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, 1999
COMMISSION FILE NUMBER 020777
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 November 5, 1999, there were 13,010,349 shares of the Company's $0.01
par value common stock issued, with 11,765,405 shares outstanding.
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XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Balance Sheets--September 30, 1999 and June 30, 1999................ 3
Statements of Income--Three Months Ended September 30, 1999
and 1998.......................................................... 4
Statements of Cash Flows--Three Months Ended September 30, 1999
and 1998.......................................................... 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
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PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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September 30, June 30,
1999 1999
------------ ----------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 24,438,464 $ 20,317,617
Accounts receivable, less reserves of approximately $56,000
at September 30, 1999 and June 30, 1999 4,829,857 3,692,426
Contract receivable 4,000,000 7,000,000
Prepaid expenses and other current assets 7,045 6,745
------------- -------------
Total Current Assets 33,275,366 31,016,788
Property and equipment, net 1,931,427 2,028,473
Deferred tax asset 1,030,000 1,030,000
Other assets 1,203,451 638,000
------------- -------------
$ 37,440,244 $ 34,713,261
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable, current portion $ - $575,000
Accounts payable 1,148,023 888,665
Accrued expenses 8,374,133 8,605,720
Deferred revenue 6,907,426 5,586,750
------------- -------------
Total Current Liabilities 16,429,582 15,656,135
Stockholders' equity:
Common Stock
Authorized--40,000,000 shares
Issued-- 13,002,628 and 12,726,936 shares at September 30, 1999 and
June 30, 1999, respectively
Outstanding-- 11,757,684 and 11,481,992 shares at September 30, 1999
and June 30, 1999, respectively 130,026 127,269
Additional paid-in capital 47,478,909 46,976,183
Treasury stock, at cost--1,224,944 shares of Common Stock at September 30,
1999 and June 30, 1999, respectively (4,107,160) (4,107,160)
Accumulated deficit (22,491,113) (23,939,166)
------------- -------------
Total stockholders' equity 21,010,662 19,057,126
------------- -------------
$ 37,440,244 $ 34,713,261
============= =============
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 INCOME
(UNAUDITED)
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Three Months Ended
-------------------------------
September 30, September 30,
1999 1998
-------------- ---------------
Net revenue $ 8,981,426 $ 7,251,362
Cost of revenue 2,753,641 2,231,457
-------------- ---------------
Gross profit 6,227,785 5,019,905
Operating expenses:
Research and development 2,861,845 3,311,780
Selling, general and administrative 1,946,457 1,567,767
-------------- ---------------
Income from operations 1,419,483 140,358
Other income, net 253,570 151,451
-------------- ---------------
Income before provision for income taxes 1,673,053 291,809
Provision for income taxes 225,000 13,000
-------------- ---------------
Net income $ 1,448,053 $ 278,809
============== ===============
Net income per share (Note 3)
Basic $ 0.12 $ 0.02
============== ===============
Diluted $ 0.11 $ 0.02
============== ===============
Weighted average number of shares outstanding (Note 3)
Basic 11,640,415 12,085,752
============== ===============
Diluted 12,630,234 12,924,272
============== ===============
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 CASH FLOWS
(UNAUDITED)
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Three Months Ended
-------------------------------
September 30, September 30,
1999 1998
-------------- ---------------
Cash flows from operating activities:
Net income $ 1,448,053 $ 278,809
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 354,699 361,591
Changes in assets and liabilities--
Accounts receivable (1,137,431) (2,025,134)
Contract receivable 3,000,000 (629,032)
Prepaid expenses and other current assets (300) (18,784)
Accounts payable 259,358 (523,172)
Accrued expenses (231,587) (309,126)
Deferred revenue 1,320,676 1,167,892
-------------- ---------------
Net cash provided by (used in) operating activities 5,013,468 (1,696,956)
-------------- ---------------
Cash flows from investing activities:
Increase in other assets (565,451) (32,019)
Purchases of property and equipment (257,653) (239,837)
-------------- ---------------
Net cash used in investing activities (823,104) (271,856)
-------------- ---------------
Cash flows from financing activities:
Repayment of note payable (575,000) (527,631)
Proceeds from exercise of stock options 437,868 69,192
Proceeds from employee stock purchase plan 67,615 180,087
-------------- ---------------
Net cash used in financing activities (69,517) (278,352)
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 4,120,847 (2,247,164)
Cash and cash equivalents, beginning of period 20,317,617 15,243,438
-------------- ---------------
Cash and cash equivalents, end of period $ 24,438,464 $ 12,996,274
============== ===============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 37,878 $ 60,643
============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
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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, 1999,
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 $4,000,000 and
$7,000,000 at September 30, 1999 and June 30, 1999, 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. At September 30, 1999, the Company
fulfilled its obligations under this contract and all amounts due will be paid
monthly through January 2000.
