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 MARCH 31, 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 May 5, 1999, there were 12,664,634 shares of the Company's $0.01 par
value common stock issued, with 12,440,571 shares outstanding.
<PAGE>
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
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PAGE
NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets--March 31, 1999
and June 30, 1998................................................ 3
Consolidated Statements of Operations--Three and Nine Months Ended
March 31, 1999 and 1998.......................................... 4
Consolidated Statements of Cash Flows--Nine Months Ended
March 31, 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........... 12
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds............................ 13
ITEM 6. Exhibits and Reports on Form 8-K..................................... 13
Signatures........................................................... 14
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
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March 31, June 30,
1999 1998
------------ ------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 18,510,013 $ 15,243,438
Accounts receivable, less reserves of approximately $56,000
at March 31, 1999 and June 30, 1998 3,163,953
3,953,722
Contract receivable 10,000,000
9,927,416
Prepaid expenses and other current assets 161,762
480,802
------------ ------------
Total current assets 31,835,728
29,605,378
Property and equipment, net 2,141,297
2,575,141
Deferred tax asset 1,030,000
1,030,000
Other assets 754,626
722,607
------------ ------------
$ 35,761,651 $ 33,933,126
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable $ 575,000 $
527,631
Accounts payable 706,082 2,184,184
Accrued expenses 8,813,123 9,030,835
Deferred revenue 3,996,015 2,096,531
------------ ------------
Total current liabilities 14,090,220 13,839,181
Note payable, net of current portion - 575,000
Stockholders' equity:
Common Stock
Authorized--40,000,000 shares
Issued--12,659,634 and 12,261,438 shares at March 31, 1999 and
June 30, 1998, respectively
Outstanding--12,435,571 and 12,037,375 shares at March 31, 1999
and June 30, 1998, respectively 126,597 122,614
Additional paid-in capital 46,836,231 46,303,791
Treasury stock, at cost--224,063 shares of Common Stock at March 31,
1999 and June 30, 1998, respectively
(151,246) (151,246)
Accumulated deficit (25,140,151) (26,756,214)
------------ ------------
Total stockholders' equity 21,671,431 19,518,945
------------ ------------
$ 35,761,651 $
33,933,126
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net revenue $ $ $ 22,890,942 $ 21,867,172
8,038,421 7,615,744
Cost of revenue 2,510,538 2,294,850 7,076,862 6,156,751
------------ ------------ ------------ ------------
Gross profit 5,527,883 5,320,894 15,814,080 15,710,421
Operating expenses:
Research and development 3,012,861 4,508,492 9,325,495 10,506,331
Selling, general and administrative 1,841,058 1,755,513 5,258,472 5,189,907
Non-recurring charge - - - 3,944,312
------------ ------------ ------------ ------------
Income (loss) from operations 673,964 (943,111) 1,230,113 (3,930,129)
Other income, net 207,144 185,534 533,951 670,474
------------ ------------ ------------ ------------
Income (loss) from continuing operations before 881,108 (757,577) 1,764,064 (3,259,655)
provision for income taxes
Provision for income taxes 48,000 58,452 148,000 201,117
------------ ------------ ------------ ------------
Net income (loss) from continuing operations 833,108 (816,029) 1,616,064 (3,460,772)
Loss from discontinued operations - (528,009) - (1,902,311)
------------ ------------ ------------ ------------
Net income (loss) $
833,108 $(1,344,038) $ 1,616,064 $(5,363,083)
============ ============ ============ ============
Net income (loss) from continuing operations per share:
Basic $ $ $
0.07 (0.07) 0.13 $ (0.29)
------------ ------------ ------------ ------------
$ $ $
Diluted 0.07 (0.07) 0.13 $ (0.29)
------------ ------------ ------------ ------------
Net loss from discontinued operations per share:
Basic $ $ $
- (0.04) - $ (0.17)
------------ ------------ ------------ ------------
$ $ $
Diluted - (0.04) - $ (0.17)
------------ ------------ ------------ ------------
Net income (loss) per share:
Basic $ $ $
0.07 (0.11) 0.13 $ (0.46)
------------ ------------ ------------ ------------
$ $ $
Diluted 0.07 (0.11) 0.13 $ (0.46)
------------ ------------ ------------ ------------
Weighted average common and common equivalent shares
outstanding:
Basic 12,357,524 11,862,147 12,221,618 11,779,060
============ ============ ============ ============
Diluted 12,809,425 11,862,147 12,780,983 11,779,060
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<S> <C> <C>
Nine Months Ended
----------------------------
March 31, March 31,
1999 1998
