SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-20777
XIONICS DOCUMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 043186685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 BLANCHARD ROAD, BURLINGTON, MA 01803
(Address of principal executive offices) (Zip Code)
(781) 2297000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
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 .
At October 30, 1998, there were 12,440,885 shares of the Company's $0.01
par value common stock issued, with 12,216,822 shares outstanding.
<PAGE>
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Balance Sheets--September 30, 1998 and June 30, 1998................... 3
Statements of Operations--Three Months Ended September 30, 1998
and 1997.............................................................. 4
Statements of Cash Flows--Three Months Ended September 30, 1998
and 1997.............................................................. 5
Notes to Consolidated Financial Statements............................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.............. 13
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds............................... 14
ITEM 6. Exhibits and Reports on Form 8-K........................................ 14
Signatures.............................................................. 15
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
============= ============
(Unaudited) (Audited)
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ASSETS
Current Assets:
Cash and cash equivalents $ 12,996,274 $ 15,243,438
Accounts receivable, less reserves of approximately $56,000
at September 30, 1998 and June 30, 1998 5,978,856 3,953,722
Contract receivable 10,556,448 9,927,416
Prepaid expenses and other current assets 499,586 480,802
============= ============
Total Current Assets 30,031,164 29,605,378
Property and equipment, net 2,453,385 2,575,141
Deferred tax asset 1,030,000 1,030,000
Other assets 754,626 722,607
============= ============
$ 34,269,175 $ 33,933,126
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable, current portion $ 575,000 $ 527,631
Accounts payable 1,661,011 2,184,184
Accrued payroll 136,022 355,275
Accrued expenses 8,585,687 8,675,560
Deferred revenue 3,264,422 2,096,531
============ ============
Total Current Liabilities 14,222,142 13,839,181
Note payable, net of current portion - 575,000
Stockholders' equity:
Common Stock
Authorized--40,000,000 shares
Issued--12,410,260 and 12,261,438 shares at September 30, 1998 and
June 30, 1998, respectively
Outstanding--12,186,197 and 12,037,375 shares at September 30, 1998
and June 30, 1998, respectively 124,103 122,614
Additional paid-in capital 46,551,581 46,303,791
Treasury stock, at cost--224,063 shares of Common Stock at September 30,
1998 and June 30, 1998, respectively (151,246) (151,246)
Accumulated deficit (26,477,405) (26,756,214)
Total stockholders' equity 20,047,033 19,518,945
============= =============
$ 34,269,175 $ 33,933,126
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
Three Months Ended
--------------------------------
September 30, September 30,
1998 1997
============== ===============
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Net revenue $ 7,251,362 $ 7,529,473
Cost of revenue 2,231,457 1,823,101
============== ===============
Gross profit 5,019,905 5,706,372
Operating expenses:
Research and development 3,311,780 2,806,961
Selling, general and administrative 1,567,767 1,639,844
============== ===============
Income from operations 140,358 1,259,567
Other income, net 151,451 208,786
============== ===============
Income before provision for income taxes 291,809 1,468,353
Provision for income taxes 13,000 700,000
============== ===============
Net income from continuing operations 278,809 768,353
Net loss from discontinued operations, net of taxes - (1,722,570)
Net income (loss) $ 278,809 $ (954,217)
============== ===============
Net income from continuing operations per share (Note 3)
Basic $ 0.02 $ 0.07
============== ===============
Diluted $ 0.02 $ 0.06
============== ===============
Net loss from discontinued operations per share (Note 3)
Basic $ - $ (0.15)
============== ===============
Diluted $ - $ (0.15)
============== ===============
Net income (loss) per share (Note 3)
Basic $ 0.02 $ (0.08)
============== ===============
Diluted $ 0.02 $ (0.08)
============== ===============
Weighted average number of shares outstanding (Note 3)
Basic 12,085,752 11,690,697
============== ===============
Diluted 12,924,272 12,880,975
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
September 30, September 30,
1998 1997
============== ===============
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Cash flows from operating activities:
Net income (loss) $ 278,809 $ (954,217)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Charge for purchased research and development (Note 5) - 2,000,000
Depreciation and amortization 361,591 527,018
