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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-20777
XIONICS DOCUMENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 04-3186685
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
70 BLANCHARD ROAD 01803
BURLINGTON, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 229-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of September 3, 1999, was $86,377,621 based
on the last sale price as reported by The Nasdaq Stock Market.
As of September 3, 1999, there were 12,977,407 shares of the registrant's
common stock issued and 11,732,463 shares of the registrant's common stock
outstanding.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 2
ITEM 2. PROPERTIES.................................................. 7
ITEM 3. LEGAL PROCEEDINGS........................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 21
ITEM 11. EXECUTIVE COMPENSATION...................................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM
8-K......................................................... 32
SIGNATURES............................................................ 35
SUMMARY OF TRADEMARKS................................................. 36
FINANCIAL STATEMENTS.................................................. F-1
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PART I
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
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.
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 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- FACTORS AFFECTING FUTURE RESULTS". READERS SHOULD CAREFULLY REVIEW
THESE RISKS AND THE RISKS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM
TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE
QUARTERLY REPORTS ON FORM 10-Q TO BE FILED IN THE COMPANY'S FISCAL YEAR 2000.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL REPORT ON FORM 10-K.
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 ANNUAL REPORT ON FORM 10-K.
ITEM 1. BUSINESS
BUSINESS OVERVIEW
Xionics Document Technologies, Inc. ("Xionics" or the "Company") is a
leading provider of digital page processing software and technology for the
office market, enabling users to print, scan, copy, process and transmit
documents to computer peripheral devices that perform document imaging
functions. Such devices include printers, copiers, scanners, and fax machines,
as well as multifunction peripherals ("MFPs") that perform a combination of
these imaging functions. The Company offers integrated, modular embedded
software products, along with firmware and silicon technology products, intended
to provide the performance, output quality and network connectivity required for
today's office market. The Company also offers complementary personal computer
software products, in particular printer drivers. Xionics provides standards-
based technology around which its customers, original equipment manufacturers
("OEMs") of peripheral devices, can design and develop differentiated products.
Xionics' technology and expertise is packaged as a range of products and
services, from licenses of core source code to complete turnkey controller
solutions, all designed to help OEMs get their devices to market quickly and
cost-effectively. A controller is a printed circuit board inside the printer
that contains all of the processing components, circuitry and firmware necessary
to enable the printer to convert data received from a user's personal computer
into marks on the printed page. Xionics markets its solutions directly to OEMs
such as Hewlett-Packard, IBM, QMS, Ricoh, Samsung, GCC, Seiko Epson, Sharp and
Xerox.
On August 12, 1998, the Company sold substantially all of the assets of its
Digital Document Products Division ("DDPD") 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, if
any, from the date of acquisition through September 2001, or until royalties
reach an aggregate of $2.2 million, subject to certain provisions as defined in
the asset purchase agreement; assumption of certain liabilities; and promissory
notes, payable in 1999 and 2000, totaling $1.28 million, subject to collection
of accounts receivable sold in the transaction. The assets sold include the line
of print and scan image acceleration products formerly marketed by the Company
under the names Turbo, Lightning, PowerLightning and XipPrint, as well as the
scanner control board products and bar code recognition software products
formerly marketed by Seaport Imaging ("Seaport"), which was acquired by the
Company in August 1997. The Company has recently agreed to extend the dates on
which certain payments from GGX are due and has received a security interest in
certain of GGX's assets.
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On July 29, 1999, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") by and among Oak Technology, Inc.
("Oak"), Vermont Acquisition Corporation, a wholly-owned subsidiary of Oak
("Merger Sub"), and the Company, 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 expected
to be mailed to Xionics stockholders during October 1999; 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. 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.
The Company was incorporated in Delaware on December 30, 1992 under the
name Xionics International Holdings, Inc., although a predecessor to the Company
was formed prior to 1985. In May 1995, the Company changed its name to Xionics
Document Technologies, Inc. The Company's executive offices are at 70 Blanchard
Road, Burlington, Massachusetts 01803. Its telephone number is (781) 229-7000.
CORE TECHNOLOGIES
Intelligent Peripheral System. At the heart of Xionics' enabling
technology for OEMs, and forming the foundation of Xionics' embedded systems
product offerings, is the Intelligent Peripheral System ("IPS"), a modular,
scalable, layered software and hardware architecture that provides processing
and control of document imaging peripheral devices. IPS was developed based on
Xionics' longstanding expertise in the development of page description language
interpreters, and enhanced and extended into a complete controller architecture
for printers and MFPs through Xionics' intensive investment in research and
development over the past several years. The Intelligent Peripheral System gives
OEMs the ability to build high-performance, network-enabled devices quickly and
cost-effectively. As OEMs increasingly rely on outside suppliers to provide
foundation technology for their document imaging devices, IPS enables Xionics to
meet OEMs' outsourcing needs and capture a significant share of the expanding
market for outsourced technology and engineering services. The Intelligent
Peripheral System is productized in a series of software developer packages and
hardware components, discussed below.
PRODUCTS
IPS/2000. IPS/2000, formerly known as IPS-PRINT, is a software developer
package that contains page rendering application components and supporting
embedded system service components needed to build printer controllers. The
package includes Xionics' industry-leading compatible implementations of
industry-standard software interpreters for the PostScript and PCL page
description languages ("PDLs"). These include Xionics 5(TM), Xionics 5E(TM),
Xionics 5C(TM), and Xionics 6(TM), which emulate the PCL family of PDLs
developed and marketed by Hewlett-Packard, and Xionics PS2(TM) and Xionics
PS3(TM), which are compatible with the PostScript(TM) Level 2 and PostScript
Level 3 page description language interpreters from Adobe Systems Inc. Xionics
PS3 was first released and shipped to 7 customers during the Company's 1999
fiscal year. Each Xionics PDL interpreter can render color and Asian-font pages
as well as standard monochrome output. IPS/2000 includes patented methods for
significantly reducing the amount of printer memory necessary for rendering
complex pages. IPS/2000 also includes extensions that allow OEMs to build high-
performance, cost-effective controllers for multifunction peripheral devices
("MFPs"). The additional software components include applications for copy, scan
and fax functions plus the extended core system services needed to support the
concurrent operation of multiple functions.
IPS/2000 Operating System. The IPS/2000 operating system provides a
real-time, multi-tasking core services system based on a dataflow architecture
which permits the direction of multiple parallel data streams through a system
of software defined and hardware executed pipelines. The IPS/2000 operating
system controls conventional reduced instruction set computer ("RISC")
processors in printer only configurations, and can control the XipChip(R) family
of MFP oriented application specific integrated circuits ("ASICs") in
multiple-function configurations.
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Printer Drivers. Xionics offers printer drivers for the PCL6, PCL5E and
PostScript Levels 2 and 3 page printing environments and the Microsoft Windows
3.1, Windows 95, Windows 98 and Windows NT 4.0 operating systems. Driver user
interfaces may be customized to match the individual OEM's look and feel, and
translated into a wide variety of human languages, including Asian languages.
XipChip Family of ASICs. Xionics has completed development of XipChip 2.0,
a downsized version of XipChip 1.5, which was the first in the Company's family
of parallel image data processing ASICs directed at the processing needs of
advanced MFPs. The XipChip processor family is able to provide the massive
bandwidth required to drive advanced MFPs and provide true concurrent operation
of two or more functions (for example, receiving a fax and making a copy)
running simultaneously on the same MFP device. XipChip 1.5 began shipping in
commercial volumes in an OEM's MFP device in the fourth calendar quarter of
1998, and XipChip 2.0 is expected to begin shipping in commercial volumes in an
OEM's MFP device in fiscal 2000.
SERVICES
Nonrecurring Engineering Services. Xionics assists OEMs in deploying its
products and technology in their devices by providing engineering services which
may include complete controller design as well as custom engineering for
vendor-specific features that complement the Company's standard technology.
Driver development and customization is also offered. In addition, the Company
maintains a network of third-party development partners under the Xionics
Partners Program to give Xionics and OEM customers the option of using an
independent development partner closely allied with Xionics for development and
integration services.
Manufacturing Services. For OEMs wishing to procure a total turnkey
controller solution, Xionics from time to time provides manufacturing management
services, including complete project management of the design, development, and
manufacturing start-up, as well as management of the ongoing production of the
OEM's controller board by a third-party manufacturing contractor.
OEM Services. The Company's OEM Services group provides customer support
in every aspect of development, training and maintenance. Software maintenance
service is provided on a contract basis, and includes updates of the licensed
software, if any, along with support in the form of telephonic and electronic
mail response to customer questions. Engineering support services, in which
Xionics engineers perform or assist with specific engineering tasks for OEMs,
are available for a fee either on a project specific or general as needed basis.
SALES AND MARKETING
The Company markets and sells its products and services, and licenses its
software, directly to OEMs of document imaging peripheral devices such as
printers, copiers, faxes, scanners and MFPs who distribute their products
worldwide. In addition, Xionics has licensed certain of its independent
development partners, participants in the Xionics Partners Program who perform
porting or controller design services for OEMs, to distribute its printer
software to OEMs for inclusion in the products being developed by the partners
for the OEMs. As of September 3, 1999, the Company's sales force had a staff of
22 people engaged in direct sales and sales support and located at the Company's
headquarters in Burlington, Massachusetts and the Company's sales office in
Tokyo, Japan. The Company derives a significant portion of its revenue from
sales and licenses of its products to international customers. The Company has
agreed in principle to transfer its Japanese sales operations to a new
independent company being formed by the current executive director of its
Japanese subsidiary, and to enter into a sales representative agreement with
such new company whereunder it will represent Xionics products in Japan. The
Company continually seeks to enhance its relationships with its existing OEM
accounts and obtain new customers through a proven account management program
and through worldwide new business development efforts. Sales account executives
each work with a limited number of OEM customers in order to focus on
partnership building and senior Company executives are active participants in
all significant OEM relationships. The Company regularly participates in trade
shows such as COMDEX, CeBIT, and the Seybold Seminars. In addition, the
Company's marketing communications group manages public relations efforts,
produces and distributes marketing and product support materials and maintains a
World Wide Web site with the address www.xionics.com.
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CUSTOMERS
The Company's customers consist primarily of OEMs that manufacture
printers, copiers, faxes, scanners and MFPs and also include several suppliers
of subsystems or components to such OEMs. As of September 3, 1999, the Company
had licensed its IPS products to over 42 OEMs. For the fiscal year ended June
30, 1999, one customer, Hewlett-Packard Company ("Hewlett-Packard" or "HP"),
accounted for approximately 66% of the Company's net revenue and a second
customer, Ricoh Company, Ltd., accounted for approximately 13% of the Company's
net revenue.
Since September 1994, the Company has had a significant relationship with
Hewlett-Packard Company to supply printer software and related technology and
support. For the three years ended June 30, 1999, 1998, and 1997, revenue from
Hewlett-Packard accounted for approximately 66%, 53%, and 58%, respectively, of
the Company's net revenue. The Company expects that revenue from its
relationship with Hewlett-Packard will continue to represent a material
percentage of the Company's total revenue for the foreseeable future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
In March 1996, the Company entered into an amendment of its preexisting
agreement with Hewlett-Packard. Under the amended agreement (the "1996 HP
Agreement"), the Company licensed certain of its page description language
technology, including its version of the PostScript page description language,
to Hewlett-Packard. The Company has met all performance milestones on which its
right to receive future payments under the 1996 HP Agreement was conditioned.
The Company's revenue stream from Hewlett-Packard under the 1996 HP Agreement
continued through February 1999 and its cash flow from payments under the 1996
HP Agreement will continue through January 2000.
In June 1998, the Company entered into a new agreement with Hewlett-Packard
(the "1998 HP Agreement"), under which the Company will develop and license
additional page description language technology to Hewlett-Packard. The Company
expects that its revenue and cash receipts from Hewlett-Packard will continue
after the expiration of the 1996 HP Agreement as the result of the 1998 HP
Agreement through December 2000. However, the Company's right to receive
payments under the 1998 HP Agreement is conditioned upon the Company's meeting
specified delivery milestones, of which the material development obligations
have been met. Hewlett-Packard has the right to terminate the 1998 HP Agreement
upon a failure by the Company to comply with any of the provisions of the 1998
HP Agreement that is not cured within 30 days, and upon the commencement of
certain bankruptcy or insolvency proceedings.
Beginning in late 1998 and continuing through the present time, the Company
has entered into a series of agreements with Hewlett-Packard for the development
and customization of printer drivers for specific HP laser and inkjet printers
(the "Driver Agreements"). The Company's right to receive payment under each
Driver Agreement is conditioned upon the Company's meeting specified delivery
milestones. Each driver is the subject of a separate agreement, such that any
failure by the Company to meet a delivery milestone under any one agreement will
not affect its right to receive payments under the remaining Driver Agreements.
The Company has met all of its material obligations under the Driver Agreements
which were due to have been performed as of June 30, 1999. The Company
anticipates that its revenues from Hewlett-Packard will continue beyond December
2000 as the result of the Driver Agreements. As with its other agreements with
the Company, Hewlett-Packard has the right to terminate each Driver Agreement
upon a failure by the Company to comply with any of the provisions of that
agreement that is not cured within 30 days, and upon the commencement of certain
bankruptcy or insolvency proceedings.
By its nature, the OEM market for embedded printing and imaging systems and
software is limited to a small number of companies worldwide who manufacture
document imaging devices. This market, in turn, is dominated by a very few
companies, most of whom are customers of Xionics. The Company's dependence on
its relationships with this small group of companies, combined with the limited
number of OEMs in the market, means that the Company's business, results of
operations and financial condition could be materially adversely affected if the
Company were unable to sustain satisfactory customer relationships or if any of
its significant customers were to experience financial, operational or other
difficulties that resulted in a reduction of orders to the Company or a failure
to pay amounts due to the Company.
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RESEARCH AND DEVELOPMENT
The Company's research and development activities are primarily conducted
at the Company's headquarters in Burlington, Massachusetts. As of September 3,
1999, the Company employed 103 software and hardware design engineers, project
managers and engineering support staff. The primary activities of these
employees are new product development, enhancement of existing products, product
testing and technical documentation development. A substantial majority of the
Company's expenses for research and development are allocated to the ongoing
development of the Company's IPS/2000 printer and MFP software products and
printer drivers. A portion of the development staff is engaged in future
technology development in such areas as Internet and corporate intranet
applications, advanced color imaging and next-generation ASICs. The Company has
developed significant tools and methodologies for the automation of testing, bug
tracking and technical document management. The Company's total research and
development expense for fiscal years 1999, 1998, and 1997 was $12.2 million,
$15.5 million and $13.4 million, respectively. The Company anticipates that it
will continue to commit substantial resources to research and development,
although a significant percentage of the engineering staff will be devoted to
customer sponsored engineering, which is included in cost of revenue.
