standards and respond
to our competitors' product announcements.
o Our ability to develop, introduce, upgrade and support
competitive, new products and product enhancements that meet
changing customer requirements and emerging industry standards.
o Our ability to maintain current market share for our products and
increase brand-name recognition.
If we are not successful in meeting the goals listed above, we may not
be able to gain broad market acceptance for our products. Further, a decline in
demand for digital imaging products generally, or for PaperPort, Pagis or
TextBridge products, in particular, could occur as a result of competitive
technological change or other factors and would have a material adverse effect
on our business, operating results and financial condition.
DIFFICULTIES ASSOCIATED WITH TIMING OF NEW PRODUCT INTRODUCTION. The
digital imaging software market is characterized by rapid technological change,
evolving customer needs, frequent new product introductions and evolving
industry standards. Rapid product advancements could erode the market position
of our products or render those products obsolete. Our success depends on how
well we are able to manage the transition to new products and new versions of
existing products. The life cycles of our products are difficult to estimate.
Further, it is not unusual in personal computer software life cycles for the
sales volume of new products to increase in the first few months after their
introduction because distributors and resellers purchase initial inventory
during that time. As a product reaches the end of its life cycle, however,
demand for that product tends to fall in anticipation of new replacement
products. Consequently, announcements about new products at the end of a product
life cycle may cause our customers to defer purchasing existing products, and we
may be forced to lower the prices of older products in anticipation of new
releases. This may result in distributors claiming price protection credits or
returning older products to us, and as a result, our revenues may decline. We
cannot accurately predict the exact timing in which a new product or version
will be ready to ship. Moreover, in order to maintain competitiveness, we must
make substantial investments in product development and testing. We cannot
guarantee that we will have sufficient resources to make the necessary
investments or that we will be able to develop new products or new product
features quickly enough to meet market demand. Any delay in the scheduled
release of new products or features, or lack of market acceptance for such new
products or features, may have a material adverse impact on our business,
results of operations and financial condition.
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<PAGE>
COMPETITION. The digital imaging market is highly competitive and
subject to rapid change, with frequent new product introductions and
enhancements, and constant pressure to reduce prices. We believe that the
principal competitive factors in the digital imaging software market include:
o OCR accuracy;
o ease of understanding and use,
o product reliability;
o tolerance for poor media;
o product features and functions;
o price/performance characteristics;
o brand recognition; and
o quality of product support.
Our current competitors include developers of digital image processing
software (including photo-editing software), personal document management
software and scanning software suites and manufacturers of scanners and
multi-function peripheral devices. We also face competition in the market for
packaged OCR application programs and bundled OCR products, both in the retail
channel and in the OEM market. We experience significant price competition in
both the retail channel and the OEM market and expect this to continue. In
addition, our "bundled" OCR products themselves compete with our fully featured
shrink-wrap products. In addition to our current competitors, Microsoft
Corporation and MGI Software offer photo-editing products and could offer
products in this market segment in the future. Increased competition may force
us to lower our prices, experience decreased gross margins or lose market
acceptance. We face the following challenges from our competitors:
o Certain of our competitors offer products comparable to ours at retail prices
that are lower than ours.
o Many of our current and potential competitors have longer
operating histories and significantly greater financial,
technical, support, sales, marketing, recruiting and other
resources.
o Certain of our competitors have greater name recognition and
larger customer bases than we do.
o Certain of our competitors may be better able to withstand
significant price decreases or devote greater resources to the
development, promotion, sale and support of their products than
we can.
o Certain of our competitors may be able to develop digital image
processing software with superior OCR accuracy, ease of
understanding and use, product reliability, tolerance for poor
media, product features and functions and price/performance
characteristics.
We may not be able to compete successfully against current and future
competitors, especially those with greater financial, technical, support, sales,
marketing, recruiting and other resources. If we are
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<PAGE>
not successful in meeting the challenges listed above, we may not be able to
gain broad market acceptance for our products and our business, financial
condition and operating results may suffer. Competitive pressures may materially
affect our business, operating results, and financial condition.
Further, we expect that some consolidation in the digital imaging
software industry will occur over the next few years through strategic
acquisitions or alliances. We expect increased competition from new entrants,
including the possibility that Microsoft will add digital imaging components to
the Windows operating system. In addition, according to PC Data, Inc., the
average retail price of scanners dropped by 47% for the nine months ending
September 30, 1998, as compared to the same period in 1997. Based on this
historical trend, we expect that scanner prices will continue to decline in the
future. We believe that the downward price trend of scanners may reduce prices
for digital imaging software products. These changes in the market could result
in price erosion, reduced gross margins or loss of market share, any of which
could have a material adverse effect on our business, operating results and
financial condition.