Deferred taxes - 500,000
Changes in assets and liabilities--
Accounts receivable (2,025,134) (445,188)
Contract receivable (629,032) (1,275,496)
Prepaid expenses and other current assets (18,784) 459,875
Accounts payable (523,172) (182,382)
Accrued payroll (219,253) 71,373
Accrued expenses (89,873) (1,070,831)
Deferred revenue 1,167,892 (34,781)
=============== ===============
Net cash used in operating activities (1,696,956) (404,629)
=============== ===============
Cash flows from investing activities:
Increase in other assets (32,019) (223,850)
Cash paid for Seaport, net of cash acquired - (672,676)
Purchases of property and equipment (239,837) (887,920)
Net cash used in investing activities (271,856) (1,784,446)
=============== ===============
Cash flows from financing activities:
Repayment of note payable (527,631) -
Proceeds from exercise of stock options 69,192 45,819
Proceeds from employee stock purchase plan 180,087 55,252
Net cash (used in) provided by financing activities (278,352) 101,071
=============== ===============
Net decrease in cash and cash equivalents (2,247,164) (2,088,004)
Cash and cash equivalents, beginning of period 15,243,438 20,843,911
=============== ===============
Cash and cash equivalents, end of period $ 12,996,274 $ 18,755,907
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid (refunded) for income taxes $ 60,643 $ (582,120)
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Xionics Document Technologies,
Inc. and subsidiaries ("the Company") presented herein have been prepared
pursuant to the rules of the Securities and Exchange Commission for quarterly
reports on Form 10-Q and do not include all of the information and note
disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended June 30, 1998,
included in the Company's annual report on Form 10-K.
The consolidated financial statements and notes herein are unaudited, but
in the opinion of management, include all the adjustments (consisting only of
normal, recurring adjustments) necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company and its
subsidiaries.
The results of operations for the interim periods shown herein are not
necessarily indicative of the results to be expected for any future interim
period or for the entire year.
2. SUMMARY OF SIGNIFICaNT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies described in this and other notes to these
condensed consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements reflect the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Contract Receivable
The Company had an outstanding contract receivable of $10,556,448 and
$9,927,416 at September 30, 1998 and June 30, 1998, respectively, from a
significant customer. The contract receivable represents an agreement entered
into by the Company and the customer whereby the Company licensed certain of
its page description technology, including its version of the PostScript page
description language, to the customer. This contract requires that the Company
perform customer support in configuring its technology to the customer
specifications. The Company follows contract accounting in recognizing revenue
on this contract using the percentage of completion method.
(c) Cash and cash equivalents
The Company accounts for investments under Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The Company considers all highly liquid investments
with original maturities of less than three months at the time of purchase to
be cash equivalents.
(d) Revenue Recognition
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Public Accountants issued Statement of Position ("SOP")
97-2, Software Revenue Recognition, which supersedes SOP 91-1. The Company as
required has adopted SOP 97-2 for transactions entered into beginning July 1,
1998. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements (i.e., software products, upgrades/enhancements,
postcontract customer support, installation, training, etc.) to be allocated to
each element based on the relative fair values of the elements. The fair
value of an element must be based on evidence which is specific to the vendor.
The revenue allocated to software products (including specified
upgrades/enhancements) generally is recognized upon delivery of the products.
The revenue allocated to postcontract customer support generally is recognized
ratably over the term of the support and revenue allocated to service elements
(such as training and installation) generally is recognized as the services are
<PAGE>
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
performed. If a vendor does not have evidence of the fair value for all
elements in a multiple-element arrangement, all revenue from the arrangement is
deferred until such evidence exists or until all elements are delivered. The
adoption of SOP 97-2 did not have a material impact on the Company's results of
operations for the three months ended September 30, 1998.