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,616,064 $(5,363,083)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Non-recurring charge (Note 6) - 3,944,312
Charge for purchased research and development (Note - 2,000,000
5)
Depreciation and amortization 1,057,365 1,142,680
Deferred taxes - (100,000)
Changes in assets and liabilities--
Accounts receivable 789,769 (227,620)
Contract receivable (72,584) (1,887,096)
Prepaid expenses and other current assets 319,040 378,670
Accounts payable (1,478,102) 206,425
Accrued expenses (217,712) (2,508,136)
Deferred revenue 1,899,484 (162,876)
------------ ------------
Net cash provided by (used in)operating activities 3,913,324 (2,576,724)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (623,523) (1,231,773)
Increase in other assets (32,019) (1,182,979)
Cash paid for Seaport, net of cash acquired - (902,468)
------------ ------------
Net cash used in investing activities (655,542) (3,317,220)
------------ ------------
Cash flows from financing activities:
Repayment of note payable (527,631) (9,838)
Proceeds from exercise of stock options 367,688 103,808
Proceeds from employee stock purchase plan 168,736 147,959
------------ ------------
Net cash provided by financing activities 8,793 241,929
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,266,575 (5,652,015)
Cash and cash equivalents, beginning of period 15,243,438 20,843,911
------------ ------------
Cash and cash equivalents, end of period $ 18,510,013 $ 15,191,896
============ ============
Supplemental disclosure of investing and financing activities:
Cash paid (refunded) for income taxes $ $
99,939 (417,487)
============ ============
Cash paid for interest $ $
2,235 180
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<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
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 $10,000,000 and
$9,927,416 at March 31, 1999 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. At March 31, 1999,
the company fulfilled its obligations under this contract and all amounts due
will be paid monthly through January 15, 2000.
(c) Cash and cash equivalents
The Company accounts for its 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 March 31, 1999 and June 30, 1998, cash equivalents
consisted of commercial paper, money market accounts and U.S. government and
agency securities.
(d) Revenue Recognition
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified 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,
<PAGE>
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 non-recurring engineering services) generally is
recognized as the services are performed using percentage of completion
contract accounting. 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 nine months ended March 31, 1999.
(e) New Accounting Standards
In July 1997, the Financial Accounting Standards Board (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 after December 15, 1997
and interim period reporting in the year following its initial year of
application. 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.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal years
beginning after June 15, 1999. The Company does not believe the adoption of
SFAS No. 133 will have a material impact on its 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 included 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>
<S> <C> <C> <C> <C>
Three months ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
Weighted average common shares outstanding............. 12,357,524 11,862,147 12,221,618 11,779,060
Incremental weighted average common shares issuable
upon exercise of stock options outstanding............ 451,901 - 559,365 -
---------- ---------- ---------- ----------
Diluted weighted average common shares outstanding..... 12,809,425 11,862,147 12,780,983 11,779,060
========== ========== ========== ==========
</TABLE>
Diluted weighted average shares outstanding for the three and nine months
ended March 31, 1998 exclude all potential common shares from stock options
because to include such shares would have been antidilutive due to the
Company's net loss in both periods. For the three and nine months ended March
31, 1998 potential common shares outstanding were 2,380,149 which were all
<PAGE>
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
antidilutive. Dilutive weighted average shares outstanding for the three and
nine months ended March 31, 1999 exclude only potential common shares from
stock options that would be antidilutive. For the three and nine months ended
March 31, 1999, 1,790,623 and 230,844 potential common shares were outstanding,
respectively, but not included in the above calculation as their effect would
have been antidilutive.
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. For the nine months ended March 31, 1998, the Company recorded
a loss of $1.9 million. Included in the loss was a $2.0 million charge for
purchased R&D in connection with the acquisition of Seaport Imaging discussed
in Note 5 below.