PRESSURE ON GROSS MARGIN. We may suffer adverse operating results if
our gross margin fluctuates. Retail prices on software products drop quickly. In
addition, our competitors will attempt to offer products which meet or exceed
our products' performance and capabilities. We intend to introduce new software
products, software upgrades and software features in response to anticipated
competitive price pressures and new product introductions. If prices fall faster
than we expect or if we must reduce our prices for any reason, we may experience
pressure on our gross margin. In addition, our gross margin will depend in part
on certain factors listed below:
o Our success in introducing new products to the market and easing
out old ones.
o Our competitors prices, products and market share.
o The amount of royalties we receive under our OEM arrangements.
o General economic conditions.
If we are not successful in meeting these challenges, our business,
operating results and financial condition may suffer.
HISTORY OF LOSSES; FLUCTUATIONS IN OPERATING RESULTS. ScanSoft had net
losses for 1996, 1997 and 1998. Visioneer also had net losses for its fiscal
1996, 1997 and 1998, although a substantial portion of those losses were
attributable to the hardware business that was sold to Primax. On a pro forma
basis, the combined companies had a net loss for 1997 and 1998..
Our revenues frequently fluctuate from quarter to quarter due, to a
large extent, on the following:
o volume, timing and filling of customer orders;
o reduction in prices in response to competition;
o increased expenditures to pursue new product or market
opportunities;
o fluctuation in sales orders, juxtaposed with a significant
portion of our operating expenses being fixed in advance, based
in large part on forecasts of future sales;
o inability to adjust operating expenses to compensate for
shortfalls in sales orders against forecast;
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<PAGE>
o price protection charges in excess of recorded allowances;
o demand for products;
o seasonality;
o customer deferrals in anticipation of new versions of products;
o introduction of new products by us or our competitors;
o timing of new product acquisitions; and
o timing of significant marketing and sales promotions.
Further, backlog early in a quarter is generally not large enough to
assure than we will meet our revenue target for any particular quarter. A
shortfall in shipments at the end of any quarter may cause operating results for
that quarter to fall significantly short of anticipated levels.
In addition, if we need to reduce our prices in response to price
competition, we will therefore be at a significant disadvantage with respect to
our competitors that have substantially greater resources. Such competitors may
more readily withstand an extended period of downward pricing pressure. In such
event, we may also incur price protection charges from our distributors and
resellers. Any price protection charges in excess of recorded allowances would
have a material adverse effect on our business, operating results and financial
condition.
Due to the foregoing factors, among others, our revenues are difficult
to forecast. We intend to base our expense levels in significant part on our
expectations of future revenue. As a result, we expect our expense levels to be
relatively fixed in the short term. Our failure to meet revenue expectations
would have a material adverse affect on our business, operating results and
financial condition. Further, an unanticipated decline in revenue for a
particular quarter may disproportionately affect our net income because a
relatively small amount of our expenses are intended to vary with our revenue in
the short term. As a result, we believe that period-to-period comparisons of our
results of operations are not and will not necessarily be meaningful, and you
should not rely upon them as an indication of future performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 23, 1999, the Company held a special meeting of
Stockholders. At such meeting, the following actions were voted upon:
a. Approval and adoption of the Agreement and Plan of Merger between
ScanSoft, Inc., an indirect wholly-owned subsidiary of Xerox
Corporation, and Visioneer, Inc. (the "Company"), the merger of the
Company and the amendment to the Company's certificate of incorporation
to increase the authorized common and preferred stock and to set forth
the rights, preferences and privileges of the Series B preferred stock
to be issued in the merger and to approve other transactions
contemplated in the Agreement and Plan of Merger.
VOTES FOR VOTES AGAINST ABSTAINED BROKER NON-VOTES
--------- ------------- --------- ----------------
11,413,061 82,920 28,608 0
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
January 21, 1999 Item 2. Reported sale of hardware business to
Primax Electronics, Ltd.
March 17, 1999 Item 2. Reported March acquisition of ScanSoft, Inc.
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<PAGE>
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 May 15, 1999.
SCANSOFT, INC.
By: /S/ SHARON E PLANTE
------------------------------------
Sharon E. Plante
Chief Accounting Officer
Treasurer
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<PAGE>
EXHIBIT INDEX
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit
No. Description of Exhibits
--- -----------------------
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.
- --------------
(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.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET, STATEMENT OF OPERATIONS AND STATEMENT OF CASH FLOWS INCLUDED
IN THE COMPANY'S FORM 10-Q FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
AND THE NOTES THERETO.
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