(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. At September 30, 1999, cash equivalents consisted of
commercial paper, money market accounts and United States government and agency
securities.
(d) Revenue Recognition
The Company has adopted Statement of Position ("SOP") 97-2, Software
Revenue Recognition, which became effective for fiscal years beginning after
December 15, 1997, as amended by SOP 98-9, Modification of SOP 97-2, "Software
Revenue Recognition", with Respect to Certain Transactions. Net revenue
includes software license fees, services, software maintenance and royalty
revenue. Revenue from software is recognized upon shipment of the product to
customers, provided that there are no significant obligations remaining and
collectibility of the receivable is probable. Revenue from software maintenance
contracts is recognized ratably as it is earned over the term of the contract,
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XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
generally one year. Unearned software maintenance revenue is included in
deferred revenue. In addition, deferred revenue includes certain advanced
royalties and advanced billings under software development contracts for
services not yet performed. Service revenue and royalty revenue are recognized
as the service is performed and the royalty is earned or paid by the customer.
Nonrefundable royalty revenue is recognized over the estimated period of the
underlying customer commercial product shipments. The Company recognizes
revenue under software development contracts as services are provided for per
diem contracts or by using the percentage-of-completion method of accounting
based on the ratio of actual labor hours incurred to the total estimated hours
for individual fixed-price contracts. Provisions for any estimated losses on
uncompleted contracts are made in the period in which such losses become
evident or estimatable.
(e) Comprehensive Income
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. The Company's comprehensive income is
equal to the net income for all periods presented.
(f) Segment Reporting
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information which requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. To date, the Company views its
operations and manages its business as principally one segment.
(g) New Accounting Standards
In June 1999, Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133, which defers the effective
date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, issued in June 1998, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and hedging activities. It requires an entity to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met and that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. The Company does not believe the adoption of this accounting
pronouncement will have a significant impact on its financial instruments.
3. NET INCOME PER COMMON SHARE
The Company has calculated net income per common share in accordance with
SFAS No. 128, Earnings Per Share, which requires the Company to present both
basic and diluted net income per share for all periods presented. Basic net
income per share ("Basic EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share ("Diluted EPS") is computed by dividing net income 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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XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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Three months ended September 30,
1999 1998
---- ----
Weighted average common shares outstanding.................. 11,640,415 12,085,752
Incremental weighted average common shares issuable
upon exercise of stock options outstanding.............. 989,819 838,520
__________ __________
Diluted weighted average common shares outstanding.......... 12,630,234 12,924,272
========== ==========
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Total antidilutive shares of 14,894 and 26,484 for the three months ended
September 30, 1999 and 1998, respectively, have been excluded from the
calculation of weighted average number of potentially diluted common shares
outstanding.
4. NOTE PAYABLE RELATED TO SEAPORT IMAGING
In August of 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 was evidenced by
a promissory note payable over two years. As of September 30, 1999, the
promissory note payable had been repaid in full.
