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 DECEMBER 31, 1998
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) 229-7000
(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 February 9, 1999, there were 12,563,284 shares of the Company's $0.01
par value common stock issued, with 12,339,221 shares outstanding.
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XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
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PAGE
NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Balance Sheets--December 31, 1998 and June 30, 1998...... 3
Condensed Statements of Operations--Three Months ended
December 31, 1998 and 1997 and Six Months Ended
December 31, 1998 and 1997....................................... 4
Statements of Cash Flows--Six Months Ended December 31, 1998
and 1997.......................................................... 5
Notes to Condensed 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 4. Submission of Matters to a Vote of Security Holders.................. 13
ITEM 6. Exhibits and Reports on Form 8-K..................................... 14
Signatures........................................................... 15
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PART I--FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIdATED FINANCIAL STATEMENTS
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XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
December 31, June 30,
1998 1998
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 16,389,257 $ 15,243,438
Accounts receivable, less reserves of approximately $56,000
at December 31, 1998 and June 30, 1998 2,456,246 3,953,722
Contract receivable 11,185,480 9,927,416
Prepaid expenses and other current assets 257,699 480,802
____________ ____________
Total current assets 30,288,682 29,605,378
Property and equipment, net 2,289,936 2,575,141
Deferred tax asset 1,030,000 1,030,000
Other assets 754,626 722,607
____________ ____________
$ 34,363,244 $ 33,933,126
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable, current portion $ 575,000 $ 527,631
Accounts payable 601,012 2,184,184
Accrued payroll - 355,275
Accrued expenses 8,810,190 8,675,560
Deferred revenue 3,766,790 2,096,531
============ ============
Total current liabilities 13,752,992 13,839,181
Note payable, net of current portion - 575,000
Stockholders' equity:
Common Stock
Authorized--40,000,000 shares
Issued--12,489,597 and 12,261,438 shares at December 31, 1998 and
June 30, 1998, respectively
Outstanding--12,265,534 and 12,037,375 shares at December 31, 1998
and June 30, 1998, respectively 124,896 122,614
Additional paid-in capital 46,609,860 46,303,791
Treasury stock, at cost--224,063 shares of Common Stock at December 31,
1998 and June 30, 1998, respectively (151,246) (151,246)
Accumulated deficit (25,973,258) (26,756,214)
=========== ===========
Total stockholders' equity 20,610,252 19,518,945
=========== ===========
$ 34,363,244 $ 33,933,126
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
=========================== ===========================
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
============ ============ ============= ============
Net revenue $ 7,601,159 $ 6,721,955 $ 14,852,521 $ 14,251,428
Cost of revenue 2,334,867 2,038,800 4,566,324 3,861,901
------------ ------------ ------------ ------------
Gross profit 5,266,292 4,683,155 10,286,197 10,389,527
Operating expenses:
Research and development 3,000,854 3,190,878 6,312,634 5,997,839
Selling, general and administrative 1,849,647 1,794,550 3,417,414 3,434,394
Non-recurring charge - 3,944,312 - 3,944,312
------------ ------------ ------------ ------------
Income (loss) from operations 415,791 (4,246,585) 556,149 (2,987,018)
Other income, net 175,356 276,154 326,807 484,940
------------ ------------- ------------ ------------
Income (loss) before (provision) benefit for income taxes 591,147 (3,970,431) 882,956 (2,502,078)
Provision for (benefit from) income taxes 87,000 (557,335) 100,000 142,665
============ ============ ============ ============
Net income (loss) from continuing operations 504,147 (3,413,096) 782,956 (2,644,743)
Net income (loss) from discontinued operations, net of taxes - 348,268 - (1,374,302)
------------ ------------ ------------ ------------
Net income (loss) $ 504,147 $ (3,064,828) $ 782,956 $ (4,019,045)
============ ============ ============ ============
Net income (loss) from continuing operations per share
Basic $ 0.04 $ (0.29) $ 0.06 $ (0.23)
============ ============ ============ ============
Diluted $ 0.04 $ (0.29) $ 0.06 $ (0.23)
============ ============= ============ ============
Net income (loss) from discontinued operations per share
Basic $ - $ 0.03 $ - $ (0.12)
============ ============ ============ ============
Diluted $ - $ 0.03 $ - $ (0.12)
============ ============ ============ ============
Net income (loss) per share
Basic $ 0.04 $ (0.26) $ 0.06 $ (0.34)
============ ============ ============ ============
Diluted $ 0.04 $ (0.26) $ 0.06 $ (0.34)
============ ============ ============ ============
Weighted average common and common equivalent shares
outstanding
Basic 12,224,533 11,786,138 12,155,143 11,738,417
=========== ============ ============ ============
Diluted 12,775,798 11,786,138 12,837,060 11,738,417
=========== ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
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XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
Six Months Ended
__________________________
December 31, December 31,
1998 1997
_____________ ____________
Cash flows from operating activities:
Net income (loss) $ 782,956 $ (4,019,045)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Non-recurring charge (Note 6) - 3,944,312
Charge for purchased research and development (Note 5) - 2,000,000
Depreciation and amortization 773,741 685,604
Deferred taxes - (100,000)
Changes in assets and liabilities--
Accounts receivable 1,497,476 125,787
Contract receivable (1,258,064) (1,258,064)
Prepaid expenses and other current assets 223,103 (302,844)
Accounts payable (1,583,172) (1,161,010)
Accrued payroll (355,275) (298,695)
Accrued expenses 134,630 (2,555,052)
Deferred revenue 1,670,259 169,608
============ ============
Net cash provided by (used in) operating activities 1,885,654 (2,769,399)
============ ============
Cash flows from investing activities:
Decrease in other assets (32,019) (1,170,436)
Cash paid for Seaport, net of cash acquired - (902,468)