Through Xionics Document Technologies GmbH ("Xionics GmbH"), a wholly owned
subsidiary located in Dortmund, Germany, the Company has a dedicated ASIC design
staff working to design the XipChip family of ASICs, as well as other future
silicon technology. In 1995, the Company acquired this entity in order to gain
access to the experience of its principal in the design, development and
deployment of complex silicon technology.
COMPETITION
The market for the Company's products is highly competitive, and many of
the Company's competitors have significantly more resources than the Company.
Principal competitive factors include brand identity, features, price,
performance, ease of integration, service and time to market.
In the market for embedded printer systems, the Company's IPS/2000 product
line has one primary competitor, Adobe Systems Incorporated ("Adobe"), which has
significantly greater resources than the Company. Adobe was the developer of the
PostScript page description language, which has a significant brand name image.
However, Hewlett-Packard, the Company's largest customer has for the most part
discontinued the use of Adobe PostScript in its printer products. Adobe has
recently changed its licensing practices to make PostScript source code
available to certain of its development partners for the first time, which may
enable Adobe to compete more effectively against the Company. A few other
companies, including Peerless Systems Corporation and Electronics for Imaging,
Inc., offer products and services that compete with the Company's systems
software and integrated controller offerings. The Company's most significant
competition in the area of controller design remains OEMs' in-house development
organizations, and certain large OEMs develop their own proprietary PDL
components as well.
The Company has a number of competitors and potential competitors for the
MFP-related portions of its IPS/2000 product line, many with significantly
greater resources than the Company. Companies such as Peerless Systems
Corporation and Electronics for Imaging, Inc. are in the market with MFP systems
solutions, including integrated processor chips or chip sets which compete with
the Company's XipChip family of ASICs. Again, OEMs' internal development
organizations represent the Company's most significant competition in this area,
as many of the OEMs now in the market with MFP products have developed much of
their base MFP technology internally.
In the market for printer driver software, the Company competes primarily
with a small number of companies, including Adobe Systems Incorporated and
Software 2000 Limited, who also offer such software. In addition, a few OEMs
have their own internal driver development capacity.
In the market for engineering services and manufacturing services the
Company competes primarily with OEMs' internal development and manufacturing
groups, as well as with third-party design houses, contract manufacturers and
the Company's competitors in other markets.
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INTELLECTUAL PROPERTY
The Company possesses six United States patents, which will expire at
various future dates beginning in 2011, including two patents issued during the
Company's 1999 fiscal year. In addition to its patents, the Company also relies
on a combination of copyright, trademark and trade secret laws, employee and
third-party non-disclosure agreements, and license agreements for the protection
of its intellectual property. The source code for the Company's products is
protected as an unpublished work under the copyright laws as they currently
exist. Despite these precautions unauthorized third parties may be able to copy
or reverse-engineer all or portions of the Company's products.
The Company believes that neither its existing products, nor those under
development, infringe any existing patents. There can be no assurance, however,
that the Company is aware of all patents that might be infringed by its
products, or that third parties will not claim such infringement by the Company
with respect to its current or future products. If infringement is alleged, the
Company may seek to obtain a license to use the subject technology. There can be
no assurance that the necessary licenses will be available to the Company on
acceptable terms, if at all, or that the Company would prevail in any related
legal proceeding.
The Company believes that, because embedded systems and software technology
for printers and MFPs changes and develops rapidly, patent, trade secret and
copyright protection are less important to its ability to compete effectively
than factors such as the knowledge, ability and experience of its employees;
contractual relationships with its market-leading OEM customers; and ongoing
product development and technological innovation.
OPERATIONS
The Company's operations consist primarily of materials planning for its
controller design and manufacturing services businesses. The Company provides
quality-assurance services in order to test its software and controller products
in conjunction with its OEM customers' printers and MFP devices. The Company has
an in-house software duplication facility which reproduces the Company's OEM
software products on CD-ROM, magnetic tape or other media for delivery to OEMs.
The Company expects IBM Microelectronics to be its sole source of supply
for its XipChip 1.5 and 2.0 ASICs. Although the Company believes it could
develop other sources for these custom components, no alternative source
currently exists, and identifying an alternative source and obtaining such
components from the alternative source could take several months or longer.
EMPLOYEES
As of September 3, 1999, Xionics had approximately 176 full-time employees.
The Company employs 130 people in engineering for Company- or customer-sponsored
development, 22 in sales and marketing, 4 in manufacturing services and
operations, and 20 in accounting and administrative functions. The Company hires
temporary employees on an as-needed basis to meet its development goals. None of
the Company's employees are represented by a labor union or subject to a
collective bargaining agreement. The Company believes that its employee
relations are good. Competition in recruiting personnel in the high-technology
industry is intense. The Company believes that its future success will depend in
part on its continued ability to recruit and retain highly skilled engineering
and technical personnel.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, and research and
development facility is located in a leased facility with approximately 74,000
square feet of space in Burlington, Massachusetts, which the Company occupies
under a lease expiring in 2002. Xionics' Japanese sales activities are conducted
from a leased office in Tokyo, Japan. The Company conducts certain of its
research and development activities at a leased facility in Dortmund, Germany.
The Company believes that its facilities are adequate for its current and
foreseeable future needs, and that suitable additional space is likely to be
available on commercially reasonable terms to accommodate the Company's
additional future needs.
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Annual Report on Form 10-K, the Company is not a party to any legal
proceedings the outcome of which, in the opinion of management, is likely to
have a material adverse effect on the Company's business, results of operations
or financial condition, either individually or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock began trading on the Nasdaq Stock Market on
September 26, 1996 under the symbol "XION". The following table sets forth, for
the periods indicated, the high and low closing sales prices for the Company's
Common Stock, as reported by Nasdaq, for the fiscal years ended June 30, 1998
and 1999:
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COMMON STOCK
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HIGH LOW
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FISCAL QUARTERS ENDED:
September 30, 1997....................................... $18.00 $10.25
December 31, 1997........................................ $19.63 $ 3.19
March 31, 1998........................................... $ 6.38 $ 3.47
June 30, 1998............................................ $ 7.75 $ 4.00
September 30, 1998....................................... $ 5.00 $ 3.06
December 31, 1998........................................ $ 4.88 $ 2.13
March 31, 1999........................................... $ 3.59 $ 2.69
June 30, 1999............................................ $ 4.47 $ 2.94
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On September 3, 1999, the closing price of the Company's Common Stock was
$6.66.
STOCKHOLDERS
As of September 3, 1999, there were approximately 89 stockholders of record
and 11,732,463 outstanding shares of Common Stock. The Company believes there
are approximately 2,500 beneficial owners of the Company's Common Stock.
DIVIDENDS
The Company has not paid dividends to its stockholders since its inception
and does not plan to pay cash dividends in the foreseeable future. The Company
currently intends to retain earnings, if any, to finance the growth of the
Company.
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended June 30, 1999, the Company sold 51,500 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 $0.39, and the total consideration received by the Company for
the sale of such shares was $31,675.
USE OF PROCEEDS
The net proceeds of the Company's initial public offering of its common
stock pursuant to its registration statement on Form S-1, declared effective
September 24, 1996, and of subsequent sales of unregistered securities pursuant
to the exercise of stock options, were used for repaying certain indebtedness,
the acquisition of complementary businesses, namely GCA Gesellschaft fur
Computer-Anwendung mbH ("GCA") and Seaport and to fund the Company's working
capital requirements.
9
<PAGE> 11
ITEM 6. SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
The selected condensed consolidated financial data set forth below with
respect to the balance sheet data at June 30, 1999 and June 30, 1998 and the
statements of operations data for each of the three years in the period ended
June 30, 1999, have been derived from the consolidated financial statements of
the Company included elsewhere in this Form 10-K that have been audited by
Arthur Andersen LLP, independent public accountants, as indicated by their
report thereon contained elsewhere herein. The balance sheet data as of June 30,
1997, June 30, 1996 and June 30, 1995 has been derived from consolidated
financial statements of the Company not included in this Form 10-K that have
been audited by Arthur Andersen LLP, independent public accountants. The
selected consolidated financial data should be read in conjunction with the
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue....................................... $31,403 $ 29,101 $29,179 $13,172 $ 4,758
Cost of revenue................................... 9,747 8,510 3,649 1,289 594
Nonrecurring cost of revenue...................... -- 2,745 -- -- --
------- -------- ------- ------- -------
Gross profit................................ 21,656 17,846 25,530 11,883 4,164
Operating expenses:
Research and development........................ 12,198 15,544 13,428 8,125 3,834
Selling, general and administrative............. 7,104 6,996 7,144 5,720 3,311
Nonrecurring charges............................ -- 6,690 -- -- --
Charge for purchased research and development... -- -- 5,400 -- 3,492
------- -------- ------- ------- -------
Income (loss) from continuing operations........ 2,354 (11,384) (442) (1,962) (6,472)
Interest and other income (expense), net.......... 753 843 853 (119) (292)
------- -------- ------- ------- -------
Income (loss) from continuing operations
before provision for income taxes........... 3,107 (10,541) 411 (2,081) (6,764)
Provision for income taxes........................ 290 272 346 -- --
------- -------- ------- ------- -------
Income (loss) from continuing operations...... 2,817 (10,813) 65 (2,081) (6,764)
Income (loss) from discontinued operations,
net of income taxes......................... -- (5,439) 787 548 739
------- -------- ------- ------- -------
Net income (loss)............................. $ 2,817 $(16,252) $ 852 $(1,533) $(6,025)
======= ======== ======= ======= =======
Income (loss) from continuing operations per
share:
Basic........................................... $ 0.23 $ (0.91) $ 0.01 $ (1.37) $ (5.10)
------- -------- ------- ------- -------
Diluted......................................... $ 0.22 $ (0.91) $ 0.01 $ (1.37) $ (5.10)
======= ======== ======= ======= =======
Income (loss) from discontinued operations per
share:
Basic........................................... $ -- $ (0.46) $ 0.08 $ 0.36 $ 0.56
======= ======== ======= ======= =======
Diluted......................................... $ -- $ (0.46) $ 0.07 $ 0.36 $ 0.56
======= ======== ======= ======= =======
Net income (loss) per share:
Basic........................................... $ 0.23 $ (1.37) $ 0.09 $ (1.01) $ (4.54)
======= ======== ======= ======= =======
Diluted......................................... $ 0.22 $ (1.37) $ 0.07 $ (1.01) $ (4.54)
======= ======== ======= ======= =======
Weighted average number of shares outstanding:
Basic........................................... 12,279 11,831 9,949 1,518 1,327
======= ======== ======= ======= =======
Diluted......................................... 12,815 11,831 12,081 1,518 1,327
======= ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $20,318 $ 15,243 $20,844 $ 2,116 $ 1,226
Working capital (deficit)......................... 15,361 15,766 26,872 (28,343) (2,365)
Total assets...................................... 34,713 33,933 42,297 9,110 6,888
Long-term debt, net of current maturities......... -- 575 -- 2,658 4,849
Redeemable preferred stock........................ -- -- -- 8,231 2,276
Stockholders' equity (deficit).................... 19,057 19,519 35,278 (6,570) (5,377)
</TABLE>
10
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 fax machines, as well as multifunction peripherals that perform a
combination of these imaging functions.
The Company derives its revenue primarily from sales of its printer
software products, which includes 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 non-refundable fees that are recognized as revenue upon the
shipment of the source code, provided there are no significant vendor
obligations. Royalty revenue is recognized as earned. Engineering services
revenue is derived from fees paid for porting of the Company's software to
customer-specific printer controllers and is recognized as revenue 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 contracted manufacturing period. Payments under
maintenance contracts are generally due at the beginning of the contract;
however, revenue is recognized ratably over the term of the contract, which is
typically twelve months.
The Company generates a significant portion of its revenue from customers
located outside of the United States. Such revenue accounted for 20%, 32% and
24% of the Company's net revenue for the fiscal years ended June 30, 1999, 1998
and 1997, respectively. The Company's international revenue is primarily
denominated and collected in United States dollars.
In March 1996, the Company entered into an amendment of its preexisting
development and license agreement with Hewlett-Packard (the "1996 HP
Agreement"). Under the 1996 HP Agreement, the Company licensed certain of its
page description technology, including its version of the PostScript page
description language, to Hewlett-Packard. Payments under the 1996 HP Agreement
include the Company's charges for source code access, engineering services,
license rights and ongoing maintenance and support. Revenue from the 1996 HP
Agreement was recognized by the Company over three years using percentage of
completion contract accounting. Under the 1996 HP Agreement, recognition of
revenue ended in February 1999, however cash payments from Hewlett-Packard
continue until January 2000. In June 1998, the Company entered into an agreement
with Hewlett-Packard (the "1998 HP Agreement") that generates an ongoing revenue
stream through December 2000 at levels nearly comparable with the 1996 HP
Agreement. Under the 1998 HP Agreement, the Company will develop, license and
support new page description languages. As of June 30, 1999, the Company has met
the material development obligations under its 1998 agreement with
Hewlett-Packard. Beginning in late 1998 and continuing through the present time,
the Company has entered into a series of agreements with Hewlett-Packard for the
development and customization of printer drivers for specific HP laser and
inkjet printers (the "Driver Agreements"). The Company's right to receive
payment under the Driver Agreements is conditioned upon the Company's meeting
specified delivery milestones. Each driver is the subject of a separate
agreement, such that any failure by the Company to meet a delivery milestone
under any one agreement will not affect its right to receive payments under the
remaining Driver Agreements. The Company has met all of its material obligations
under the Driver Agreements which were due to have been performed as of June 30,
1999. The Company anticipates that its revenues from Hewlett-Packard will
continue beyond December 2000 as the result of the Driver Agreements. As with
its other agreements with the Company, Hewlett-Packard has the right to
terminate each Driver Agreement upon a failure by the Company to comply with any
of the provisions of that agreement that is not cured within 30 days, and upon
the commencement of certain bankruptcy or insolvency proceedings. Revenue from
Hewlett-Packard accounted for 66%, 53% and 58% of the Company's net revenue for
the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
In June 1998, the Company announced a restructuring of its operations to
position the Company to return to profitability resulting in nonrecurring
charges, including amounts in discontinued operations, totaling
11
<PAGE> 13
approximately $8.2 million. As part of the restructuring, the Company included
as nonrecurring cost of revenue a $2.7 million charge representing certain costs
under contracts with Ricoh Company, Ltd., including the estimated future costs
to complete the development of an MFP. In addition to the restructuring, the
Company had announced its intent to sell the Company's Digital Document Products
Division ("DDPD"), which sold print and scan image accelerator products. DDPD
also included the assets of Seaport Imaging ("Seaport"), which was acquired in
August 1997 for $2.5 million, including direct acquisition costs, of which $1.1
million was paid at closing and $1.1 million in promissory notes payable over
two years. The sale of DDPD had been accounted for as discontinued operations
resulting in a loss of $5.4 million, including the loss on the sale and the loss
from discontinued operations. All comparative financial information herein has
been restated to reflect this accounting treatment. On August 12, 1998, the
Company announced the sale of substantially all of the assets of DDPD for
consideration consisting of future royalties on GGX's sales of products
purchased in the transaction, if any, through September 2001 or until such
royalties reach an aggregate of $2.2 million; assumption of certain liabilities;
and promissory notes totaling $1.28 million payable in 1999 and 2000, subject to
collection of accounts receivable sold in the transaction. At June 30, 1999, the
Company has not received any material proceeds from the sale and has recorded no
estimated proceeds from the disposition due to the significant uncertainty of
realizing any proceeds from the sale of the DDPD business. If material proceeds
are collected in the future, the Company will record them as income from
discontinued operations in the period received. The Company has recently agreed
to extend the dates on which certain payments from GGX are due and has received
a security interest in certain of the assets sold to GGX.