5. MERGER AND REORGANIZATION WITH OAK TECHNOLOGY, INC.
On July 29, 1999, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Oak Technology, Inc.
("Oak"), and Vermont Acquisition Corporation, a wholly-owned subsidiary of Oak
("Merger Sub"), whereunder the Company will merge with and
into Merger Sub and thus become a wholly-owned subsidiary of Oak (the
"Merger"). Completion of the Merger is contingent upon Xionics' stockholders
approving the Merger at a special meeting to be announced in a Joint Proxy
Statement to be mailed to Xionics stockholders; Oak's stockholders approving
the issuance of new shares of Oak common stock to be exchanged for Xionics
common stock; and the satisfaction or waiver of other closing conditions
contained in the Merger Agreement. Subject to satisfying these conditions, the
merger is expected to close by January 2000. In the Merger, Xionics
stockholders will receive $2.94 in cash and 0.8031 shares of Oak Common Stock
for each share of Xionics Common Stock.
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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 13, 1999. 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. Net revenue includes software license fees, services,
software maintenance and royalty revenue. Revenue from software is recognized
upon shipment of the product to customers, provided that there are no
significant obligations remaining and collectibility of the receivable is
probable. Revenue from software maintenance contracts is recognized ratably as
it is earned over the term of the contract, generally one year. Unearned
software maintenance revenue is included in deferred revenue. In addition,
deferred revenue includes certain advanced royalties and advanced billings
under software development contracts for services not yet performed. Service
revenue and royalty revenue are recognized as the service is performed and the
royalty is earned or paid by the customer. Nonrefundable royalty revenue is
recognized over the estimated period of the underlying customer commercial
product shipments. The Company recognizes revenue under software development
contracts as services are provided for per diem contracts or by using the
percentage-of-completion method of accounting based on the ratio of actual
labor hours incurred to the total estimated hours for individual fixed-price
contracts. Provisions for any estimated losses on uncompleted contracts are
made in the period in which such losses become evident or estimatable.
On July 29, 1999, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Oak Technology, Inc.
("Oak"), and Vermont Acquisition Corporation, a wholly-owned subsidiary of Oak
("Merger Sub"), whereunder the Company will merge with and
into Merger Sub and thus become a wholly-owned subsidiary of Oak (the
"Merger"). Completion of the Merger is contingent upon Xionics' stockholders
approving the Merger at a special meeting to be announced in a Joint Proxy
Statement to be mailed to Xionics stockholders; Oak's stockholders approving
the issuance of new shares of Oak common stock to be exchanged for Xionics
common stock; and the satisfaction or waiver of other closing conditions
contained in the Merger Agreement. Subject to satisfying these conditions, the
merger is expected to close by January 2000. In the Merger, Xionics
stockholders will receive $2.94 in cash and 0.8031 shares of Oak Common Stock
for each share of Xionics Common Stock owned.
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RESULTS OF OPERATIONS
The following table summarizes the Company's consolidated operating results as
a percentage of net revenue for each of the periods indicated.
Three months ended
September 30,
1999 1998
Net revenue 100% 100%
Cost of revenue 31 31
-- --
Gross profit 69 69
Operating expenses:
Research and design 32 46
Selling, general and administrative 21 21
-- --
Income from operations 16 2
Other income, net 3 2
-- --
Income before provision for income taxes 19 4
Provision for income taxes 3 -
-- --
Net income 16% 4%
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FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Revenue totaled $9.0 million for the three months ended September 30,
1999, compared to $7.3 million for the three months ended September 30, 1998,
an increase of $1.7 million or 24%. The growth in revenue is attributable to an
increase in access fees and royalty revenue, which combined increased by 30%
for the quarter ending September 30, 1999 as compared to the quarter ended
September 30, 1998. The increase in access fees and royalty revenue was a
result of an increased number of source code licenses and increased deployment
of devices in which the Company's technology has been licensed. The access and
royalty revenue was partially offset by a slight decrease in revenue from
engineering services performed during the quarter.