(e) Comprehensive Income
Effective July 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income which requires disclosure of all components of
comprehensive income on an annual and interim basis. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. For the
three months ended September 30, 1998, there were no items that the Company
recorded as other comprehensive income.
(f) New Accounting Standards
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis
for each reportable segment of an enterprise. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 and interim period reporting is
not required until interim periods beginning after December 15, 1998. Unless
impracticable, companies would be required to restate prior period information
upon adoption. The Company does not believe the adoption of this accounting
pronouncement will have a significant impact on the Company's financial
statements.
3. NET INCOME (LOSS) PER COMMON SHARE
The Company has calculated net income (loss) per common share in
accordance with SFAS No. 128, Earnings Per Share, which requires the Company to
present both basic and diluted net income (loss) per share for all periods
presented. Basic net income (loss) per share ("Basic EPS") is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share ("Diluted
EPS") is computed by dividing net income (loss) by the weighted average number
of common and common equivalent shares outstanding during the period using the
treasury stock method. In computing Diluted EPS, common equivalent shares are
not considered dilutive in periods in which a net loss is reported because such
common equivalent shares are antidilutive.
The following table represents the shares used in the computation of basic
and diluted weighted average common shares outstanding:
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<CAPTION>
Three months ended September 30,
1998 1997
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Weighted average common shares outstanding........................ 12,085,752 11,690,697
Incremental weighted average common shares issuable
upon exercise of stock options outstanding...................... 838,520 1,190,278
Diluted weighted average common shares outstanding................ 12,924,272 12,880,975
========== ==========
</TABLE>
Total antidilutive shares of 26,484 and 360,303 for the three months ended
September 30, 1998 and 1997, respectively, have been excluded from the
calculation of weighted average number of potentially diluted common shares
outstanding.
<PAGE>
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 1998, the Company made the decision to
shift all of its focus to the Company's core embedded systems business and to
sell or otherwise dispose of its Digital Document Products Division ("DDPD").
The Company's DDPD division sold print and scan accelerators in the production
scanner market. During the fourth quarter of fiscal 1998, the Company recorded
the estimated loss on the disposal of the business, including the write-off of
DDPD assets and extinguishment of DDPD liabilities, of approximately
$2,256,000.
On August 12, 1998, the Company sold substantially all of the assets of
its DDPD division to GammaGraphX, Inc. ("GGX") of Waltham, Massachusetts for
consideration consisting of future royalties on GGX's future sales of all
products purchased from the Company in this transaction from the date of
closing through September 2001, or until royalties reach an aggregate of $2.2
million, subject to provisions as defined in the asset purchase agreement;
assumption of certain liabilities; and promissory notes totaling $1.28 million
payable in 1999 and 2000, subject to collection of receivables sold in the
transaction. At September 30, 1998, the Company has not received any proceeds
from the sale and has recorded no estimated proceeds from the disposition due
to the uncertainty of realizing any proceeds from the sale of the DDPD
business. If proceeds are collected in the future, the Company will record them
as income from discontinued operations.
5. ACQUISITION OF SEAPORT IMAGING
On August 13, 1997, the Company acquired Seaport Imaging ("Seaport") for
$2,450,000, which included direct acquisition costs of approximately $250,000.
The Company paid $1,100,000 in cash at closing and the balance is evidenced by
a promissory note payable over two years, subject to adjustment. The
acquisition has been accounted for as a purchase in accordance with APB Opinion
No. 16, and accordingly, Seaport's operating results from August 13, 1997 are
included in the accompanying financial statements. The Seaport results combined
with the $2,000,000 charge for in-process R&D has been included in the loss
from discontinued operations, discussed in Note 4, for the three months ended
September 30, 1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10-Q
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES AcT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
INCLUDING STATEMENTS ABOUT FUTURE REVENUE AND FUTURE CASH FLOW. THESE
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW IN THE SECTION ENTITLED "FACTORS AFFECTING
FUTURE RESULTS." READERS SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER
DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED ON
SEPTEMBER 28, 1998. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY
REPORT ON FORM 10-Q. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE
ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR UPDATE THEM TO REFLECT
EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE OF THIS QUARTERLY REPORT ON
FORM 10-Q.