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 March 31, 1999, the Company has not received any material
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 in the period received.
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 operating
results combined with a $2,000,000 charge for purchased R&D has been included
in the loss from discontinued operations, discussed in Note 4, for the three
and nine months ended March 31, 1998.
6. NON-RECURRING CHARGE
During the second quarter ended December 31, 1997, the Company recorded a
non-recurring charge of approximately $3.9 million. Included in the charge was
a write-down of intangible assets to net realizable value of $3.0 million and a
$0.9 million provision for lease costs of excess facilities. The Company
determined that, due to changes in market conditions related to certain
products, certain intangible assets were impaired.
<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 THAT MAY
AFFECT FUTURE RESULTS OF OPERATIONS". 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. 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
generally 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 original equipment
manufacturer ("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 QUARTERS AND NINE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Net revenue for the three months ended March 31, 1999 increased 6% to $8.0
million compared to $7.6 million for the three months ended March 31, 1998. The
increase is primarily related to higher engineering services fees, which
increased to 57% of net revenue in the quarter ended March 31, 1999 compared to
15% in the quarter ended March 31, 1998. The increase in revenue from
engineering services fees was offset by a decrease in revenue from the sale of
controller boards, which equated to approximately 22% of net revenue in the
quarter ended March 31, 1998. Excluding the controller board revenue, the
quarter over quarter revenue growth rate is 36%. Net revenue for the nine
months ended March 31, 1999, increased 5% to $22.9 million compared to $21.9
million for the nine months ended March 31, 1998. Contributing to the increase
in net revenue was an increase in engineering services fees, which increased to
44% of net revenue from 14% in the nine months ended March 31, 1998. The
increase in net revenue from engineering services fees was offset by a decrease
in revenue from the sale of controller boards, which equated to approximately
17% of net revenue in the nine months ended March 31, 1998. The sale of
controller boards contributed virtually no revenue for the three and nine
months ended March 31, 1999 and is no longer intended to be a revenue
generating activity of the Company.
Gross profit for the three months ended March 31, 1999 increased 4% to
$5.5 million from $5.3 million for the three months ended March 31, 1998,
primarily as a result of the increase in revenue. Gross margin as a percentage
<PAGE>
of net revenue decreased slightly to 69% for the three months ended March 31,
1999 compared to 70% for the three months ended March 31, 1998. Gross profit
for the nine months ended March 31, 1999 increased 1% to $15.8 million from
$15.7 million for the nine months ended March 31, 1998. The absolute increase
in gross profit due to the increase in net revenue was offset by the decline in
gross margin as a percentage of net revenue, which decreased to 69% for the
nine months ended March 31, 1999 compared to 72% for the nine months ended
March 31, 1998. The decrease in gross margin as a percentage of net revenue for
both the three and nine months ended March 31, 1999 as compared to the three
and nine months ended March 31, 1998 was attributable to: 1) a higher
proportion of revenue generated from lower margin non-recurring engineering
fees; 2) a decline in higher margin royalty revenue; offset by 3) the decline
in the sale of controller boards which historically contributed very little
gross margin.
Research and development expenses decreased by 33% to $3.0 million for the
three months ended March 31, 1999 from $4.5 million for the three months ended
March 31, 1998. As a result of higher net revenue and lower expenditures due to
the completion of development projects that had required substantial
expenditures for outside consultants and contractors, research and development
expenses as a percentage of net revenue decreased to 37% for the three months
ended March 31, 1999 compared to 59% for the three months ended March 31, 1998.
Research and development expenses decreased by 11% to $9.3 million for the nine
months ended March 31, 1999 from $10.5 million for the nine months ended March
31, 1998 as a result of decreased personnel expenditures, particularly outside
contractors, hired to complete development projects in the second half of
fiscal 1998 as well as the first quarter of fiscal 1999. As a result of higher
net revenues and lower expenditures, research and development expenses as a
percentage of net revenue decreased to 41% for the nine months ended March 31,
1999 compared to 48% for the nine months ended March 31, 1998.