In fiscal 1999, the Company returned to profitability, compiling four
consecutive profitable quarters. The Ricoh MFP was deployed during the first
quarter of fiscal 1999 and is the first commercial product to include the
XipChip, an integrated ASIC for multifunctional devices, which the Company
intends to market to other manufacturers of MFPs.
The Company also repurchased approximately one million outstanding shares
of its common stock costing approximately $4 million, in the aggregate, or on
average $3.88 per share.
In fiscal 1999 and 1998, the Company recorded a tax provision of
approximately $290,000 and $272,000, respectively. In fiscal 1999 and 1998, the
provision relates primarily to taxes on foreign operations, which do not benefit
from the Company's net operating loss carryforwards. As of June 30, 1999, the
Company had available net operating loss carryforwards of approximately $15.8
million for U.S. income tax reporting purposes. These carryforwards may be used
to offset future taxable income, if any, and are subject to review and possible
adjustment by the Internal Revenue Service.
12
<PAGE> 14
RESULTS OF OPERATIONS
The following table summarizes the Company's condensed consolidated
operating results as a percentage of net revenue for each of the periods
indicated.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net revenue................................................. 100.0% 100.0% 100.0%
Cost of revenue............................................. 31.0 38.7 12.5
----- ----- -----
Gross profit................................................ 69.0 61.3 87.5
Operating expenses:
Research and development.................................. 38.9 53.4 46.0
Selling, general and administrative....................... 22.6 24.0 24.5
Nonrecurring charges...................................... -- 23.0 --
Charge for purchased research and development............. -- -- 18.5
----- ----- -----
Income (loss) from continuing operations.................... 7.5 (39.1) (1.5)
Interest and other income (expense), net.................... 2.4 2.9 2.9
----- ----- -----
Income (loss) from continuing operations before provision
for income taxes.......................................... 9.9 (36.2) 1.4
Provision for income taxes.................................. 0.9 0.9 1.2
----- ----- -----
Income (loss) from continuing operations.................... 9.0 (37.1) 0.2
Income (loss) from discontinued operations, net of taxes.... -- (18.7) 2.7
----- ----- -----
Net income (loss)........................................... 9.0% (55.8)% 2.9%
===== ===== =====
</TABLE>
FISCAL YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Revenue. Revenue totaled $31.4 million in fiscal 1999, compared to $29.1
million in fiscal 1998, an increase of $2.3 million or 7.9%. The increase
primarily resulted from higher engineering services fees, which related to
development and porting of languages and the development and customization of
driver software, which increased to 50.1% of net revenue in fiscal 1999 compared
to 17.0% in fiscal 1998. The increase in engineering service fees is primarily
due to revenue recognized under the 1998 HP Agreement and the Driver Agreements,
offset by a decrease in revenue from the 1996 HP Agreement, which represented
approximately 28.9% of fiscal 1999 net revenue compared to approximately 49.9%
in fiscal 1998. Revenue from the sale and customization of driver software
increased to approximately 17.0% of net revenue in fiscal 1999 compared to 5.2%
in fiscal 1998. Hewlett-Packard represented 66.3% of net revenue in fiscal 1999
compared to 53.3% in fiscal 1998. Also offsetting the increase in net revenue
was the decrease in net revenue from the sale of controller boards, which
contributed virtually no revenue for fiscal 1999 compared to 14.8% in fiscal
1998. Excluding the controller board revenue, the year over year increase in
revenue is 26.4%.
Gross Profit. Gross profit increased 21.4% to $21.7 million for the fiscal
year ended 1999, from $17.8 million for the fiscal year ended 1998. Gross margin
as a percentage of net revenue increased to 69.0% for the fiscal year ended 1999
compared to 61.3% for the fiscal year ended 1998. The increase is attributable
to the inclusion in fiscal 1998 of nonrecurring cost of revenue of $2.7 million
related to losses on certain contracts with Ricoh. Excluding the nonrecurring
cost of revenue, gross profit for fiscal 1998 would have been approximately
70.8%. The decrease in gross margin, excluding the $2.7 million nonrecurring
cost of revenue, as a percentage of revenue was attributable to: 1) a higher
proportion of revenue generated from lower margin nonrecurring engineering
services 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. 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
13
<PAGE> 15
software and color technologies. Research and development expenses decreased
21.5% to $12.2 million for fiscal 1999 from $15.5 million in fiscal 1998. As a
result of higher net revenue and lower expenditures, due primarily 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 38.8% for fiscal 1999 compared to 53.4%
for fiscal 1998.
Selling, General and Administrative. 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 remained fairly constant, increasing less than 1.5% to
$7.1 million for fiscal 1999 from $7.0 million in fiscal 1998. As a percentage
of net revenue, selling, general and administrative expenses decreased to 22.6%
for fiscal 1999 from 24.0% for fiscal 1998.
Nonrecurring Charges. The Company recognized nonrecurring operating
charges in 1998 of $6.7 million related to the write-down of certain intangible
assets which were deemed to have no future value, the provision for severance
payments related to a workforce reduction and management restructuring, and
provision for lease expense on excess facilities. There were no such charges
recorded in fiscal 1999.
Interest and Other Income (Expense), Net. Net other income, consisting
primarily of interest income earned on cash and cash equivalents, totaled
$753,000 in fiscal 1999 compared to $843,000 in fiscal 1998. Interest income in
fiscal 1999 declined as the average cash and cash equivalents declined during
fiscal 1999.
FISCAL YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Revenue. Revenue totaled $29.1 million in fiscal 1998, essentially flat
with fiscal 1997 revenue of $29.2 million. However, the components of revenue
changed between the years. In 1998, revenues from sales of manufactured boards
and customer sponsored engineering services that were subcontracted directly to
third parties increased to 21.6% of revenue in 1998 vs. 4.6% in 1997. Revenues
from the sale of driver software increased to approximately 5.3% of revenue in
1998 vs. 3.5% in 1997. Offsetting these increases were decreases in revenues
from royalties and licensing of the Company's PDL software products, including
revenue recognized under the 1996 HP Agreement, which represented approximately
68.4% of fiscal 1998 revenue compared to approximately 84.2% in 1997. The
decline in royalty and license revenue resulted primarily from the reduction in
royalties from Lexmark on printers that incorporated the Company's IPS printer
language software, but which had reached the end of their product life, and a
decline in the recognition of revenue under the 1996 HP Agreement.
Hewlett-Packard represented 53.3% of revenue in 1998 vs. 57.5% in 1997. Also
offsetting the increase in revenue was revenue recognized on the development
contract of the MFP which declined to approximately 0.8% of revenue in 1998 vs.
approximately 5.6% in 1997.
Gross Profit. Gross profit declined to $17.8 million, or 61.3% of revenue,
in 1998 versus $25.5 million, or 87.5% of revenue, in 1997. The decline in gross
profit was primarily attributable to two factors. The first was the inclusion in
1998 of nonrecurring cost of revenue of $2.7 million related to the losses on
certain contracts with Ricoh, primarily related to the future costs to complete
the MFP. Excluding the nonrecurring cost of revenue, gross profit would have
been approximately 70.8% versus 87.5% for the prior year. The second factor was
the inclusion in revenue of manufactured boards and customer sponsored
engineering services contracted to third parties which carry very little gross
margin. It is the intent of the Company to structure these activities such that
they will not be included in revenue or cost of revenue in future periods.
Research and Development. Research and development expenses consist
primarily of personnel costs, costs of engineering contractors and outside
consultants, engineering supplies, computer equipment depreciation and overhead
costs, all of which are associated with development of the Company's IPS, MFP,
driver software and color technologies. Research and development expenses
increased 15.8% to $15.5 million for fiscal 1998 from $13.4 million in fiscal
1997. The higher expense level resulted primarily from increased personnel
expenditures, particularly outside contractors hired to complete the development
of the MFP. As a percentage of revenue, research and development expenses
increased to 53.4% for fiscal 1998 from 46.0% for fiscal 1997.
14
<PAGE> 16
Selling, General and Administrative. 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 remained fairly constant, decreasing 2.1% to $7.0
million for fiscal 1998 from $7.1 million in fiscal 1997. As a percentage of
revenue, selling, general and administrative expenses decreased to 24.0% for
fiscal 1998 from 24.5% for fiscal 1997.
Nonrecurring Charges. The Company recognized nonrecurring operating
charges in 1998 of $6.7 million related to the write-down of intangible assets
which were deemed to have no future value, the provision for severance payments
related to a workforce reduction and management restructuring, and provision for
lease expense on excess facilities.
Charge for Purchased Research and Development. The charge in fiscal 1997
for purchased research and development represents the February 21, 1997
acquisition of GCA Gesellschaft fur Computer-Anwendung mbH ("GCA"),
Freiberg/Neckar, Germany, a leading developer of printer drivers for the
worldwide multifunction and printer peripheral market (the "GCA acquisition").
The Company acquired all of the outstanding shares of GCA in a $5.0 million cash
transaction through its wholly-owned subsidiary Xionics Document Technologies
GmbH, Dortmund, Germany. The GCA acquisition resulted in a charge of $5.4
million for purchased in-process research and development costs. This amount
represents the value of acquired in-process research and development projects as
determined by an independent appraisal. The development of these projects had
not yet reached technological feasibility and the technology had no alternative
future use. The technology acquired in the GCA acquisition has required
substantial additional development by the Company.
Other Income (Expense), Net. Net other income, consisting primarily of
interest income earned on cash and cash equivalents, totaled $843,000 in 1998
versus $853,000 in 1997. Interest income in 1998 declined as cash and cash
equivalents declined during 1998. However, offsetting this decline in interest
income was a decline in interest expense from 1997. The 1997 interest expense
included bank lines of credit and a note payable to a shareholder, which were
repaid in full by December 31, 1996 from the proceeds of the Company's IPO.
Discontinued Operations. In June 1998 the Company announced its intent to
sell the Company's Digital Document Products Division ("DDPD"), which sells
print and scan image accelerator products. DDPD also includes the assets of
Seaport Imaging ("Seaport"), which was acquired in August 1997 for $2.5 million.
DDPD has been accounted for as discontinued operations resulting in a loss of
$5.4 million, including the loss on DDPD operations of $3.2 million and an
estimated loss on the disposal of the business, its assets and liabilities of
approximately $2.2 million. On August 12, 1998, the Company announced the sale
of substantially all of the assets of DDPD for consideration consisting of the
future royalties on GGX's sales of products purchased in the transaction through
September 2001 or until royalties reach an aggregate of $2.2 million; 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents of $20.3
million, an increase of $5.1 million from the $15.2 million of cash and cash
equivalents at June 30, 1998. This increase is primarily due to the $9.9 million
of net cash generated from operating activities which is partially offset by
approximately $4.0 million of cash used to repurchase approximately one million
outstanding shares of the Company's common stock from Phoenix Technologies, Inc.
during the fourth quarter of fiscal 1999.
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 revolving line of credit terminates on December 1, 1999. At June 30,
1999, there were no outstanding borrowings under the working capital line of
credit or term loan facility. It is possible that the Company may in the future
use private or public sales of its securities as a source of liquidity.
15
<PAGE> 17
The Company believes that its existing cash and cash equivalent balances,
together with cash provided by operations, $7.0 million of additional cash
payments on the 1996 HP Agreement which continue 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 1) in Item 8. Financial Statements and Supplementary Data.
FACTORS AFFECTING FUTURE RESULTS
Dependence on Relationship with Hewlett-Packard. The Company derived 66%
of its revenue from Hewlett-Packard in fiscal 1999. Therefore, any significant
disruption or deterioration of its relationship with Hewlett-Packard would have
a material adverse effect on the Company's business, results of operations and
financial condition. The Company has met all of its obligations necessary to
secure the right to receive ongoing payments from Hewlett-Packard under its 1996
agreement with Hewlett-Packard discussed above, and is also current in
performing its obligations under various other agreements it has with
Hewlett-Packard including meeting the material development obligations under its
1998 agreement with Hewlett-Packard. However, there can be no assurance that the
Company will continue to meet all such obligations in the future. Hewlett-
Packard has the right to terminate each of its agreements with the Company if
the Company materially breaches its obligations under that agreement and does
not cure such breach within 30 days. In addition, competitors of the Company,
including without limitation Adobe Systems Inc., Peerless Systems Corporation,
and Electronics for Imaging, Inc., are continuously engaged in efforts to expand
their business relationship with Hewlett-Packard at the Company's expense, and
are likely to continue those efforts in the future. There can be no assurance
that one or more of the Company's competitors will not be successful in
competing with the Company for some or all of Hewlett-Packard's business.
Further, although Hewlett-Packard has shown a strong tendency to outsource
embedded systems software and development for its printer products over the past
several years, there can be no assurance that this trend will continue or that
Hewlett-Packard's internal development groups will not compete successfully for
some or all of this outsourced business in the future. Finally, any adverse
change in Hewlett-Packard's business, results of operations or financial
condition could in turn have a material adverse effect on the Company's
business, results of operations and financial condition.