OVERvIEW
Xionics Document Technologies, Inc. designs, develops and markets
innovative software and silicon solutions for printing, scanning, copying,
processing and transmitting digital documents to computer peripheral devices
that perform document imaging functions. Such devices include printers,
copiers, scanners and multifunction peripherals that perform a combination of
these imaging functions. The Company derives its revenue primarily from sales
of its printer software products, which include revenue from software licenses,
royalties, engineering and manufacturing services and maintenance. Software
license revenue consists of the Company's charges for licensed source code,
which generally includes initial nonrefundable fees which are recognized as
revenue upon the shipment of the source code, provided there are no significant
vendor obligations. Royalty revenue is generally earned as a percentage of net
revenue or a fixed amount from unit sales by licensees of products that
incorporate the Company's software, and is generally recognized as earned in
the Company's financial statements in the quarter in which amounts due to the
Company have been determined using estimates based upon historical payments.
Engineering services revenue is derived from fees paid for porting or
customization of the Company's software to customerspecific device controllers.
Revenue is recognized as the services are performed or using percentage of
completion contract accounting. Manufacturing services revenue is derived from
fees received for providing design and manufacturing coordination and support
on behalf of the OEM. These fees are earned over the manufacturing period.
Payments under maintenance contracts are due at the beginning of the contract;
however, revenue is recognized ratably over the term of the contract, which is
typically twelve months.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBeR 30, 1998 AND SEPTEMBER 30, 1997
Revenue for the three months ended September 30, 1998 decreased 4% to $7.2
million compared to $7.5 million for the three months ended September 30, 1997.
Revenue, although down from last year's level, reflects an improved mix as a
result of the Company's decision to modify its business model to exclude the
sale of controller boards. Controller boards, which historically have had lower
gross margins, comprised 15% of total revenue or $1.1 million for the three
months ended September 30, 1997 as compared to less than 1% of total revenue or
$15,000 for the three months ended September 30, 1998. This decrease in
controller board revenue was offset by engineering and manufacturing services
revenue which increased $1.6 million or 151% from the same period in the prior
year. Decreases of approximately $0.8 million in software license and royalty
revenue primarily resulted from the reduction of royalties earned from Lexmark,
as the Lexmark printers in which Xionics software was deployed reached the end
of their economic life. The decline in royalty revenue is anticipated to
stabilize, with the potential for increasing revenue as new printers from
customers which have licensed the Company's software begin to be deployed.
Gross profit for the three months ended September 30, 1998 decreased 12%
to $5.0 million from $5.7 million for the three months ended September 30,
1997. Gross profit decreased to 69% for the three months ended September 30,
<PAGE>
1998 compared to 76% for the three months ended September 30, 1997. The
decreases in both the gross profit and gross profit percentage in the three
months ended September 30, 1998 are primarily attributable to lower royalty
revenue, which has a significantly higher margin than the increased revenue on
the engineering and manufacturing services.
Research and development expenses consist primarily of personnel costs,
costs of engineering contractors and outside consultants, engineering supplies,
computer equipment depreciation and overhead costs, all of which are associated
with development of the Company's IPS, MFP, driver software and color
technologies. Research and development expenses increased by 18% to $3.3
million for the three months ended September 30, 1998 from $2.8 million for the
three months ended September 30, 1997. The higher expense level resulted
primarily from increased personnel expenditures, particularly outside
contractors hired to complete the development of the MFP. As a percentage of
revenue, research and development expenses increased to 46% for the three
months ended September 30, 1998 from 37% for the three months ended September
30, 1997.
Selling, general and administrative expenses include personnel and related
overhead costs for sales, marketing, finance, human resources and general
management. Selling, general and administrative expenses decreased by $72,000
or 4% for the three months ended September 30, 1998 as compared to the same
period in the prior year. The lower expense level resulted primarily from
decreased personnel expenditures resulting from the June 1998 restructuring. As
a percentage of revenue, selling, general and administrative expenses decreased
slightly to 21% for the three months ended September 30, 1998 from 22% for the
three months ended September 30, 1997.