Purchases of property and equipment (488,536) (1,125,718)
============ ============
Net cash used in investing activities (520,555) (3,198,622)
============ ============
Cash flows from financing activities:
Repayment of note payable (527,631) -
Proceeds from exercise of stock options 128,264 73,674
Proceeds from employee stock purchase plan 180,087 55,252
------------- ------------
Net cash provided by (used in) financing activities (219,280) 128,926
------------- ------------
Net increase (decrease) in cash and cash equivalents 1,145,819 (5,839,095)
Cash and cash equivalents, beginning of period 15,243,438 20,843,911
============= ============
Cash and cash equivalents, end of period $ 16,389,257 $ 15,004,816
============= ============
Supplemental disclosure of cash flow information:
Cash paid (refunded) for income taxes $ 74,634 $ (442,782)
============= ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
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XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 condensed 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 condensed 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 condensed 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 $11,185,480 and
$9,927,416 at December 31, 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.
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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
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 six months ended December 31, 1998.
(e) 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 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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<S> <C> <C> <C> <C>
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
Weighted average common shares outstanding............. 12,224,533 11,786,138 12,155,143 11,738,417
Incremental weighted average common shares issuable
upon exercise of stock options outstanding.......... 551,265 - 681,917 -
---------- ---------- ---------- ----------
Diluted weighted average common shares outstanding..... 11,786,138 12,837,060 11,738,417 12,775,798
========== ========== ========== ==========
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Diluted weighted average shares outstanding for the three and six months
ended December 31, 1997 exclude all potential common shares from stock options
and convertible preferred stock because to include such shares would have been
antidilutive due to the Company's net loss in both periods. For the three and
six months ended December 31, 1997 potential common shares outstanding were
1,944,361. Dilutive weighted average shares outstanding for the three and six
months ended December 31, 1998 exclude only potential common shares from stock
options that would be antidilutive. For the three and six months ended December
31, 1998, 1,676,478 and 106,016 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 six months ended December 31, 1997, the Company
recorded a loss of $1.4 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.
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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 December 31, 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 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 six months ended December 31, 1997.
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. Included in the charge was a
lease loss accrual of $0.9 million which consists of costs related to excess
facilities.
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1
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 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 QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Net revenue for the three months ended December 31, 1998 increased 13% to
$7.6 million compared to $6.7 million for the three months ended December 31,
1997. The increase is primarily related to higher engineering services fees,
which increased to 39% of total revenue from 15% in the historical quarter. 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 11%
of revenue in the historical quarter, and which contributes virtually no
revenue in the current periods and is no longer intended to be a revenue
activity of the Company. Net revenue for the six months ended December 31,
1998, increased 4% to $14.9 million compared to $14.3 million for the six
months ended December 31, 1997. Contributing to the net increase in revenue was
an increase in engineering services fees, which increased to 38% of total
revenue from 19% in the historical period. 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 9% of revenue in the
historical period, and which contributes virtually no revenue in the current
period and a decline in royalty revenue, primarily due to the decline in
royalties received from Lexmark, which has contributed very little revenue in
the current period.
<PAGE>
Gross profit for the three months ended December 31, 1998 increased 12% to
$5.3 million from $4.7 million for the three months ended December 31, 1997,
primarily as a result of the increase in revenue. Gross margin decreased
slightly to 69% of revenue for the three months ended December 31, 1998
compared to 70% for the three months ended December 31, 1997. Gross profit for
the six months ended December 31, 1998 decreased 1% to $10.3 million from $10.4
million for the six months ended December 31, 1997. The increase in gross
margin from the increase in revenue was offset by the decline in gross margin
percentage, which decreased to 69% for the six months ended December 31, 1998
compared to 73% for the six months ended December 31, 1997. The decrease in
gross margin percentage was attributable primarily to changes in the revenue
mix. This decline in gross margin percentage included: 1) a higher proportion
of revenue generated from non-recurring engineering fees, which are at a lower
gross margin; 2) a decline in higher margin royalty revenue; and 3) the decline
in the sale of controller boards which contributes very little margin, and
therefore, positively contributed to the gross margin percentage in the current
period.
Research and development expenses decreased by 6% to $3.0 million for the
three months ended December 31, 1998 from $3.2 million for the three months
ended December 31, 1997. Principally as a result of higher revenue, research
and development expenses decreased to 39% of revenue for the three months ended
December 31, 1998 compared to 47% for the three months ended December 31, 1997.