Dependence on Market Success of Third Parties. The markets for the
Company's products and services are characterized by rapidly changing
technology, evolving industry standards and needs, and frequent new product
introductions. The Company currently derives substantially all of its revenue
from the licensing of technology, including royalty streams derived from OEMs'
shipments of office devices containing the Company's products, and the sale of
related products and services to manufacturers of office devices. The Company
anticipates that these sources of revenue will continue to account for
substantially all of its revenue for the foreseeable future. In order to assure
that the Company will derive future royalty streams from the shipment of OEM
devices, the Company and its OEMs are required to develop and release in a
regular and timely manner new office products with increased speed, enhanced
output resolutions, reduced memory requirements, multiple functions, and network
connectivity. The Company's OEMs are under tremendous pressure to continually
shorten the development cycles of these products, leading to increased
complexity and cost of development to the Company and its OEMs. The Company's
success will depend on, among other things: market acceptance of the Company's
technology and the office devices of the Company's OEMs; the ability of the
Company and its OEMs to meet industry changes and market demands in a timely
manner; achievement of new design wins by the Company; successful implementation
of the Company's technology in new office devices being developed by its OEMs;
and successful marketing of those devices by the OEMs. Any failure by the
Company or its OEMs to anticipate or respond adequately to the rapidly changing
technology and evolving industry standards and needs in the market for office
devices could result in a loss of competitiveness or revenue, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Product Development; Product Delays. The Company has in the past
experienced delays in the development of certain of its products and in the
implementation of those products in its customers' office devices. There can be
no assurance that the Company will not experience similar, or more severe,
delays in the
16
<PAGE> 18
future. Prior delays have resulted from numerous factors such as changing OEM
product specifications, difficulties in allocating engineering personnel among
competing projects, other resource limitations, difficulties with independent
contractors, changing market or competitive requirements and unanticipated
engineering complexity. There can be no assurance that these or other factors
will not contribute to future delays; that OEMs will tolerate those delays; or
that delayed office devices, once introduced, will meet with market acceptance
or success. Given the short product life cycles in the market for office
devices, any delay or unanticipated difficulty associated with new product
development or introduction could have a material adverse effect on the
Company's business, results of operations and financial condition.
Competition. The market for the Company's products and services is
intensely competitive, and the Company has numerous competitors, including not
only other suppliers of outsourced products and services such as Peerless
Systems Corporation and Electronics for Imaging, Inc., but also its OEM
customers' own internal development groups as well. The Company's page
description language interpreter products compete directly with those of Adobe
Systems, Inc., and its controller designs compete with those of Electronics for
Imaging, Inc., both of which are substantially larger than the Company and have
significantly greater resources and name recognition than the Company.
Similarly, the Company's printer drivers compete with driver offerings from a
small number of companies, including Adobe Systems, Inc. and Software 2000
Limited; certain internal OEM driver development groups; and generic drivers
offered by Microsoft Corporation with its Windows operating system. Both
Peerless Systems Corporation and Electronics for Imaging, Inc. are sublicensees
of Adobe Systems, Inc.'s products that compete with the Company. In addition,
the Company's OEM customers compete fiercely with one another, and with other
manufacturers of office devices, for market share in a market characterized by
rapid development cycles, short product life cycles, and ever-increasing
consumer demand for greater performance and functionality at reduced prices.
There can be no assurance that the Company or its OEMs will be able to compete
successfully against their respective current or future competitors, or that
competitive pressures faced by the Company and its OEMs will not have a material
adverse effect on its business, results of operations or financial condition.
Competitive and Market Trends. The future growth of the market for the
Company's products and services is highly dependent on OEMs' continuing to
outsource an increasing portion of their product development work. While the
trend toward outsourcing on the part of the Company's OEM customers has
accelerated in recent years, any reversal of this trend could have a material
adverse effect on the Company's business, financial condition, and results of
operations. Similarly, significant market trends leading to changes in the way
the Company's competitors do business may enable them to compete more
effectively against the Company than they have in the past. For example, in
response to market demand, Adobe Systems, Inc. has recently begun licensing the
source code of its PostScript page description language interpreters to certain
development partners, including competitors of the Company, thus adopting for
the first time a marketing strategy which the Company has long used to
differentiate itself from its competitors. These changes, if they enable
competitors to compete more effectively for business from the Company's
customers, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Technological Change/Developing Markets. A substantial portion of the
Company's recent development effort has been directed at the development of new
embedded imaging technologies, including next-generation PDLs, the XipChip
family of ASICs, other foundation technology for MFPs, and embedded digital
color copier technology. While the Company has substantial experience in certain
of these areas, it has limited experience in others. The Company's future
success will depend to a significant degree on its ability to complete
development of these technologies and have them deployed in OEMs' office
devices. This success will be dependent in part on the ability of the Company's
OEMs to develop new products that provide the functionality, performance, speed,
and connectivity demanded by the market at acceptable prices, and for the OEMs
to convince end users to adopt new generations of products for office and
desktop use. There can be no assurance that the market for MFP, color imaging
and other products will develop or continue to expand as currently anticipated
by the Company; that the Company's OEM customers will choose the Company's
technology for use in their printers, MFPs, color copiers or other devices; that
the Company's OEM customers will be successful in developing or introducing such
devices; or that these products will gain market acceptance. The failure of any
of these events to occur could have a material adverse effect on the Company's
17
<PAGE> 19
business, results of operations and financial condition. Likewise, there can be
no assurance that future changes in the technological or marketing direction of
industry leaders such as Microsoft Corporation or Intel Corporation -- for
example, the possibility that Microsoft may include native print rendering
capability in future versions of its personal computer operating systems -- will
not render the Company's key products such as printer languages, interpreters
and drivers obsolete or reduce market demand for them. Any of these developments
could also have a material adverse effect on the Company's business, results of
operations and financial condition.
Asian Economic Crisis. The Company has several significant OEM customers
in Japan, South Korea, and other parts of Asia. Although the adverse economic
circumstances recently prevailing in Japan and elsewhere in Asia have begun to
show signs of abating, they could still affect these customers' willingness or
ability to do business with the Company in the future or their success in
developing and launching document imaging devices containing the Company's
products, which in turn could have a material adverse effect on the Company's
business, results of operations and financial condition.
Recruitment and Retention of Employees. The Company's future success is
dependent in part upon its ability to attract and retain qualified employees,
especially highly skilled engineering and technical employees. The current labor
market, both in the Company's geographical area and in the high-technology
industry in general, is such that the number of open positions in these
disciplines far exceeds the supply of personnel qualified to fill them. In
consequence, the Company must continually compete with other high-technology
employers for this limited pool of available employees. There can be no
assurance that the Company will be able to attract or retain the employees it
needs to execute against its current or future business plans. Any failure to do
so could have a material adverse effect on the Company's business, results of
operations and financial condition.
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.
18
<PAGE> 20
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 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 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.
Factors Affecting Stock Price. The market price of the Company's common
stock has been, and may continue to be, subject to significant fluctuations in
response to quarter-to-quarter variations in the Company's operating results,
announcements of technological innovations or strategic relationships by the
Company or its competitors, and other events or factors. In addition, the stock
market in recent months and years has experienced extreme price and volume
fluctuations which have affected the market price of the stock of many
technology companies, and in particular those with small market capitalizations.
These fluctuations, as well as general economic and market conditions, may
materially and adversely affect the market price of the Company's common stock.
19
<PAGE> 21
ITEM 7A. 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 or other financial instruments for which fair value
disclosure would be required under Statement of Financial Accounting Standards
("SFAS") No. 107, Disclosures about Fair Value of Financial Instruments. All of
the Company's investments are in short-term, investment-grade commercial paper,
United States government and agency securities 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
XIONICS DOCUMENT TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
NUMBER
------
<S> <C>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998.... F-2
Consolidated Statements of Operations for the Fiscal Years
Ended June 30, 1999, 1998 and 1997........................ F-3
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity (Deficit) for the Fiscal Years Ended
June 30, 1999, 1998 and 1997.............................. F-4
Consolidated Statements of Cash Flows for the Fiscal Years
Ended June 30, 1999, 1998 and 1997........................ F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The Company's Amended and Restated Certificate of Incorporation and By-laws
provide for the Company's business to be managed by or under the direction of a
Board of Directors. The number of directors is fixed from time to time by the
Board of Directors. The Board of Directors currently consists of five members,
classified into three classes as follows: Paul R. Low and Richard A. D'Amore
constitute a class with a term expiring at the Annual Meeting of Stockholders in
1999 or until their successors are elected and duly qualified(the "Class III
Directors"); Peter J. Simone and Thomas A. St. Germain constitute a class with a
term expiring at the Annual Meeting of Stockholders in 2000 (the "Class I
Directors"); and David R. Skok constitutes a class with a term expiring at the
Annual Meeting of Stockholders in 2001 (the "Class II Director");. At each
Annual Meeting of Stockholders, directors are elected for a full term of three
years to succeed those directors whose terms are expiring.
The Company's current directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Paul R. Low................................ 66 Chairman of the Board of Directors
President, Chief Executive Officer and
Peter J. Simone............................ 52 Director
Richard A. D'Amore......................... 45 Director
David R. Skok.............................. 43 Director
Thomas A. St. Germain...................... 61 Director
</TABLE>
Dr. Low has served as a Director of the Company since October 1995 and as
Chairman of the Board of Directors since January 1998. Dr. Low has been
President and Chief Executive Officer of PRL Associates, a technology consulting
company, since June 1992. Previously, Dr. Low was Vice President and General
Manager of IBM Microelectronics, IBM's silicon design and fabrication division,
and a member of IBM's Management Board. Dr. Low is a director of Applied
Materials, Inc., Network Computing Devices, Inc., Solectron Corporation, Veeco
Instruments, Inc., and Maker Communications, Inc.
Mr. Simone has served as a Director of the Company since December 1997, as
Chief Executive Officer of the Company since October 1997, and as President of
the Company since April 1997. He also served as Chief Operating Officer of the
Company from April 1997 until October 1997. Prior to joining the Company Mr.
Simone served as Group Vice President of Simplex Time Recorder Company, a
manufacturer and supplier of hardware and software based systems for workforce
management, building life safety, and security, from December 1992 until
December 1996. Mr. Simone is a director of Cymer Inc. and a director and member
of the Executive Council of the Massachusetts High Technology Council.
Mr. D'Amore has served as a Director of the Company since June 1993. Mr.
D'Amore has been a general partner of North Bridge Venture Partners since 1994
and of Hambro International Venture Funds from 1982 until July of 1998, both
venture capital investing firms. Mr. D'Amore is also a director of Solectron
Corporation and Veeco Instruments, Inc.
Mr. Skok has served as a Director of the Company since November 1995. Mr.
Skok has been Chairman of the Board of Directors of Silverstream Software, Inc.,
an Internet software company, since July 1997, and served as its President and
Chief Executive Officer from June 1996 until July 1997. From January 1993 until
June 1996, he was President and Chief Executive Officer of Watermark Software,
Inc., an imaging software company. Mr. Skok is a former Chairman of the Board
and Chief Executive Officer of the Company.
Mr. St. Germain has served as a Director of the Company since March 1996.
Mr. St. Germain has been Vice President -- Financial Services of Vicor
Corporation, a power systems manufacturing company, since January 1998. He
served as Senior Vice President, Chief Financial Officer and Treasurer of Summa
Four, Inc., a telecommunications company, from May 1993 until August 1997.
21
<PAGE> 23
EXECUTIVE OFFICERS
The Company's current executive officers, who are not also directors, are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Rosemary E. Grande................... 41 Chief Operating Officer
Robert L. Lentz...................... 49 Senior Vice President -- Finance and
Administration, Chief Financial Officer and
Treasurer
John L. Seguin....................... 45 Vice President -- Worldwide Sales
</TABLE>
Ms. Grande has served as Chief Operating Officer since October 1997. She
previously served as Senior Vice President -- Strategic Accounts from January
1997 until October 1997; as Vice President -- Product Development from July 1995
until January 1997; and as General Manager of the Company's printer software
division from November 1994 until June 1995. From August 1993 until November
1994, Ms. Grande served as General Manager of the Peripherals Division of
Phoenix.
Mr. Lentz has served as Senior Vice President -- Finance and
Administration, Chief Financial Officer and Treasurer since joining the Company
in April 1998. Prior to joining the Company, he served as Vice President of
Corporate Development for NewsEdge Corporation, a provider of business news and
current awareness solutions, from January 1998 until April 1998; as Senior Vice
President of Finance and Administration and Chief Financial Officer of
Individual, Inc., a predecessor of NewsEdge, from March 1996 until January 1998;
and as Senior Vice President -- Finance and Operations and Chief Financial
Officer at Teloquent Communications Corporation, a telecommunications software
company, from July 1993 until March 1996.
Mr. Seguin has served as Vice President -- Worldwide Sales since joining
the Company in April 1999. Prior to joining the Company, he served as Vice
President of Sales at Miros, Inc., a biometrics software company specializing in
facial recognition, from November 1998 until April 1999. From July 1994 until
April 1998, he served as Vice President and Division General Manager for
Bitstream Inc., a leading software company in the graphics communications
industry. From July 1993 until July 1994, Mr. Seguin served as Vice
President/General Manager, Commercial Business Unit for XLI Corporation, a
manufacturer of high resolution laser printing solutions and enhancement
technologies.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons owning more than 10% of the Company's Common
Stock, to file with the Securities and Exchange Commission (the "SEC") initial
reports of beneficial ownership and reports of changes in beneficial ownership
of the Common Stock and other equity securities of the Company. Officers,
directors, and beneficial owners of more than 10% of the Company's Common Stock
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to it and written representations that no other reports were
required during the fiscal year ended June 30, 1999, all Section 16(a) filings
required to have been made by its officers, directors, and stockholders owning
more than 10% of the Company's Common Stock were made in compliance with Section
16(a) with the following exceptions: late filings of Form 4's reporting the
acquisition of insubstantial numbers of shares of stock under the Company's
Employee Stock Purchase Plan (with no accompanying sale of stock) in August of
1998 were made by Fred Ellis, Brian Fitzgerald (former Vice
President -- Engineering), Rosemary Grande, Peter Simone, Mark Sheehan and Paul
Thorn, and in February of 1999 by Robert Lentz, Rosemary Grande and Peter
Simone.