During the three month period ended September 30, 1998, net interest
income and other income decreased by $57,000, or 27%, compared to the three
month period ended September 30, 1997. This decrease resulted primarily from
reduced cash and cash equivalents balances during the quarter.
The Company recorded income tax provisions of $13,000 and $700,000 for the
three months ended September 30, 1998 and September 30, 1997 respectively. The
tax provision for the three months ending September 30, 1998 represents foreign
and other taxes which do not benefit from the operating losses generated in
prior fiscal years. The tax provision for the three months ending September 30,
1997 was calculated based on the expected fiscal 1998 effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of $13.0
million compared to $15.2 million at June 30, 1998. This decrease is due to
uses of cash for operating activities, payments of restructuring charges
expensed in the fourth quarter of fiscal 1998 and the repayment of a note
payable related to the Seaport acquisition.
At present, the Company has available a $4.0 million working capital
revolving line of credit and a $2.0 million term loan facility with a bank,
both of which are secured by substantially all assets of the Company. The
working capital line of credit terminates on December 1, 1998, although the
Company expects the credit agreement to be extended beyond its expiration date.
As of September 30, 1998, there were no outstanding borrowings under the
working capital line of credit or term loan facility. Under the terms of the
working capital and term loan facilities, the Company is prohibited from
declaring or paying dividends on its Common Stock. It is possible that the
Company may in the future use private or public sales of its securities as a
source of liquidity.
The Company believes that its existing cash and cash equivalent balances,
together with funds generated from operations, cash payments on the Company's
1996 agreement with Hewlett-Packard which continue through 1999, and available
borrowings under its lines of credit, will be sufficient to finance the
Company's operations for at least the next 12 months. In the event the Company
acquires one or more businesses or products, the Company's capital requirements
could increase substantially, and there can be no assurance that additional
capital will be available on terms acceptable to the Company, if at all.
<PAGE>
FACTORS AFFECTING FUTURE RESULTS
Dependence on Relationship with Hewlett-Packard. The Company derived 53% of its
revenue from Hewlett-Packard in fiscal 1998. Therefore, any significant
disruption or deterioration of its relationship with Hewlett-Packard would have
a material adverse effect on the Company's business, results of operations and
financial condition. The Company has met all of its obligations necessary to
secure the right to receive ongoing payments from Hewlett-Packard under its
1996 and 1998 agreements with Hewlett-Packard, and is also current in
performing its obligations under various other less material agreements it has
with Hewlett-Packard. However, there can be no assurance that the Company will
continue to meet all such obligations in the future. Hewlett-Packard has the
right to terminate each of its agreements with the Company if the Company
breaches its obligations under that agreement and does not cure such breach
within 30 days. In addition, competitors of the Company, including without
limitation Adobe and Peerless, are continuously engaged in efforts to win
Hewlett-Packard's business away from the Company, and are likely to continue
such efforts in the future. There can be no assurance that one or more of the
Company's competitors will not be successful in competing with the Company for
some or all of Hewlett-Packard's business. Further, although Hewlett-Packard
has shown a strong tendency to outsource embedded systems software and
development for its printer products over the past several years, there can be
no assurance that this trend will continue or that Hewlett-Packard's internal
development groups will not compete successfully for some or all of this
outsourced business in the future. Finally, any adverse change in
Hewlett-Packard's business, results of operations or financial condition could
in turn have a material adverse effect on the Company's business, results of
operations and financial condition.
Dependence on Market Success of Third Parties. The markets for the Company's
products and services are characterized by rapidly changing technology,
evolving industry standards and needs, and frequent new product introductions.