Selling, general and administrative expenses remained comparable at
approximately $1.8 million and $5.2 million for the three and nine months ended
March 31, 1999 and March 31, 1998. Principally as a result of higher net
revenue, selling, general and administrative expenses as a percentage of net
revenue remained consistent at 23% for the three months ended March 31, 1999
and 1998, and was 23% of net revenue for nine month period ended March 31, 1999
as compared to 24% of net revenue for the nine months ended March 31, 1998.
During the second quarter ended December 31, 1997, the Company recorded a
non-recurring charge of approximately $3.9 million. Included in the charge was
a write-down of intangible assets to net realizable value of $3.0 million and a
$0.9 million provision for lease costs of excess facilities. The Company
determined that, due to changes in market conditions related to certain
products, certain intangible assets were impaired.
During the three month period ended March 31, 1999, net interest income
and other income increased by approximately $22,000, or 12%, compared to the
three month period ended March 31, 1998, and decreased by approximately
$137,000, or 20%, compared to the nine month period ended March 31, 1998.
The Company recorded a provision for income taxes of $48,000 and $148,000
for the three and nine months ended March 31, 1999, respectively, representing
foreign and other taxes which do not benefit from the Company's federal and
state operating losses generated in prior fiscal years. The Company recorded a
provision for income taxes of $58,452 and $201,117 for the three and nine
months ended March 31, 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents of $18.5
million compared to $15.2 million at June 30, 1998. This increase is due to
approximately $3.9 million of cash provided by operating activities, due
primarily to a decrease in accounts receivable and an increase in customer
prepayments. The increase in cash from operating activities was partially
offset by a decrease in accounts payable.
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. As of March 31,
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 funds generated from operations, cash payments on the contract
receivable, as explained in Note 2 above relating to the Company's 1996
agreement with Hewlett-Packard Company which continue through 1999, and
<PAGE>
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.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
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 of course 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 28, 1998 and subsequently filed Form 10-Qs.
The Company is dependent on a single customer, Hewlett-Packard Company,
for over half its revenue. For the fiscal year ended June 30, 1998, 53% of the
Company's revenue was derived from its 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 believes that its OEM customers are
currently developing approximately 33 models of devices that incorporate the
Company's products, and that 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; Peerless Systems
Corporation and several other companies which provide outsourced imaging
technology and engineering services to OEMs; and the OEMs' own internal
engineering groups. The Company has competed quite successfully for new and
repeat business in recent quarters, but changes in strategy by its competitors,
for example price reductions or new product introductions, 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. For example,
Electronics for Imaging, Inc., which is considerably larger and with more
resources than the Company, may seek to compete with the Company for business
relating to the development of moderately-priced printer controllers. Increased
competition from new and/or existing competitors, could cause the Company's
future results of operations to differ materially from current expectations.
Among other technological changes, color capability is rapidly emerging as
a market requirement for printers and other imaging devices. Some of the
Company's competitors have the capacity to supply color solutions, and some of
their color solutions are well received in the marketplace. The Company faces
the challenges of establishing itself as a credible source of color print and
imaging solutions, and of completing the development of additional viable color
products, including page description language software modified to work with
tandem color print engines. 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, 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.
<PAGE>
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. 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. The Company believes its current products do not require
modification to function correctly in and after the year 2000. The Company is
currently investigating whether its critical software systems which it uses in
its business operations are Year 2000 compliant. 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
internally used third party equipment and software, as well as third party
customer and other vendor 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 could result in the Company
incurring unanticipated expenses related to working with third parties to
remedy such problems, and any such reduced spending by existing or potential
customers, 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.
The Company is in the process of contacting its critical customers, suppliers,
financial institutions and 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 generally. 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. 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, 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 March 31, 1999, the Company sold 96,312 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
<PAGE>
Form S-1, declared effective September 24, 1996. The average exercise price for
the shares was $0.4771, and the total consideration received by the Company for
the sale of such stock was $39,865.53. 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 March 31, 1999.
<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 May 14, 1999
PETER J. SIMONE Officer
/s/ Robert L. Lentz Senior Vice President and Chief May 14, 1999
ROBERT L. LENTZ Financial Officer
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