22
<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
regarding the Company's Chief Executive Officer and each of the four most highly
compensated other executive officers (the "Named Executive Officers") during the
fiscal years ended June 30, 1999, 1998 and 1997 except as otherwise indicated:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
NUMBER OF
SHARES UNDER-
OTHER ANNUAL LYING OPTIONS
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY(1) BONUS COMPENSATION(2) GRANTED(#)(3)
- --------------------------- ----------- --------- ------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Peter J. Simone...................... 1999 $240,000 $77,900 $9,422 135,000
President and Chief Executive 1998 $219,000 $ -- $4,695 225,000(4)
Officer 1997 $ 52,500 $ 9,900 $ -- 250,000(5)
Rosemary E. Grande................... 1999 $180,000 $53,000 $2,672 55,000
Chief Operating Officer 1998 $167,000 $ -- $8,388 87,500(4)
1997 $152,500 $20,000 $2,150 30,000(5)
Robert L. Lentz(7)................... 1999 $160,000 $39,000 $3,418 75,000
Senior Vice President -- Finance 1998 $ 33,000 $ -- $ 676 125,000
and Administration, Chief Financial
Officer and Treasurer
Former Executive Officers:
Frank P. Monaco(8)................... 1999 $156,000 $43,600 $2,672 10,000
Senior Vice President -- Research 1998 $139,000 $ -- $9,284 67,000(4)
and Development and Chief Technical 1997 $130,000 $15,500 $1,650 30,000(5)
Officer
Brian F. Fitzgerald(9)............... 1999 $152,000 $ 6,000 $3,774 --
Vice President -- Engineering 1998 $ 89,000 $ -- $2,022 80,000
Edward B. Mallen(10)................. 1999 $167,000 $ 8,250 $ 975 15,000
Executive Vice President -- Sales 1998 $169,000 $ -- $6,046 86,563(4)
and Marketing 1997 $145,000 $22,250 $2,250 50,000(6)
</TABLE>
- ---------------
(1) Includes amounts deferred during the Company's 1999, 1998 and 1997 fiscal
years under the Company's 401(k) plan.
(2) Includes matching contributions to the Company's 401(k) plan made by the
Company during its 1999, 1998 and 1997 fiscal years.
(3) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive plan payments during
its 1999, 1998 or 1997 fiscal years. None of the named executive officers
hold any restricted stock of the Company.
(4) Includes new options granted in exchange for previously granted options
which were surrendered and cancelled, pursuant to a company-wide stock
option repricing which the Company carried out in February 1998. Under the
repricing, many employees' existing stock options, including certain stock
options held by the Named Executive Officers, were exchanged for new stock
options having a lower exercise price at an exchange rate of 9 for 10
(i.e., 9 new stock options were granted for every 10 surrendered).
(5) These options were surrendered and cancelled upon the issuance of the
repriced options described in footnote (4) above.
(6) The unexercised portion of these options were surrendered and cancelled
upon the issuance of the repriced options described in footnote (4) above.
23
<PAGE> 25
(7) Information regarding Mr. Lentz's compensation for the Company's 1997
fiscal year has been omitted as Mr. Lentz was not employed by the Company
at any time during its 1997 fiscal year.
(8) Mr. Monaco was employed by the Company for the entire 1999 fiscal year,
however he resigned from the Company effective as of September 7, 1999.
(9) Information regarding Mr. Fitzgerald's compensation for the Company's 1997
fiscal year has been omitted as Mr. Fitzgerald was not employed by the
Company at any time during its 1997 fiscal year. Mr. Fitzgerald was
employed by the Company for the entire 1999 fiscal year, however he
resigned from the Company effective as of July 13, 1999.
(10) Information regarding Mr. Mallen's compensation for the Company's 1999
fiscal year has been provided for that period of time prior to Mr. Mallen's
resignation from the Company on April 20, 1999.
Options granted to the Named Executive Officers during the fiscal year
ended June 30, 1999 are set forth in the following table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF
SHARES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------------
NAME GRANTED(#)(1)(2) IN FISCAL 1999 ($/SHARE) DATE 5% 10%
- ---- ---------------- -------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Simone......... 135,000 21.2% $3.5000 2008 $297,153 $753,043
Rosemary E. Grande...... 30,000 4.7% $4.0630 2008 $ 76,656 $194,261
25,000 3.9% $3.3750 2009 $ 53,063 $134,472
Robert L. Lentz......... 75,000 11.8% $3.5000 2008 $165,085 $418,357
Former Executive
Officers:
Frank P. Monaco......... 10,000 1.6% $3.3750 2009 $ 21,225 $ 53,789
Brian F. Fitzgerald..... -- -- $ -- -- $ -- $ --
Edward B. Mallen........ 15,000 2.4% $3.3750 2009 $ 31,838 $ 80,683
</TABLE>
- ---------------
(1) There were no stock appreciation rights granted or outstanding during fiscal
1999.
(2) Except as hereinafter described, all options vest and become exercisable in
equal quarterly installments over the four years from the original date of
grant, which in each case is ten years prior to the expiration date shown.
Options available to Mr. Simone and Mr. Lentz are also subject to
accelerated vesting and extended exercise periods under certain
circumstances as described in the section entitled Employment Agreements,
Termination of Employment and Change-in-Control Arrangements of this Item
11.
(3) Represents the hypothetical gains that could be achieved for the options if
exercised at the end of the option terms. These gains are based on assumed
rates of stock price appreciation of 5% and 10% compounded annually from the
date the respective options were granted to their expiration dates. There
can be no assurance that the stock price will appreciate at the rates shown
in this table.
24
<PAGE> 26
The following table sets forth certain information regarding the number of
shares of Common Stock received upon exercise of options during the last fiscal
year, the aggregate dollar value realized upon exercise and the total number of
unexercised options held by each of the Named Executive Officers as of June 30,
1999:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END(#) AT FISCAL YEAR-END(1)
ACQUIRED IN VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Simone.......... -- -- 147,531 212,469 $130,144 $193,293
Rosemary E. Grande....... -- -- 82,813 99,187 $204,439 $ 78,983
Robert L. Lentz.......... -- -- 48,438 151,562 $ 39,305 $128,657
Former Executive
Officers:
Frank P. Monaco.......... -- -- 63,600 47,000 $168,747 $ 42,883
Brian F. Fitzgerald...... -- -- 25,000 55,000 $ 21,875 $ 48,125
Edward B. Mallen......... -- -- 41,700 -- $ 36,663 $ --
</TABLE>
- ---------------
(1) The value of unexercised in-the-money options at the end of the Company's
1999 fiscal year assumes a fair market value for the Company's Common Stock
of $4.4375, the closing sale price per share of the Company's Common Stock
as reported in the Nasdaq National Market on June 30, 1999.
(2) The value realized on exercise represents the difference between the
exercise prices of the stock options and the closing price of the Company's
Common Stock on the Nasdaq National Market on the date of such exercise.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive meeting fees of
$2,000 for each Board of Directors meeting attended in person and $1,000 for
each committee meeting attended in person (other than committee meetings held on
the same day and at the same place as a Board of Directors meeting), and
reimbursement of reasonable travel expenses. The Chairman of the Board of
Directors also receives compensation of $1,000 per day for up to two days per
month for on-site services. In addition, each non-employee director and new
non-employee director joining the Board may be granted an option to purchase
shares of the Company's Common Stock under the Company's 1996 Stock Option Plan
at a price per share equal to the closing price of the Company's Common Stock on
the date of grant, with the number of shares determined by the Compensation
Committee at its discretion.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In March 1998 the Company entered into an employment agreement with its
President and Chief Executive Officer, Peter J. Simone, which agreement was
amended in November 1998 and December 1998. The agreement, as amended, provides
for a three year term of employment beginning March 18, 1998 at a base salary
initially paid at the annual rate of $240,000, plus benefits, including
vacation, medical and conditional bonus in the initial amount of $60,000 per
year. The agreement, as amended, also contains non-dislosure and non-competition
provisions, and provisions for severance pay under certain circumstances. The
agreement, as so amended, also provides for certain cash payments in the event
of termination of Mr. Simone's employment following a merger, consolidation,
sale or change in control of the Company, where a "change in control" is defined
as occurring when 50% or more of the voting equity in the Company becomes
beneficially owned by a single person, entity or affiliated group of persons or
entities. If, within eighteen months after such an event involving the Company,
Mr. Simone's employment is actually terminated (other
25
<PAGE> 27
than for Cause or Disability, as defined in the employment agreement), he is not
the chief executive officer of the surviving entity and/or the surviving entity
is not a publicly traded corporation, or his responsibility, compensation or
benefits are materially reduced without his express consent, then Mr. Simone
will be entitled to receive twelve months' base salary together with
reimbursement of the cost of his group health and dental plan coverage, as well
as a period of twenty-four months from and after such actual or constructive
termination to exercise certain vested stock options. In addition, the
employment agreement, as amended, provides that Mr. Simone's then unvested stock
options shall become fully vested upon the closing of any merger, consolidation,
business combination or other reorganization of the Company in which he is not
the chief executive officer of the surviving entity, and/or the surviving entity
is not a publicly traded corporation.
Except for Mr. Simone, as described above, none of the Company's Named
Executive Officers has an employment agreement with the Company. All of the
Named Executive Officers are parties to confidentiality and noncompetition
agreements with the Company, whereby each is required to disclose to the Company
certain inventions, discoveries and developments, and to assign his or her
rights therein to the Company.
The Company has also previously entered into two letter agreements dated
March 12, 1998 and November 23, 1998 with its Senior Vice President of Finance
and Administration and Chief Financial Officer, Robert L. Lentz, which provide
for certain benefits in the event of a change in control of Xionics. More
specifically, under the letter agreements, if, following a change of control,
Mr. Lentz is not the chief financial officer of a publicly traded company, or he
is required to relocate or increase his commute by more than 25 miles, Mr. Lentz
will receive six months base salary and benefits, including any earned portion
of the current bonus program. Additionally, all unvested stock options will
become fully exercisable. In addition, in the event Mr. Lentz is actually or
constructively terminated, Mr. Lentz will have a period of twenty-four months to
exercise certain unvested options. The letter agreements also provide that Mr.
Lentz shall receive six months salary and benefits in the event his employment
is terminated for any other reason, excepting cause.
The Company has entered into a letter agreement with Brian Fitzgerald,
former Vice President -- Engineering, which provides for the continued payment
of salary and vesting of options through January 15, 2000.
The Company is in the process of entering into letter agreements with 7
officers, one of whom is a Named Executive Officer, not including Mr. Simone or
Mr. Lentz. The letter agreements will provide that in the event of termination
of such officer's employment in connection with a merger, consolidation, sale or
change in control of the Company, where a "change in control" is defined as
occurring when 50% or more of the voting equity in the Company becomes
beneficially owned by a single person, entity or affiliated group of persons or
entities, such officer shall be entitled to receive six months' base salary
together with reimbursement of the cost of his/her group health and dental plan
coverage, as well as a period of twenty-four months from and after such
termination to exercise certain vested stock options. Such officer's employment
shall be deemed terminated if, within eighteen months after such an event
involving the Company, such officer's employment is actually terminated, his/her
responsibilities, compensation or benefits are materially reduced without
his/her express consent, or he/she is required, as a condition of continued
employment, to relocate to a facility or location more than fifty miles from
his/her present location.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors has established a Compensation Committee,
which reviews and recommends to the Board of Directors the salaries, bonuses and
other forms of compensation for executive officers of the Company and
administers various compensation and benefit plans. The members of the
Compensation Committee are Mr. D'Amore and Mr. St. Germain. None of the members
of the Compensation Committee is a current or past officer or employee of the
Company.
26
<PAGE> 28
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Company's executive officer compensation program consists of three
primary components: base salary, performance and discretionary bonuses and
grants of stock options. Each component is intended to further the Company's
overall compensation philosophy and to achieve the compensation objectives of
the Company. The Company's compensation philosophy is that executive officer
compensation should further the Company's short- and long-term strategic goals
and values by aligning compensation with business objectives and individual
performance. Further, the compensation of executive officers should be closely
aligned with the interests of the Company's stockholders.
The Company's executive officer compensation program is based on the
following principles and objectives:
Competitive, Fair and Balanced Compensation. The Company is committed to
providing an executive officer compensation program that helps to attract and
retain highly qualified executive officers. To ensure that compensation is
competitive, the Company compares its compensation practices with the executive
officer compensation practices of other companies, both in the same geographical
area and in the high-technology industry generally. The Company also seeks to
balance the compensation paid to a particular individual and the compensation
paid to the other executive officers of the Company, and strives to achieve a
balance between the fixed and variable components and between the short- and
long-term components of each executive officer's compensation.
Corporate and Individual Performance. Executive officers are rewarded
based upon both corporate and individual performance. Corporate performance is
evaluated by reviewing the extent to which planned financial results, including
revenue and profit goals, are achieved and strategic and business plan goals are
met. Individual performance is evaluated by reviewing the achievement of
specified individual objectives and the degree to which the executive officer
contributed to the overall success of the Company and the management team. In
keeping with the philosophy that executive compensation should be closely
aligned with the interests of the stockholders, the Company weights the
Company's achievement of its financial and business goals more heavily than
performance against individual goals and objectives in determining the
compensation for each executive officer. In particular, with respect to the
payment of discretionary bonuses, achievement of corporate financial goals as to
revenue and profitability is a threshold which must be met before the portion of
any bonus that relates to individual performance will be paid.
In evaluating each executive officer's performance, the Company generally
uses the following procedures. Prior to or shortly after the beginning of each
fiscal year, the Company prepares an annual plan setting its goals and
objectives for that fiscal year. The plan is reviewed with and ultimately
approved by the full Board of Directors. The Chief Executive Officer reports to
the Board of Directors from time to time throughout the year on the Company's
progress toward those goals and objectives. At or near the beginning of each
fiscal year, the Compensation Committee and the Chief Executive Officer review
the performance of each executive officer during the fiscal year just ended, and
the Compensation Committee determines the base and discretionary compensation
for each such officer for the new fiscal year based both on the executive
officer's individual performance during the preceding fiscal year and on the
Company's financial performance against its goals during the preceding fiscal
year. The Compensation Committee determines the amount of base and discretionary
compensation for the Chief Executive Officer, and takes management
recommendations into consideration in determining the amount of base and
discretionary compensation for each of the other executive officers. For fiscal
1999, 87.5% of discretionary compensation for each executive officer was tied to
achievement of the Company's business objectives, and 12.5% to individual
performance. Long-term compensation in the form of grants of stock options is
awarded when an executive officer joins the Company, and occasionally thereafter
to reflect promotion or other special circumstances.