Gross profit for the three months ended September 30, 1999 increased 24%
to $6.2 million from $5.0 million for the three months ended September 30,
1998. Gross profit remained constant at 69% for both the three months ended
September 30, 1999 and 1998 and the increase in gross profit was primarily
related to the increase in revenue.
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 decreased 14% to $2.9 million
for the three months ended September 30, 1999 from $3.3 million for the three
months ended September 30, 1998. The decline in engineering expense is due
primarily to the completion of development projects that had required
expenditures for outside consultants and contractors. Research and development
expenses as a percentage of net revenue decreased to 32% for the three months
ended September 30, 1999 as compared to 46% for the three months ended
September 30, 1998.
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 increased by $379,000
or 24% for the three months ended September 30, 1999 as compared to the same
period in the prior year. The increase in selling, general and administrative
expenses is a result of increased sales expense in Japan related to the revenue
from Japanese customers. As a percentage of revenue, selling, general and
administrative expenses remained constant at 21% for the three months ended
September 30, 1999 and 1998.
During the three month period ended September 30, 1999, net interest
income and other income increased by $102,000, or 67%, compared to the three
month period ended September 30, 1998. This increase resulted primarily from
additional interest earned on the higher level of cash and cash equivalents
balances maintained during the quarter.
The Company recorded income tax provisions of $225,000 and $13,000 for the
three months ended September 30, 1999 and September 30, 1998 respectively. The
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tax provision for the three months ended September 30, 1999 represents foreign
and other taxes which do not benefit from the operating losses generated in
prior fiscal years which are available to offset current income in the United
States. The increase in the tax provision is attributable to higher level of
revenue from foreign sources recognized in the current quarter.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of $24.4
million compared to $20.3 million at June 30, 1999. This increase is due to
$5.0 million in cash generated from operating activities offset by purchases of
property and equipment, capitalized merger costs and repayment of a note
payable related to the Seaport acquisition.
At present, the Company has available a $5.0 million working capital
revolving line of credit and a $1.0 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, 1999, although the
Company expects the credit agreement to be extended beyond its expiration date.
As of September 30, 1999, 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 cash provided by operations, $4.0 million contract receivable at
September 30, 1999, which will be paid monthly through January 2000, and
available borrowings under its loan facilities, will be sufficient to finance
the Company's operations for at least the next 12 months. In July of 1999, the
Company announced that it had entered into a definitive agreement to merge with
a wholly-owned subsidiary of Oak Technology, Inc. See related footnote
disclosure (Note 5) in Item 1. Consolidated Financial Statements.
FACTORS AFFECTING FUTURE RESULTS
The Company believes that in the future its results of operations could be
affected by various factors, such as dependency on a major customer, possible
delays in the development and shipment of OEM devices containing the Company's
products, competition from new as well as traditional competitors, its success
in introducing and achieving market acceptance of its products, including its
products for color printing and imaging, and its ongoing ability to manage its
growth. The Company's future results are subject to numerous risks and
uncertainties. Those discussed below are those which the Company believes to
have the most current relevance. Readers are strongly encouraged to review all
of the risk factors discussed in the Company's Annual Report on Form 10-K filed
with the SEC on September 13, 1999.
The Company is dependent on a single customer, Hewlett-Packard Company,
for over half its revenue. For the fiscal year ended June 30, 1999, 66% of the
Company's revenue was derived from various contracts with Hewlett-Packard. The
Company expects Hewlett-Packard to remain a very substantial customer for the
foreseeable future. Any significant disruption in the Company's relationship
with Hewlett-Packard, whether as the result of competition, reduced outsourcing
by Hewlett-Packard, or future unanticipated performance problems on the part of
the Company, would therefore be likely to have a material adverse effect on the
Company's future business, financial condition and results of operations.