Research and development expenses increased by 5% to $6.3 million for the six
months ended December 31, 1998 from $6.0 million for the six months ended
December 31, 1997 as a result of increased personnel expenditures, particularly
outside contractors, hired to complete the development of the MFP in the first
quarter of fiscal 1999. Research and development expenses increased to 43% for
the six months ended December 31, 1998 compared to 42% for the six months ended
December 31, 1997.
Selling, general and administrative expenses remained comparable at $1.8
million and $3.4 million for the three and six months ended December 31, 1998
and December 31, 1997. Principally as a result of higher revenue, selling,
general and administrative expenses decreased to 24% of revenue for the three
months ended December 31, 1998 compared to 27% for the three months ended
December 31, 1997, and 23% of revenue for six month period ended December 31,
1998 as compared to 24% of revenue for the six months ended December 31, 1997.
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. Included in the charge was a
lease loss accrual of $0.9 million which consists of costs related to excess
facilities.
During the three month period ended December 31, 1998, net interest income
and other income decreased by approximately $100,000, or 37%, compared to the
three month period ended December 31, 1997, and decreased by approximately
$158,000, or 33%, compared to the six month period ended December 31, 1997.
These declines were primarily the result of a decline in cash and cash
equivalent balances.
The Company recorded an income tax provision of $87,000 and $100,000 for
the three and six months ended December 31, 1998, respectively, representing
foreign and other taxes which do not benefit from the operating losses
generated in prior fiscal years. The Company recorded a tax benefit of $557,335
and a tax provision of $142,665 for the three and six months ended December 31,
1997, respectively. As a result of the operating loss incurred in the second
quarter of fiscal 1998, the Company recorded a tax benefit in order to reflect
the expected fiscal 1998 income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of $16.4
million compared to $15.2 million at June 30, 1998. This increase is due to
cash provided by operating activities, including a higher than expected level
of collections of accounts receivable and customer prepayments. The increase in
cash from operating activities was partially offset by the repayment of a note
payable related to the Seaport acquisition and purchases of equipment. The
Company expects that its normal days sales outstanding to be around 70 days
versus the less than 50 days achieved at December 31, 1998.
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 December
31, 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.
<PAGE>
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 Company 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.
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.
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. Though
this concentration may diminish somewhat as the Company's revenue mix changes,
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 40 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 difficulties with implementing the
Company's products in the devices), and/or smaller-than-anticipated sales of
the devices, 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. 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. Adoption of the
Company's color solutions has not been widespread in the OEM market; thus, the
Company faces the near-term challenges of establishing itself as a credible
source of color print and imaging solutions, and of completing the development
of 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
<PAGE>
and motivating its employees, and establishing processes and infrastructure to
help it manage its business more effectively. 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.
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 and systems do not
require modification to function correctly in and after the year 2000. 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 December 31, 1998, the Company sold 74,000 shares of
unregistered common stock in reliance on exemptions available under Securities
and Exchange Commission Rule 701, pursuant to the exercise of employee stock
<PAGE>
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 $0.619722, and the total consideration received by the Company
for the sale of such stock was $40,060.01. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of its Stockholders on November 23, 1998, at
which the following occurred:
Election of Director: The stockholders elected David R. Skok as a Class II
Director, to serve until the Annual Meeting of Stockholders to be held in the
year 2001. The other persons continuing as directors are Richard A. D'Amore,
Paul R. Low, Peter J. Simone and Thomas A. St. Germain. The vote on the matter
was as follows:
For 10,746,531
Authority Withheld 662,230
Appointment of Independent Auditors: The stockholders ratified the appointment
of Arthur Andersen LLP as the Company's independent public accountants for the
fiscal year ending June 30, 1999. The vote on the matter was as follows:
For 11,351,380
Against 30,521
Abstain 26,860
Amendment of 1996 Directors Stock Option Plan and 1996 Stock Option Plan: The
stockholders approved the reallocation of 334,000 shares previously available
for grant under the 1996 Directors Stock Option Plan to the 1996 Stock Option
Plan. Specifically, the stockholders approved the amendment of the 1996
Directors Stock Option Plan to decrease the number of shares available for
grant under such Plan from 334,000 to 0, and the amendment of the 1996 Stock
Option Plan to increase the number of shares available for grant under such
Plan from 1,750,000 to 2,084,000 shares. The vote on the matter was as follows:
For 6,248,120
Against 993,323
Abstain 51,574
Broker non-votes 4,115,744
Further Amendment of 1996 Stock Option Plan: The stockholders approved the
further amendment of the 1996 Stock Option Plan to increase the number of
shares available for grant under such Plan from 2,084,000 to 2,584,000 shares.
The vote on the matter was as follows:
For 6,022,914
Against 1,197,749
Abstain 72,354
Broker non-votes 4,155,744
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 December 31, 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 February 12, 1999
PETER J. SIMONE Officer
/s/ Robert L. Lentz
___________________ Senior Vice President and Chief February 12, 1999
ROBERT L. LENTZ Financial Officer
<PAGE>
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