27
<PAGE> 29
CHIEF EXECUTIVE OFFICER COMPENSATION FOR FISCAL 1999
The compensation for Peter J. Simone, the Company's Chief Executive
Officer, consisted in fiscal 1999 of a base salary of $240,000 and eligibility
for a discretionary bonus of up to $80,000, of which 97% was paid. Mr. Simone's
base salary for fiscal 1999 was unchanged from his base salary at fiscal 1998
year end, reflecting the philosophy of the Compensation Committee that the
compensation of senior executives should be closely tied to corporate
performance including financial results. His fiscal 1998 base salary had been
increased to an annual rate of $240,000 as of January 1, 1998 to reflect his
promotion to Chief Executive Officer late in calendar 1997. The target amount of
his bonus was increased from $60,000 in fiscal 1998 to $80,000 in fiscal 1999 to
reflect his achievement of personal goals during fiscal 1998.
Richard A. D'Amore Thomas A. St. Germain
28
<PAGE> 30
PERFORMANCE GRAPH
The following graph and table compare the cumulative total stockholder
return on a monthly basis on the Company's Common Stock for the period from
September 26, 1996 (the date of the Company's initial public offering of its
Common Stock) through June 30, 1999 ("Company") against the cumulative total
returns on the Nasdaq Composite Index ("Broad Index") and the Nasdaq Computer
and Data Processing Services Index ("Select") during the same period. It should
be noted that the Company has not paid any dividends on Common Stock, and no
dividends are included in the representation of the Company's performance. The
stock price performance on the graph below is not necessarily indicative of
future stock price performance.
<TABLE>
<CAPTION>
COMPANY BROAD INDEX SELECT
<S> <C> <C> <C>
Sep-96 100 100 100
Dec-96 83.3333 105.225 110.888
Mar-97 84.1667 99.5745 104.239
Jun-97 98.3333 117.536 126.857
Sep-97 115.833 137.392 150.247
Dec-97 25.7733 127.991 132.235
Mar-98 35.8333 149.617 165.222
Jun-98 32.92 154.431 181.483
Sep-98 21.6667 138.056 182.428
Dec-98 22.9167 178.715 242.426
Mar-99 18.75 200.616 278.938
Jun-99 29.5833 218.932 296.322
</TABLE>
The above graph and table assume $100.00 invested on September 26, 1996,
with all dividends reinvested, in each of the Company's Common Stock, the Nasdaq
Composite Index and the Nasdaq Computer and Data Processing Services Index.
29
<PAGE> 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 3, 1999, certain
information with respect to the beneficial ownership of the Common Stock by: (i)
each person known by the Company to beneficially own more than 5% of the Common
Stock; (ii) each director of the Company; (iii) each executive officer named in
the Summary Compensation Table on page 23 hereof (the "Named Executive
Officers")***; and (iv) all directors and executive officers of the Company as a
group. The Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole voting
and investment power with respect to such shares, except as noted below.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)(2)
--------------------
NAME AND ADDRESS** NUMBER PERCENT
- ------------------ --------- -------
<S> <C> <C>
Peter J. Simone(3).......................................... 209,885 1.8%
Robert L. Lentz(3).......................................... 95,259 *%
Rosemary E. Grande.......................................... 103,981 *%
Richard A. D'Amore.......................................... 141,449 1.2%
Paul R. Low................................................. 42,750 *%
David R. Skok............................................... 583,324 5.0%
Thomas A. St. Germain....................................... 14,000 *%
Hambro International Venture Fund II
650 Madison Avenue
New York, NY 10022(4)..................................... 781,977 6.7%
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741(5).................................. 759,847 6.5%
All directors and executive officers as a group (7
persons).................................................. 1,190,648 10.1%
</TABLE>
- ---------------
* Less than 1%
** Addresses are given for beneficial owners of more than 5% of the outstanding
Common Stock only.
*** Other than the information for Brian Fitzgerald, former Vice
President -- Engineering who resigned on July 13, 1999, Edward Mallen,
former Executive Vice President -- Sales and Marketing who resigned on April
20, 1999 and Frank Monaco, former Senior Vice President -- Research and
Development and Chief Technical Officer who resigned September 7, 1999.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the shares. Shares of Common Stock subject to options
currently exercisable or exercisable within 60 days following September 3,
1999 are deemed outstanding for purposes of computing the share ownership
and percentage of the person holding such options, but are not deemed
outstanding for purposes of computing the percentage of any other person.
(2) The number of shares of Common Stock outstanding on September 3, 1999 was
11,732,463.
(3) Does not include options which may become exercisable under certain
circumstances in the event of a change in control of the Company. Further
details are available in the Section entitled "Employment Agreements,
Termination of Employment and Change-in-Control Arrangements" under Item 11
of Part II of this Form 10-K.
(4) Ownership information for Hambro International Venture Fund II is current as
of August 10, 1999.
(5) Massachusetts Financial Services Company has sole voting power with respect
to 733,747 shares. Ownership information for Massachusetts Financial
Services Company is current as of February 11, 1999, the date of filing by
Massachusetts Financial Services Company of its Schedule 13-G.
30
<PAGE> 32
CHANGES IN CONTROL
On July 29, 1999, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") by and among Oak Technology, Inc.
("Oak"), Vermont Acquisition Corporation, a wholly-owned subsidiary of Oak
("Merger Sub"), and the Company, 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 expected
to be mailed to Xionics stockholders during October 1999; 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. 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert E. Gilkes, the Company's former Chairman of the Board of Directors
and Chief Executive Officer, resigned as Chairman of the Board of Directors and
as a director of the Company and its subsidiaries on January 15, 1998. The
Company provided him with severance pay and benefits through July 31, 1999,
pursuant to a letter agreement whereunder he was also retained as a consultant
to the Board of Directors through that date.
31
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
Item 14(a) The following documents are filed as part of this Annual
Report on Form 10-K.
Item 14(a)(1) See "Index to Consolidated Financial Statements and
Supplementary Data" at Item 8. of this Annual Report on Form
10-K.
Item 14(a)(2) Financial Statement Schedule Included in Part IV of this
Annual Report on Form 10-K. Schedule II -- Valuation and
Qualifying Accounts. Other financial statement schedules
have not been included because they are not applicable or
the information is included in the financial statements or
notes thereto.
Item 14(a)(3) Exhibits
</TABLE>
The following exhibits are incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 dated May 28, 1996, File
No. 333-4613)
3.2 Amended and Restated By-Laws of the Registrant (filed as
Exhibit 3.2 to the Company's Registration Statement on Form
S-1 dated May 28, 1996, File No. 333-4613)
4.1 Specimen Certificate for shares of the Registrant's stock
(filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1 dated May 28, 1996, File No. 333-4613)
10.1 1996 Stock Option Plan and related form of stock option
agreement (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 dated May 28, 1996, File
No. 333-4613)
10.2 1995 Stock Option Plan and related form of stock option
agreement (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1 dated May 28, 1996, File
No. 333-4613)
10.3 1993 Stock Option Plan and related form of stock option
agreement (filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1 dated May 28, 1996, File
No. 333-4613)
10.4 1996 Director Stock Option Plan (filed as Exhibit 10.4 to
the Company's Registration Statement on Form S-1 dated May
28, 1996, File No. 333-4613)
10.5 1996 Employee Stock Purchase Plan (filed as Exhibit 10.5 to
the Company's Registration Statement on Form S-1 dated May
28, 1996, File No. 333-4613)
10.6 Credit Agreement, dated September 25, 1995, between the
Company and Fleet Bank of Massachusetts, N.A. (filed as
Exhibit 10.8 to the Company's Registration Statement on Form
S-1 dated May 28, 1996, File No. 333-4613)
10.6.1 Modification of Credit Agreement, dated August 21, 1996,
between the Company and Fleet National Bank (filed as
Exhibit 10.8.1 to the Company's Registration Statement on
Form S-1 dated May 28, 1996, File No. 333-4613)
10.7 Computer Technology License Agreement between Phoenix
Technologies Ltd. and Hewlett-Packard Company for
PhoenixPage Software Products dated September 30, 1994 as
amended (including amended and restated Amendment No. 1
between the Registrant and Hewlett-Packard, effective as of
March 8, 1996) (filed as Exhibit 10.10 to the Pre-effective
Amendment No. 1 to the Company's Registration Statement on
Form S-1 dated June 7, 1996, File No. 333-4613)
10.8 Lease by and between the Registrant and E & F Realty
Associates Limited Partnership of Property at One Twenty
Eight Corporate Center, 70 Blanchard Road, Burlington,
Massachusetts, dated November 29, 1994, including First
Amendment to Lease, dated August 9, 1995 (filed as Exhibit
10.11 to the Company's Registration Statement on Form S-1
dated May 28, 1996, File No. 333-4613)
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.9 Stock Option Agreement between the Company and Robert E.
Gilkes (filed as Exhibit 10.13 to the Company's Registration
Statement on Form S-1 dated May 28, 1996, File No. 333-4613)
10.10 Form of Invention and Nondisclosure Agreement (filed as
Exhibit 10.16 to the Company's Registration Statement on
Form S-1 dated May 28, 1996, File No. 333-4613)
10.11 Second Amendment dated August 1, 1997 to Lease by and
between the Company and E&F Realty Associates Limited
Partnership of Property at One Twenty Eight Corporate
Center, 70 Blanchard Road, Burlington, Massachusetts dated
November 29, 1994 (filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K dated September 29, 1997)
10.12 Securities Purchase Agreement between WaveMark Technologies,
Inc. and the Company dated June 20, 1997 (filed as Exhibit
10.14 to the Company's Annual Report on Form 10-K dated
September 29, 1997)
10.13 Stock Option Agreements between the Company and Peter J.
Simone dated June 27, 1997 (filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K dated September 29,
1997)
10.14 Stock Purchase Agreement between Xionics, Inc., Xionics
Document Technologies, Inc., Seaport Imaging, et al dated
August 13, 1997 (filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K dated September 17, 1998)
10.15 Employment Agreement between the Company and Larry Krummel
dated September 5, 1997 (filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K dated September 17,
1998)
10.16 Letter agreement between the Company and Robert E. Gilkes
dated February 24, 1998 (filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K dated September 17,
1998)
10.17 Technology and Services Agreement between the Company and
Hewlett-Packard Company dated June 19, 1998 (filed as
Exhibit 10.17 to Amendment No. 1 dated October 8, 1998 to
the Company's Annual Report on Form 10-K dated September 17,
1998)
10.18 Rights Agreement between the Company and BankBoston N.A.
dated April 15, 1998 (filed as Exhibit 10.18 to the
Company's Annual Report on Form 10-K dated September 17,
1998)
10.19 Second Loan Modification Agreement between the Company and
Fleet National Bank dated December 31, 1997 (filed as
Exhibit 10.19 to the Company's Annual Report on Form 10-K
dated September 17, 1998)
10.20 Employment Agreement between the Company and Peter J. Simone
dated March 18, 1998 (filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K dated September 17,
1998)
10.21 Letter Agreement between the Company and Paul R. Low dated
March 16, 1998 (filed as Exhibit 10.21 to the Company's
Annual Report on Form 10-K dated September 17, 1998)
10.22 Form of Stock Option Agreement pursuant to the Company's
1993, 1995 and 1996 Stock Option Agreements (filed as
Exhibit 10.22 to the Company's Annual Report on Form 10-K
dated September 17, 1998)
21.1 Subsidiaries of the Registrant (filed as Exhibit 21.1 to the
Company's Annual Report on Form 10-K dated September 17,
1998)
99.1 Agreement for the Purchase of Shares, dated as of February
21, 1997, by and between the Company and Wilfried Welch and
Oliver Fohr (filed as Exhibit 99.12 to the Company's Current
Report on From 8-K filed March 8, 1997)
</TABLE>
33
<PAGE> 35
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.23 Third Loan Modification Agreement dated February 12, 1999
between the Company and Fleet National Bank
10.24 Amendment No. 1 to Employment Agreement dated November 1998
between the Company and Peter J. Simone
10.25 Amendment No. 2 to Employment Agreement dated December 1998
between the Company and Peter J. Simone
10.26 Letter Agreement dated June 15, 1999 between the Company and
Phoenix Technologies, Ltd.
10.27 Amendment to Rights Agreement dated July 29, 1999 between
the Company and BankBoston, N.A.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
ITEM 14(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 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. The 8-K further announced that the transaction is subject to certain
conditions, including approval by the stockholders of Xionics and Oak, and is
expected to be completed in the fourth calendar quarter of 1999.
34
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Burlington, Commonwealth of Massachusetts, on this 10th the day of September,
1999.
XIONICS DOCUMENT TECHNOLOGIES, INC.