The Company currently derives substantially all of its revenue from the
licensing of technology to a relatively small number of significant OEM
customers, including royalty streams derived from OEMs' shipments of document
imaging devices containing the Company's products, and the sale of related
products and services to manufacturers of document imaging devices. The Company
anticipates that these sources of revenue will continue to account for
substantially all of its revenue for the foreseeable future. In order to assure
that the Company will derive future royalty streams from the shipment of OEM
devices, the Company and its OEMs are required to develop and release in a
regular and timely manner new document imaging products with increased speed,
enhanced output resolutions, reduced memory requirements, multiple functions,
and network connectivity. The Company's OEMs are under tremendous pressure to
continually shorten the development cycles of these products, leading to
increased complexity and cost of development to the Company and its OEMs. The
Company's success will depend on, among other things: market acceptance of the
Company's technology and the document imaging devices of the Company's OEMs;
the ability of the Company and its OEMs to meet industry changes and market
demands in a timely manner; achievement of new design wins by the Company;
successful implementation of the Company's technology in new document imaging
devices being developed by its OEMs; and successful marketing of those devices
by the OEMs. Any failure by the Company or its OEMs to anticipate or respond
adequately to the rapidly changing technology and evolving industry standards
and needs in the market for document imaging devices could result in a loss of
competitiveness or revenue, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Product Development; Product Delays. The Company has in the past experienced
delays in development of its products and in implementation of those products
in its customers' document imaging devices. There can be no assurance that the
Company will not experience similar, or more severe, delays in the future.
Prior delays have resulted from numerous factors such as changing OEM product
specifications, difficulties in allocating engineering personnel among
competing projects, other resource limitations, difficulties with independent
contractors, changing market or competitive requirements and unanticipated
engineering complexity. There can be no assurance that these or other factors
will not contribute to future delays; that OEMs will tolerate such delays; or
that delayed document imaging devices, once introduced, will meet with market
acceptance or success. Given the short product life cycles in the market for
document imaging devices, any delay or unanticipated difficulty associated with
new product development or introduction could have a material adverse effect on
the Company's business, results of operations and financial condition.
<PAGE>
Competition. The market for the Company's products and services is intensely
competitive, and the Company has numerous competitors, including not only other
suppliers of outsourced products and services, such as Peerless Systems
Corporation, but its OEM customers' own internal development groups as well.
The Company's page description language interpreter products compete directly
with those of Adobe Systems, Inc., which is substantially larger than the
Company and has significantly greater resources and name recognition than the
Company. In addition, the Company's OEM customers compete fiercely with one
another, and with other manufacturers of document imaging devices, for market
share in a market characterized by rapid development cycles, short product life
cycles and ever-increasing consumer demand for greater performance and
functionality at reduced prices. There can be no assurance that the Company or
its OEMs will be able to compete successfully against their respective current
or future competitors, or that competitive pressures faced by the Company and
its OEMs will not have a material adverse effect on the Company's business,
results of operations or financial condition.
Technological Change/Developing Markets. A substantial portion of the Company's
recent development effort has been directed at the development of new embedded
imaging technologies, including next-generation PDLs, the XipChip ASIC, other
foundation technology for MFPs, and embedded digital color copier technology.
While the Company has substantial experience in certain of these areas, it has
limited experience in others. The Company's future success will depend to a
significant degree on its ability to complete development of these technologies
and have them deployed in OEMs' document imaging devices. This success will be
dependent in part on the ability of the Company's OEMs to develop new products
that provide the functionality, performance, speed, and connectivity demanded
by the market at acceptable prices, and to convince end users to adopt new
generations of products for office and desktop use. There can be no assurance
that the market for MFP, color imaging and other products will develop or
continue to expand as currently anticipated by the Company; that the Company's
OEM customers will choose the Company's technology for use in their printers,
MFPs, color copiers or other devices; that the Company's OEM customers will be
successful in developing or introducing such devices; or that such products
will gain market acceptance. The failure of any of these events to occur could
have a material adverse effect on the Company's business, results of operations
and financial condition. Likewise, there can be no assurance that future
changes in the technological or marketing direction of industry leaders such as
Microsoft Corporation or Intel Corporation - for example, the possibility that
Microsoft may include native print rendering capability in future version of
its personal computer operations systems - will not render the Company's key
products such as printer languages, interpreters and drivers obsolete or reduce
market demand for them. Any such developments could also have a material
adverse effect on the Company's business, results of operations and financial
condition.