The Company's revenue derived from royalties on OEMs' devices
incorporating the Company's software and hardware products depends on the
timely development and introduction of those devices, and on the OEMs' success
in marketing and selling them. The Company's OEM customers are continuously
developing new models of devices that incorporate the Company's products which
should yield a royalty stream to Xionics after the OEMs begin to sell them.
Delays in development and shipment of these OEM devices (including delays
caused by unforeseen technical complexity and/or other difficulties with
implementing the Company's products in the devices), smaller-than-anticipated
sales of the devices, failure of the market to accept such OEM devices, and/or
unforeseen changes in OEM product plans, could cause the Company's future
royalty revenue to differ significantly from current expectations.
The Company's products and services continue to face serious competition
from traditional sources such as Adobe Systems, Incorporated, the originator of
the PostScript page description language with which the Company's
PostScript-compatible language interpreter products compete, Electronics for
Imaging, Inc., Peerless Systems Corporation and several other companies which
provide outsourced imaging technology and engineering services to OEMs, and the
OEMs' own internal engineering groups. Some of these sources of competition are
<PAGE>
considerably larger, with more resources than the Company. The Company has
competed successfully for new and repeat business in recent quarters, but
changes in strategy by its competitors, for example price reductions, new
product introductions or new marketing/distribution methods, could make it more
difficult for the Company to compete effectively, cause reduced market demand
for the Company's products and/or render the Company's products obsolete. In
addition, the Company believes that new competitors may attempt to enter the
market for certain of the Company's products and services.
Among other technological changes, embedded PDF and color capability are
rapidly emerging as market requirements for printers and other imaging devices.
Some of the Company's competitors have the capacity to supply these solutions,
and some of their solutions are well received in the marketplace. The Company
faces the challenges of competing with products that require greater color
capability and image complexity including web-based documents, and to work with
higher performing devices in networked environments. Any significant inability
to meet these challenges could cause future results of operations to differ
materially from current expectations.
The Company also faces the ongoing task of managing its growth and
executing its business plan. This entails, among other things, refreshing its
product lines, performing under its customer contracts, attracting, retaining
and motivating its employees, particularly in light of the pending merger with
Oak, and establishing processes and infrastructure to help it manage its
business more effectively. This also entails operating under overall business
and economic conditions which may be beyond the Company's control, including
business and economic conditions in Asia. If the Company were to encounter
significant difficulties in any one or more of these areas, its future operating
results could differ materially from current expectations.
The Year 2000. Many computer programs written during approximately the
past 20 years use two digits rather than four to identify a calendar year. Such
programs could recognize a date represented as "00" as the year 1900 rather
than the 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.
Xionics' IPS/2000 products generally do not have date and time dependent
functions. To the extent that any ancillary functions contain date operators,
4-digit representations of year dates are used. The Company believes its
current products do not require modification in order to function correctly in
and after the year 2000 based upon the assumption that all other products used
in combination with Xionics' products (i.e. software, hardware, firmware)
properly exchange date data with Xionics' products. Xionics has reviewed
certain critical software systems which it uses in its business operations for
Year 2000 compliance, and is in the process of investigating whether other
critical software systems which it uses in its business operations are Year
2000 compliant, and based upon the information received by Xionics to date,
Xionics believes that most of such software systems will continue to function
in the manner intended without material interruption of service or other
difficulty resulting from the Year 2000 issue. Xionics is in the process of
identifying alternative systems for those critical software systems which are
known to have problems related to the Year 2000 issue. The Year 2000 issue
creates risk for the Company from undetected, unknown, and/or unforeseen
problems (including failure of systems, equipment, software, firmware and/or
devices to operate properly with regard to dates in the year 2000 and after) in
its own products, in its internally used third party equipment and software, as
well as third-party customer and other vendor services and software, firmware
and devices in or with which Xionics' products are incorporated or used.