By: /s/ PETER J. SIMONE
------------------------------------
PETER J. SIMONE
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ PETER J. SIMONE President, Chief Executive September 10, 1999
- --------------------------------------------------- Officer, and Director
PETER J. SIMONE (principal executive
officer)
/s/ PAUL R. LOW Chairman of the Board of September 10, 1999
- --------------------------------------------------- Directors
PAUL R. LOW
/s/ RICHARD A. D'AMORE Director September 10, 1999
- ---------------------------------------------------
RICHARD A. D'AMORE
/s/ DAVID R. SKOK Director September 10, 1999
- ---------------------------------------------------
DAVID R. SKOK
/s/ THOMAS A. ST. GERMAIN Director September 10, 1999
- ---------------------------------------------------
THOMAS A. ST. GERMAIN
/s/ ROBERT L. LENTZ Senior Vice President -- September 10, 1999
- --------------------------------------------------- Finance and Administration,
ROBERT L. LENTZ Chief Financial Officer, and
Treasurer (principal
financial and accounting
officer)
</TABLE>
35
<PAGE> 37
SUMMARY OF TRADEMARKS
The following trademarks of Xionics Document Technologies, Inc., which may
be registered in certain jurisdictions, are referenced in this Form 10-K:
Intelligent Peripheral System
IPS-PRINT
Xionics
XipChip
IPS/2000
Xionics 5
Xionics 5E
Xionics 5C
Xionics 6
Xionics PS2
Xionics PS3
36
<PAGE> 38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Xionics Document Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Xionics
Document Technologies, Inc. (a Delaware corporation) and subsidiaries as of June
30, 1999 and 1998, and the related consolidated statements of operations,
redeemable preferred stock and stockholders' equity (deficit) and cash flows for
each of the three years in the period ended June 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Xionics Document
Technologies, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 22, 1999, (except with respect to the
matter discussed in Note 1, as to which
the date is July 29, 1999)
F-1
<PAGE> 39
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 20,317,617 $ 15,243,438
Accounts receivable, less reserves of approximately
$56,000 at June 30, 1999 and 1998...................... 3,692,426 3,953,722
Contract receivable....................................... 7,000,000 9,927,416
Prepaid expenses and other current assets................. 6,745 480,802
------------ ------------
Total current assets.............................. 31,016,788 29,605,378
------------ ------------
PROPERTY AND EQUIPMENT, NET................................. 2,028,473 2,575,141
DEFERRED TAX ASSET.......................................... 1,030,000 1,030,000
OTHER ASSETS................................................ 638,000 722,607
------------ ------------
$ 34,713,261 $ 33,933,126
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, current portion............................ $ 575,000 $ 527,631
Accounts payable.......................................... 888,665 2,184,184
Accrued expenses.......................................... 8,605,720 9,030,835
Deferred revenue.......................................... 5,586,750 2,096,531
------------ ------------
Total current liabilities......................... 15,656,135 13,839,181
------------ ------------
NOTES PAYABLE, NET OF CURRENT PORTION....................... -- 575,000
COMMITMENTS (Notes 6 and 9)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; Authorized -- 40,000,000
shares Issued -- 12,726,936 shares at June 30, 1999 and
12,261,438 at June 30, 1998 Outstanding -- 11,481,992
shares at June 30, 1999 and 12,037,375 at June 30,
1998................................................... 127,269 122,614
Additional paid-in capital................................ 46,976,183 46,303,791
Accumulated deficit....................................... (23,939,166) (26,756,214)
Treasury stock, at cost -- 1,244,944 shares of common
stock at June 30, 1999 and 224,063 shares of common
stock at
June 30, 1998.......................................... (4,107,160) (151,246)
------------ ------------
Total stockholders' equity........................ 19,057,126 19,518,945
------------ ------------
$ 34,713,261 $ 33,933,126
============ ============
</TABLE>
F-2
<PAGE> 40
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net revenue........................................ $31,403,383 $ 29,101,136 $29,179,466
Cost of revenue.................................... 9,747,074 8,510,491 3,649,188
Nonrecurring cost of revenue....................... -- 2,744,500 --
----------- ------------ -----------
Gross profit..................................... 21,656,309 17,846,145 25,530,278
Operating expenses:
Research and development......................... 12,197,907 15,544,150 13,428,466
Selling, general and administrative.............. 7,103,998 6,996,031 7,144,055
Nonrecurring charges............................. -- 6,690,053 --
Charge for purchased research and development.... -- -- 5,400,000
----------- ------------ -----------
19,301,905 29,230,234 25,972,521
----------- ------------ -----------
Income (loss) from continuing operations...... 2,354,404 (11,384,089) (442,243)
Interest and other income (expense):
Interest income.................................. 768,348 870,715 956,402
Interest expense................................. (3,350) (1,567) (95,462)
Other expense.................................... (12,380) (25,783) (8,001)
----------- ------------ -----------
752,618 843,365 852,939
----------- ------------ -----------
Income (loss) from continuing operations before
provision for income taxes....................... 3,107,022 (10,540,724) 410,696
Provision for income taxes....................... 289,974 272,374 345,500
----------- ------------ -----------
Net income (loss) from continuing operations....... 2,817,048 (10,813,098) 65,196
Discontinued operations (Note 2)
Income (loss) from discontinued operations of
DDPD (net of provision for income taxes of
approximately $0, $0 and $398,000,
respectively)................................. -- (3,182,447) 787,153
Loss on sale of discontinued operations.......... -- (2,255,988) --
----------- ------------ -----------
Net income (loss).................................. $ 2,817,048 $(16,251,533) $ 852,349
=========== ============ ===========
Income (loss) from continuing operations per share
Basic............................................ $ 0.23 $ (0.91) $ 0.01
=========== ============ ===========
Diluted.......................................... $ 0.22 $ (0.91) $ 0.01
=========== ============ ===========
Income (loss) from discontinued operations per
share
Basic............................................ $ -- $ (0.46) $ 0.08
=========== ============ ===========
Diluted.......................................... $ -- $ (0.46) $ 0.07
=========== ============ ===========
Net income (loss) per share
Basic............................................ $ 0.23 $ (1.37) $ 0.09
=========== ============ ===========
Diluted.......................................... $ 0.22 $ (1.37) $ 0.07
=========== ============ ===========
Weighted average number of shares outstanding
Basic............................................ 12,279,266 11,830,541 9,948,607
=========== ============ ===========
Diluted.......................................... 12,815,248 11,830,541 12,080,987
=========== ============ ===========
</TABLE>
F-3
<PAGE> 41
XIONICS DOCUMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS C REDEEMABLE
CONVERTIBLE
-------------------------
NUMBER OF LIQUIDATION
SHARES VALUE
---------- -----------
<S> <C> <C>
BALANCE, JUNE 30, 1996...................................... 2,698,938 $ 8,231,410
Exercise of stock options................................. -- --
Exercise of stock options, issued from treasury........... -- --
Issuance of Common Stock under Employee Stock Purchase
Plan (ESPP)............................................ -- --
Tax benefit from exercise of incentive stock options...... -- --
Conversion of Preferred Stock to Common Stock............. (2,698,938) (8,231,410)
Issuance of Common Stock from initial public offering, net
of issuance costs of $926,439.......................... -- --
Net income................................................ -- --
---------- -----------
BALANCE, JUNE 30, 1997...................................... -- --
Exercise of stock options................................. -- --
Issuance of Common Stock under Employee Stock Purchase
Plan (ESPP)............................................ -- --
Tax benefit from exercise of incentive stock options...... -- --
Net loss.................................................. -- --
---------- -----------
BALANCE, JUNE 30, 1998...................................... -- --
Exercise of stock options................................. -- --
Issuance of Common Stock under Employee Stock Purchase
Plan (ESPP)............................................ -- --
Noncash compensation charge............................... -- --
Repurchase of Common Stock................................ -- --
Net income................................................ -- --
---------- -----------
BALANCE, JUNE 30, 1999...................................... -- $ --
========== ===========
</TABLE>
F-4
<PAGE> 42
XIONICS DOCUMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
CLASS A
CONVERTIBLE CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------------- ----------------------- ----------------------
NUMBER LIQUIDATION NUMBER $.01 NUMBER $.01
OF SHARES VALUE OF SHARES PAR VALUE OF SHARES PAR VALUE
---------- ----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996............ 3,125,051 $ 3,606,658 1,386,066 $ 13,861 558,931 $ 5,589
Exercise of stock options....... -- -- -- -- -- --
Exercise of stock options,
issued from treasury.......... -- -- -- -- -- --
Issuance of Common Stock under
Employee Stock Purchase Plan
(ESPP)........................ -- -- -- -- -- --
Tax benefit from exercise of
incentive stock options....... -- -- -- -- -- --
Conversion of Preferred Stock to
Common Stock.................. (3,125,051) (3,606,658) (1,386,066) (13,861) (558,931) (5,589)
Issuance of Common Stock from
initial public offering, net
of issuance costs of
$926,439...................... -- -- -- -- -- --
Net income...................... -- -- -- -- -- --
---------- ----------- ---------- -------- -------- -------
BALANCE, JUNE 30, 1997............ -- -- -- -- -- --
Exercise of stock options....... -- -- -- -- -- --
Issuance of Common Stock under
Employee Stock Purchase Plan
(ESPP)........................ -- -- -- -- -- --
Tax benefit from exercise of
incentive stock options....... -- -- -- -- -- --
Net loss........................ -- -- -- -- -- --
---------- ----------- ---------- -------- -------- -------
BALANCE, JUNE 30, 1998............ -- -- -- -- -- --
Exercise of stock options....... -- -- -- -- -- --
Issuance of Common Stock under
Employee Stock Purchase Plan
(ESPP)........................ -- -- -- -- -- --
Noncash compensation charge..... -- -- -- -- -- --
Repurchase of Common Stock...... -- -- -- -- -- --
Net income...................... -- -- -- -- -- --
---------- ----------- ---------- -------- -------- -------
BALANCE, JUNE 30, 1999............ -- $ -- -- $ -- -- $ --
========== =========== ========== ======== ======== =======
</TABLE>
F-5
<PAGE> 43
XIONICS DOCUMENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
---------------------- ADDITIONAL ----------------------- STOCKHOLDERS'
NUMBER $.01 PAID-IN ACCUMULATED NUMBER EQUITY
OF SHARES PAR VALUE CAPITAL DEFICIT OF SHARES COST (DEFICIT)
---------- --------- ----------- ------------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996............ -- $ -- $ 1,312,381 $(11,357,030) 224,311 $ (151,413) $ (6,569,954)
Exercise of stock options....... 1,182,227 11,822 397,605 -- -- -- 409,427
Exercise of stock options,
issued from treasury.......... -- -- (117) -- (248) 167 50
Issuance of Common Stock under
Employee Stock Purchase Plan
(ESPP)........................ 5,549 55 69,515 -- -- -- 69,570
Tax benefit from exercise of
incentive stock options....... -- -- 1,600,000 -- -- -- 1,600,000
Conversion of Preferred Stock to
Common Stock.................. 7,768,986 77,690 11,779,828 -- -- -- 8,231,410
Issuance of Common Stock from
initial public offering, net
of issuance costs of
$926,439...................... 2,875,000 28,750 30,656,250 -- -- -- 30,685,000
Net income...................... -- -- -- 852,349 -- -- 852,349
---------- -------- ----------- ------------ --------- ----------- ------------
BALANCE, JUNE 30, 1997............ 11,831,762 118,317 45,815,462 (10,504,681) 224,063 (151,246) 35,277,852
Exercise of stock options....... 394,246 3,943 172,714 -- -- -- 176,657
Issuance of Common Stock under
Employee Stock Purchase Plan
(ESPP)........................ 35,430 354 147,605 -- -- -- 147,959
Tax benefit from exercise of
incentive stock options....... -- -- 168,010 -- -- -- 168,010
Net loss........................ -- -- -- (16,251,533) -- -- (16,251,533)
---------- -------- ----------- ------------ --------- ----------- ------------
BALANCE, JUNE 30, 1998............ 12,261,438 122,614 46,303,791 (26,756,214) 224,063 (151,246) 19,518,945
Exercise of stock options....... 331,932 3,319 253,278 -- -- -- 256,597
Issuance of Common Stock under
Employee Stock Purchase Plan
(ESPP)........................ 133,566 1,336 366,351 -- -- -- 367,687
Noncash compensation charge..... -- -- 52,763 -- -- -- 52,763
Repurchase of Common Stock...... -- -- -- -- 1,020,881 (3,955,914) (3,955,914)
Net income...................... -- -- -- 2,817,048 -- -- 2,817,048
---------- -------- ----------- ------------ --------- ----------- ------------
BALANCE, JUNE 30, 1999............ 12,726,936 $127,269 $46,976,183 $(23,939,166) 1,244,944 $(4,107,160) $ 19,057,126
========== ======== =========== ============ ========= =========== ============
</TABLE>
F-6
<PAGE> 44
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
------------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 2,817,048 $(16,251,533) $ 852,349
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Charge for purchased research and development.......... -- 2,000,000 5,400,000
Depreciation and amortization.......................... 1,572,582 2,044,446 1,369,506
Noncash compensation charge............................ 52,763 -- --
Deferred income taxes.................................. -- (100,000) (930,000)
Loss on disposal of property and equipment............. -- -- 22,712
Nonrecurring charges................................... -- 6,690,053 --
Nonrecurring cost of revenue........................... -- 2,000,000 --
Changes in current assets and current liabilities (net
of effects of acquisitions) --
Accounts receivable................................. 261,296 (3,733) (2,948,470)
Contract receivable................................. 2,927,416 (2,516,128) (7,411,288)
Prepaid expenses and other current assets........... 474,057 673,559 (1,063,488)
Assets and liabilities of discontinued operations,
net............................................... -- 2,113,195 58,868
Accounts payable.................................... (1,295,519) 201,459 40,841
Accrued expenses.................................... (425,115) 536,007 2,425,562
Deferred revenue.................................... 3,490,219 791,498 (63,800)
----------- ------------ -----------
Net cash provided by (used in) operating
activities..................................... 9,874,747 (1,821,177) (2,247,208)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................... (1,025,914) (1,721,192) (1,504,395)
Decrease (increase) in other assets...................... 84,607 (1,428,133) (2,342,697)
Acquisitions, net of cash acquired and acquisition costs
paid................................................... -- (2,225,228) (5,205,475)
Decrease in short-term investments....................... -- --.......... 644,613
----------- ------------ -----------
Net cash used in investing activities............. (941,307) (5,374,553) (8,407,954)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of secured promissory notes payable
to stockholder......................................... (527,631) -- (2,094,000)
Borrowing under notes payable............................ -- 1,102,631 --
Repurchase of Common Stock............................... (3,955,914) -- --
Proceeds from exercise of stock options.................. 256,597 176,657 409,427
Proceeds from issuance of Common Stock under Employee
Stock Purchase Plan (ESPP)............................. 367,687 147,959 69,570
Tax benefit from exercise of incentive stock options..... -- 168,010 1,600,000
Sale of Common Stock, net of issuance costs.............. -- -- 30,685,000
Deferred offering costs.................................. -- -- (400,000)
Issuance of treasury stock............................... -- -- 50
Repayment of term loans.................................. -- -- (886,833)
----------- ------------ -----------
Net cash (used in) provided by financing
activities..................................... (3,859,261) 1,595,257 29,383,214
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 5,074,179 (5,600,473) 18,728,052
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............... 15,243,438 20,843,911 2,115,859
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR..................... $20,317,617 $ 15,243,438 $20,843,911
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................... $ 4,469 $ 1,567 $ 135,631
=========== ============ ===========
Cash paid (refunded) for income taxes.................... $ 147,881 $ (648,668) $ 910,097
=========== ============ ===========
</TABLE>
F-7
<PAGE> 45
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Xionics Document Technologies, Inc. and subsidiaries (the "Company")
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. The
Company's products enable the high-speed capture, processing, printing, copying
and display of complex electronic documents, both locally and across networks.
The Company provides standards-based technology around which its customers,
original equipment manufacturers ("OEMs") of peripheral devices, can design and
develop differentiated products.
In August 1998, the Company sold its Digital Document Products Division
("DDPD") business to GammaGraphX, Inc. ("GGX"). The sale involved the transfer
of all DDPD assets and related personnel and certain liabilities to GGX for
future consideration, including notes issued for certain assets and future
royalties (see Note 2).
On July 29, 1999, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") by and among Oak Technology, Inc.