Investment in Ricoh MFP and XipChip. The Company has made a substantial
investment in research and development in order to create a family of MFP
devices for its customer Ricoh Co., Ltd., in completing its commitment to Ricoh
and to develop its XipChip ASIC for use in those devices. While commercial
shipment of Xionics' XipChip ASIC and MFP technology to Ricoh and commercial
shipments of the first Ricoh MFP containing Xionics' XipChip and MFP technology
have begun, there can be no assurance that Ricoh will be successful in
marketing or selling such product, or that it will sell sufficient quantities
of current or future MFPs based on Xionics technology to enable Xionics to
recoup its investment in the development of such devices. Similarly, there can
be no assurance that the Company will succeed in marketing current or future
versions of the XipChip ASIC to other customers in addition to Ricoh, or that
it will sell production units of XipChips in sufficient quantities to recoup
its investment in the development thereof.
Asian Economic Crisis. The Company has several significant OEM customers in
Japan, South Korea, and other parts of Asia. The adverse economic circumstances
currently prevailing in Japan and elsewhere in Asia could affect these
customers' willingness or ability to do business with the Company in the future
or their success in developing and launching document imaging devices
containing the Company's products, which in turn could have a material adverse
effect on the Company's business, results of operations and financial
condition. One Japanese customer, Mita Industrial Co., Ltd., petitioned for
reorganization in 1998, although another Japanese corporation, Kyocera
Corporation, has agreed to acquire Mita and its reorganization is expected to
be successfully completed.
<PAGE>
Risks Associated with Provision of Controller Design and Manufacturing
Services. The Company provides comprehensive services for the management and
coordination of the design and manufacturing of controller boards for its OEM
customers by third parties. The Company seeks to confine its role in such
arrangements to that of agent for the OEM. However, in response to customer or
supplier requirements, the Company has at times assumed contractual
responsibility for the delivery of development deliverables and manufactured
boards. There can be no assurance that the Company will not incur liability to
its customers as the result of its third-party contractor's failure or
inability to develop and manufacturer controller boards for such OEMs as
agreed.
Recruitment and Retention of Employees. The Company's future success is
dependent in part upon its ability to attract and retain qualified employees,
especially highly skilled engineering and technical employees. The current
labor market, both in the Company's geographical area, and in the high
technology industry in general, is such that the number of open positions in
these disciplines far exceeds the supply of personnel qualified to fill them.
In consequence, the Company must continually compete with other high-technology
employers for this limited pool of available employees. There can be no
assurance that the Company will be able to attract or retain the employees it
needs to execute against its current or future business plans. Any failure to
do so could have a material adverse effect on the Company's business, results
of operations and financial condition.
Year 2000 Readiness Disclosure. Many computer programs written during
approximately the past 20 years use two digits rather than four to identify a
calendar year, and a number of these programs are still in widespread use. Such
programs could recognize a date represented as "00" as the calendar year 1900
rather than the calendar year 2000 when performing date-sensitive operations.