Furthermore, existing customers or potential customers may have reduced funds
available to purchase products and services such as those offered by the
Company as companies expend significant resources to correct their current
systems for Year 2000 compliance. Any such undetected, unknown and/or
unforeseen problems which results in the Company incurring unanticipated
expenses related to correcting such problem and/or working with third parties
to remedy such problems, and/or any such reduced spending by existing or
potential customers, could have a material adverse effect on the Company's
business, financial condition and results of operations. 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 based on, among other things, third party software or hardware
products used with the Xionics' product which third party software or hardware
products are not Year 2000 compliant or which, when used together with Xionics'
products, are not Year 2000 compliant. For instance, Xionics' IPS/2000 fax
software module is portable to various hardware platforms. Provided that the
underlying third-party hardware clock used with Xionics' IPS/2000 fax software
provides sufficient control to allow Xionics' IPS/2000 fax software to
correctly detect and/or set proper calendar values (i.e. leap year, centuries,
decades, etc.), Xionics' IPS/2000 fax software is expected to perform properly
in the Year 2000. However, if the underlying third-party hardware clock does
not work as anticipated, Xionics' IPS/2000 fax software may not perform
properly in the Year 2000. Due to the unprecedented nature of the potential
litigation related to the Year 2000 readiness discussed in the industry and
popular press, the most likely worst case scenario is that the Company could be
subject to litigation related to the Year 2000 issue. It is uncertain whether
or to what extent the Company may be affected by such litigation. The Company
is in the process of contacting its critical customers, suppliers, financial
institutions and development partners to obtain assurances that their
operations and the products and services they provide to the Company are Year
2000 compliant. The Company plans to rely on these assurances, and does not
plan to perform testing or obtain other independent confirmation of such
third-party's statements. Accordingly, the Company may discover additional Year
2000 related problems, may not be able to develop or implement contingency
plans in a timely manner, or may find the costs of these activities to be
material, in the event these assurances are not obtained, are not obtained in a
timely manner or are not accurate, any or all of which could have a material
adverse effect on the Company's business, financial condition or results of
operations. While the Company's evaluation of the Year 2000 issue as it relates
to the Company's business operations is on-going, the Company does not
currently 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 generally.
As such, the Company has not established, nor does it currently intend to
<PAGE>
establish, a Year 2000 contingency plan. However, the Company or third parties
on which the Company relies for services, products or payments may be unable to
produce reliable information or process routine transactions, or may be
otherwise incapable of conducting critical business activities, which could
include manufacturing and shipping products, invoicing customers and paying
vendors, in the event of significant Year 2000 related failures, whether in the
Company's products or in the products or services provided by third parties to
the Company, in the event of failure of a third party's internal operations or
products, or in the event of widespread economic and/or financial market
disruption. In the case of any such events, the business, financial condition
and results of operations of the Company could be materially adversely
affected. The Company has not to date spent a material amount on Year 2000
expenditures and does not currently anticipate that any further expenditures
will be material to its business, financial condition or results of operations
in any given year. The Company will reevaluate the need for a contingency plan,
and the potential for related expenditures, from time to time.
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, Disclosures about Fair Value of Financial
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. Additionally, 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, 1999, the Company sold 149,363 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 $0.7977, and the total consideration received by the Company for
the sale of such stock was $90,400.30. Use of proceeds is as disclosed in the
Company's Annual Report on Form 10-K filed with the Commission on September 13,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On August 13, 1999, the Company filed a current report on
Form 8-K, announcing that Xionics had entered into an Agreement
and Plan of Merger and Reorganization dated as of July 29, 1999
<PAGE>
with Oak Technology, Inc. ("Oak"), which agreement sets forth
the terms and conditions of the proposed merger of Xionics with
and into a wholly owned subsidiary of Oak (the "Merger")
pursuant to which such wholly owned subsidiary will be the
surviving corporation in the Merger.
<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 12, 1999
- -------------------------- Officer
PETER J. SIMONE
/s/Robert L. Lentz Senior Vice President and Chief November 12, 1999
- -------------------------- Financial Officer
ROBERT L. LENTZ
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