This in turn could cause the programs to generate erroneous data or fail when
called upon to perform date-sensitive operations using the year 2000 or
subsequent years. The Company believes its current products and systems are
Year 2000 compliant and do not require modification to function correctly in
and after the year 2000. However, the Company utilizes third-party equipment
and software which may not be Year 2000 compliant. Failure of such third-party
equipment or software to operate properly with regard to dates in the year 2000
and subsequent years could require the Company to incur unanticipated expenses
to remedy any problems, which could have a material adverse effect on the
Company's business, results of operations and financial condition. Furthermore,
the purchasing patterns of customers or potential customers may be affected by
Year 2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase products and services such as those offered
by the Company, which could have a material adverse effect on the Company's
business, results of operations and financial condition. Additionally, the
Company's software and firmware is often integrated with that of its customers
or other vendors, and the Company has no knowledge of the Year 2000 readiness
of such third-parties' software and firmware, or the devices into which they
are incorporated. Failure of such third-party software or firmware, or the
devices in which they are incorporated, to operate properly with regard to
dates in the Year 2000 and subsequent years could result in the Company
incurring unanticipated expenses related to working with such third parties to
remedy any problems. Such unanticipated expenses could have a material adverse
effect on the Company's business, results of operations and financial
condition. Since the Company licenses and provides services relating to
embedded software and firmware, the Company may become involved in
investigations or allegations regarding Year 2000 issues. Due to the various
factors involved, the Company cannot anticipate the degree to which it could be
the subject of claims or complaints regarding Year 2000 issues. The Company is
in the process of contacting its critical customers, suppliers, financial
institutions and significant development partners to determine if their
operations and the products and services that they provide to the Company are
Year 2000 compliant. The Company does not anticipate any material exposure
arising from Year 2000 issues relating to its own products and services, nor
does the Company currently believe that it has material exposure arising from
Year 2000 issues. As such, the Company has not established, nor does it
currently intend to establish a Year 2000 contingency plan. The Company has not
to date spent a material amount on Year 2000 expenditures and does not
anticipate further expenditures to be material to its financial position or
results of operations in any given year. However, the Company will reevaluate
the need for a contingency plan, and the potential for related expenditures,
from time to time.
<PAGE>
Factors Affecting Stock Price. The market price of the Company's common stock
has been, and may continue to be, subject to significant fluctuations in
response to quarter-to-quarter variations in the Company's operating results,
announcements of technological innovations or strategic relationships by the
Company or its competitors and other events or factors. In addition, the stock
market in recent months and years has experienced extreme price and volume
fluctuations that have particularly affected the market price of the stock of
many technology companies, and in particular those with small market
capitalizations. These fluctuations, as well as general economic and market
conditions, may materially and adversely affect the market price of the
Company's common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments. The Company does not participate in derivative financial
instruments, other financials instruments for which fair value disclosure would
be required under SFAS No. 107, or derivative commodity instruments. All of the
Company's investments are in short-term, investment-grade commercial paper and
money market accounts that are carried at fair value on the Company's books.
Accordingly, the Company has no quantitative information concerning the market
risk of participating in such investments.
Primary Market Risk Exposures. The Company's primary market risk exposures are
in the areas of interest rate risk and foreign currency exchange rate risk. The
Company's investment portfolio of cash equivalents is subject to interest rate
fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. Substantially all of the Company's
business outside the United States is conducted in U.S. dollar-denominated
transactions, whereas the Company's operating expenses in Japan and Germany are
denominated in local currency. The Company has no foreign exchange contracts,
option contracts or other foreign hedging arrangements. However, the Company
believes that the operating expenses of its foreign operations are immaterial,
and therefore any associated market risk is unlikely to have a material adverse
effect on the Company's business, results of operations or financial condition.
PART II -OTHER INFORMATION
ITEM 2. CHANGES IN SECURiTIES AND USE OF PROCEEDS
During the quarter ended September 30, 1998, the Company sold 83,963 shares of
unregistered common stock in reliance on exemptions available under Securities
and Exchange Commission Rule 701, pursuant to the exercise of employee stock
options granted under the Company's 1993, 1995 and 1996 Stock Option Plans (the
"Plans") prior to the effectiveness of the Company's registration statement on
Form S-1, declared effective September 24, 1996. The average exercise price for
the shares was $0.89275, and the total consideration received by the Company
for the sale of such stock was $51,871.55. Use of proceeds is as disclosed in
the Company's Annual Report on Form 10-K filed with the Commission on September
28, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THE REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
XIONICS DOCUMENT TECHNOLOGIES, INC.
NAME TITLE DATE
/s/ Peter J. Simone
____________________ President and Chief Executive November 13, 1998
PETER J. SIMONE Officer
/s/ Robert L. Lentz
_____________________ Senior Vice President and Chief November 13, 1998
ROBERT L. LENTZ Financial Officer
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