("Oak"), Vermont Acquisition Corporation, a wholly-owned subsidiary of Oak
("Merger Sub"), and the Company, 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 expects
to be mailed to Xionics stockholders during October 1999; 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. 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.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described below and elsewhere in
the notes to consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Xionics Holdings Limited
("Limited"), Xionics Document Technologies GmbH, Xionics Kabushiki Kaisha,
Xionics, Inc. and Xionics Securities Corporation. Xionics International Limited
("Xionics UK") is a wholly owned subsidiary of Limited. Xionics
Geschaftsfuhrungs GmbH and Xionics GmbH & Co. KG Software Consulting ("Xionics
KG") are wholly owned subsidiaries of Xionics Document Technologies GmbH. GCA
Software GmbH is a wholly owned subsidiary of Xionics KG. All material
intercompany accounts and transactions of the consolidated companies have been
eliminated in consolidation.
(b) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) 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
F-8
<PAGE> 46
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 prepaid 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. During 1998,
the Company recorded contract losses of approximately $2.7 million, which were
included in nonrecurring cost of revenue in the accompanying fiscal 1998
statements of operations.
(d) Nonrecurring Charges
During fiscal 1998, the Company recorded nonrecurring charges of
approximately $6.7 million. The components of these charges were as follows:
<TABLE>
<S> <C>
Write-down of intangible and other assets to net
realizable value....................................... $4,904,891
Provision for lease costs of excess facilities and
other.................................................. 1,785,162
----------
$6,690,053
==========
</TABLE>
The Company assesses the realizability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of. SFAS 121 requires, among other things, that an entity review
its long-lived assets, including intangibles such as goodwill, for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. During fiscal 1998, the Company recorded charges
of approximately $4.9 million relating to the impairment of certain long-lived
assets, which is included in the nonrecurring operating charges in the
accompanying consolidated statements of operations. The Company wrote off
certain intangible assets that the Company determined were impaired, which
included $3.3 million of purchased technology, $1.0 million of prepaid royalties
and $0.6 million of other assets for which there was no estimated future
economic benefit based upon the Company's estimated revenue forecasts. The lease
loss and other accrual of $1.8 million consists of $0.9 million of costs related
to excess facilities and $0.9 million related to additional commitments that the
Company is required to pay under nonrecurring arrangements that the Company
determined were impaired in the fourth quarter of fiscal 1998. As of June 30,
1999, $1,331,948 related to the nonrecurring charges was included in accrued
expenses in the accompanying consolidated balance sheet.
(e) Warranty Cost
The Company provides a 90-day warranty with the sale of its software
products. The Company estimates and accrues for the costs of providing these
warranties upon shipment of the products.
(f) Research and Development Costs
Research and development costs are charged to operations as incurred. SFAS
No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased or
Otherwise Marketed, requires capitalization of certain software development
costs incurred subsequent to the establishment of technological feasibility.
Based on the
F-9
<PAGE> 47
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have not been and are not expected to be material.
(g) Cash and Cash Equivalents
The Company accounts for investments under 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. As of June 30, 1999 and 1998 cash
and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash............................................ $ 206,809 $ 391,871
Commercial paper................................ 6,986,973 9,498,630
Money market accounts........................... 2,397,362 1,644,009
U.S. government and agency securities........... 10,726,473 3,708,928
----------- -----------
Total cash and cash equivalents....... $20,317,617 $15,243,438
=========== ===========
</TABLE>
(h) Property and Equipment
The Company records property and equipment at cost. Maintenance and repair
items are charged to expense when incurred. Depreciation and amortization is
recorded for financial statement purposes on a straight-line basis over the
estimated useful lives of the assets, as follows:
<TABLE>
<CAPTION>
JUNE 30,
ESTIMATED ------------------------
ASSET CLASSIFICATION USEFUL LIVES 1999 1998
-------------------- ------------ ---------- ----------
<S> <C> <C> <C>
Computer equipment............................. 3 years $5,526,900 $4,510,519
Furniture and fixtures......................... 3 - 7 years 1,098,116 1,127,905
Machinery and equipment........................ 3 years 296,112 256,790
---------- ----------
6,921,128 5,895,214
Less -- Accumulated depreciation and
amortization................................. 4,892,655 3,320,073
---------- ----------
$2,028,473 $2,575,141
========== ==========
</TABLE>
(i) Accrued Expenses
Accrued expenses as of June 30, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Accrued payroll and related expenses................ $2,245,107 $1,054,903
Accrued nonrecurring charges........................ 1,331,948 1,407,228
Accrued contract loss............................... 2,053,688 2,000,000
Accrued discontinued operations..................... 558,288 1,045,000
Accrued other....................................... 2,416,689 3,523,704
---------- ----------
$8,605,720 $9,030,835
========== ==========
</TABLE>
F-10
<PAGE> 48
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Foreign Currency Translation
The Company follows the translation principles established by SFAS No. 52,
Foreign Currency Translation. Gains and losses resulting from changes in
exchange rates relating to the remeasurement of financial statements of the
Company's subsidiaries, whose functional currency is the U.S. dollar, are
immaterial for all periods presented and are included in other expense in the
accompanying consolidated statements of operations.
(k) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet risk such as
foreign exchange contracts, option contracts or other foreign hedging
arrangements. Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash equivalents, marketable
securities and accounts receivable. Concentration of credit risk with respect to
accounts receivable is limited to certain customers to whom the Company makes
substantial sales. The Company performs periodic credit evaluations of its
customers and has recorded allowances for its estimated losses.
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenue for the fiscal year and/or total
trade accounts receivable at June 30 and their aggregate percentage of the
Company's total net revenue and accounts receivable.
<TABLE>
<CAPTION>
NET REVENUE ACCOUNTS RECEIVABLE
------------------------------- -----------------------------
PERCENTAGE OF
CUSTOMER REVENUE PERCENTAGE OF
SIGNIFICANT ---------------- SIGNIFICANT TOTAL ACCOUNTS
CUSTOMERS A B CUSTOMERS RECEIVABLE
----------- ------ ------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Fiscal Years Ended --
June 30, 1999........................ 2 66% 13% 5 64%
June 30, 1998........................ 2 53% 14% 3 40%
June 30, 1997........................ 1 58% --% 5 79%
</TABLE>
(l) Income (Loss) per Share
SFAS No. 128, Earnings Per Share, establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. In accordance with SFAS No. 128, basic net
income (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding for those periods. Diluted
net income (loss) per share is calculated by dividing net income (loss) by the
diluted weighted average number of common shares outstanding for all periods
presented.
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of basic and diluted weighted
average common shares outstanding:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding..... 12,279,266 11,830,541 9,948,607
Incremental weighted average common shares
issuable upon exercise of stock options
outstanding.................................. 535,982 -- 2,132,380
---------- ---------- ----------
Diluted weighted average common shares
outstanding.................................. 12,815,248 11,830,541 12,080,987
========== ========== ==========
</TABLE>
F-11
<PAGE> 49
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dilutive weighted average shares outstanding for fiscal 1999 and 1997
exclude only potential common shares from stock options that would be
antidilutive. Diluted weighted average shares outstanding for fiscal 1998
exclude all potential common shares from stock options because to include such
shares would have been antidilutive due to the Company's fiscal 1998 net loss.
As of June 30, 1999, 1998 and 1997, 223,967, 2,209,770 and 364,750 potential
common shares, respectively, were outstanding, but not included in the above
calculation, as their effect would have been antidilutive.
(m) Postretirement Benefits
The Company has no obligations under SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, as it does not currently offer
such benefits.
(n) Accounting for Stock Compensation Plans
The Company applies Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees, in accounting for the stock option
activity for its employees and directors. The Company has adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (see Note 8(c)).
(o) Reclassifications
Certain amounts from prior years have been reclassified to conform with the
current year's presentation.
(p) Other Assets
Other assets as of June 30, 1999 and 1998 consist of long-term deposits and
an investment representing less than 20% ownership in a company that was founded
by the previous chief operating officer of the Company. This investment is being
accounted for under the cost method of accounting.
(q) Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income in the
1999 fiscal year. SFAS No. 130 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 (loss) is equal to the net income (loss) for all
periods presented.
(r) Segment Reporting
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in the 1999 fiscal year. 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. To date,
the Company views its operations and manages its business as principally one
segment (See note 11 for revenue by geographic destination).
(s) New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 established 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. SFAS No. 133 is effective for
F-12
<PAGE> 50
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fiscal quarters of fiscal years beginning after June 15, 2000. The Company does
not believe the adoption of this accounting pronouncement will have a
significant impact on its financial instruments.
(t) Noncash Investing and Financing Activities
The following table summarizes the supplemental disclosure of noncash and
certain other transactions for the years indicated.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
----------------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
In connection with the initial public offering of
Common Stock (Note 8(a)), the following were
converted to Common Stock --
Class A Common Stock............................... $ -- $ -- $ 13,861
========== =========== ===========
Class B Common Stock............................... $ -- $ -- $ 5,589
========== =========== ===========
Class A Convertible Preferred Stock................ $ -- $ -- $ 3,606,658
========== =========== ===========
Class C Redeemable Convertible Preferred Stock..... $ -- $ -- $ 8,231,410
========== =========== ===========
Total noncash conversion................... $ -- $ -- $11,857,518
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO
ACQUISITIONS:
During 1997 and 1998, the Company acquired GCA and
Seaport Imaging, as described in Notes (3) and
(4), respectively
These acquisitions are summarized as follows --
Fair value of assets acquired, excluding cash...... $ -- $ 2,492,052 $ 5,750,648
Payments in connection with the acquisitions, net
of cash acquired................................ -- (2,225,228) (5,205,475)
---------- ----------- -----------
Liabilities assumed................................ $ -- $ 266,824 $ 545,173
========== =========== ===========
</TABLE>
(2) DISCONTINUED OPERATIONS
In 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 DDPD division. The Company's DDPD division sold print and scan accelerators
in the production scanner market. The Company's $5,438,000, or $0.46 per share,
loss reported from discontinued operations for the year ended June 30, 1998
represented a loss from DDPD's operations of $3,182,000 or $0.27 per share that
included a $2,000,000 charge for purchased research and development in
connection with the Seaport Imaging ("Seaport") acquisition (See Note 4). In
addition, the Company recorded the estimated loss on the disposal of the
business, including the write-off of assets and extinguishment of liabilities of
approximately $2,256,000 or $0.19 per share.
On August 12, 1998, the Company sold substantially all of the assets of its
DDPD division to 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, if any, from the date of closing through September
2001, or until royalties reach an aggregate of $2.2 million, subject to
provisions 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 June 30,
1999, the Company has not
F-13
<PAGE> 51
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
received any material proceeds from the sale and has recorded no estimated
proceeds from the disposition due to the significant uncertainty of realizing
any proceeds from the sale of the DDPD business. If material proceeds are
collected in the future, the Company will record them as income from
discontinued operations in the period received. The Company has recently agreed
to extend the dates on which certain payments from GGX are due and has received
a security interest in certain of the assets sold to GGX.
The accompanying consolidated financial statements contain certain accounts
that have been reclassified in each of the periods presented to reflect this
disposition by the Company. Reported revenue, costs and expenses exclude the
operating results of the Company's DDPD business. The results of the Company's
DDPD business are presented on a net basis in the consolidated statements of
operations as income (loss) from discontinued operations. Product revenue from
the DDPD business was approximately $6,190,000 and $8,621,000 for the years
ended June 30, 1998 and 1997, respectively.
At June 30, 1999, the Company has approximately $558,000 included in
accrued expenses that principally relates to rent obligations for discontinued
operations.
(3) ACQUISITION OF GCA
On February 21, 1997, the Company acquired GCA Gesellschaft fur
Computer-Anwendung mbH ("GCA"). The Company paid $5,000,000 in cash for the
outstanding stock of GCA. The acquisition has been accounted for as a purchase
in accordance with APB Opinion No. 16, and, accordingly, GCA's operating results
from February 21, 1997 are included in the accompanying consolidated statements
of operations. In accordance with APB Opinion No. 16, the Company has allocated
the purchase price based on the fair value of assets acquired and liabilities
assumed. A significant portion of the purchase price, as described below, has
been identified as in-process research and development ("in-process R&D") in an
independent appraisal using proven valuation procedures and techniques. The
portion of the purchase price allocated to the in-process R&D projects that had
not yet reached technological feasibility and did not have a future alternative
use, totaling $5,400,000 was charged to expense as of the acquisition date.
Acquired intangibles include the assembled workforce of GCA and goodwill. During
fiscal 1998, these intangibles were determined to be impaired due to the
Company's change in business focus and were written off (see Note 1(d)).
The purchase price of $5,750,000, including direct acquisition costs, was
allocated as follows:
<TABLE>
<S> <C>
Current assets........................................... $ 444,313
Property and equipment................................... 91,762
Acquired intangibles..................................... 150,000
In-process R&D........................................... 5,400,000
Other assets............................................. 9,098
Goodwill................................................. 200,000
Liabilities assumed...................................... (545,173)
----------
$5,750,000
==========
</TABLE>
(4) 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 was 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 consolidated financial statements. The Seaport results combined
with the $2,000,000 charge for in-process R&D has been included in the loss from
discontinued operations for the year ended June 30, 1998.
F-14
<PAGE> 52
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with APB Opinion No. 16, the Company has allocated the
purchase price based on the fair value of assets acquired and liabilities
assumed. A significant portion of the purchase price, as described below, has
been identified in an independent appraisal as intangible assets using proven
valuation procedures and techniques, including approximately $2,000,000 of
in-process R&D. The in-process R&D represents the fair value of projects that
did not have a future alternative use and was therefore charged to expense as of
the acquisition date. Acquired intangibles include the assembled workforce and
existing product technology of Seaport. These acquired intangibles were also
written off and included in the loss from discontinued operations for the year
ended June 30, 1998.
The purchase price of $2,450,000, including direct acquisition cost was
allocated as follows:
<TABLE>
<S> <C>
Current assets........................................... $ 434,595
Property and equipment................................... 35,209
In-process R&D........................................... 2,000,000
Other assets............................................. 4,314
Acquired intangibles..................................... 242,706
Liabilities assumed...................................... (266,824)
----------
$2,450,000
==========
</TABLE>
(5) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the difference
between the financial statement and tax bases of assets and liabilities, as
measured by the enacted tax rates assumed to be in effect when these differences
reverse.
The components of the Company's provision for income taxes for the years
ended June 30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $ --
State............................................ 38,955 35,000 18,000
Foreign.......................................... 251,019 337,374 44,000
Deferred:
Federal.......................................... -- (65,000) 579,000
State............................................ -- (35,000) 102,190
-------- -------- --------
Total provision for income taxes................... $289,974 $272,374 $743,190
======== ======== ========
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Tax (benefit) at federal statutory rate..................... 34.0% (34.0)% 34.0%
State taxes, net of federal benefit......................... 0.8 (5.0) 6.3
Foreign taxes............................................... 8.1 1.0 1.1
Change in valuation allowance/utilization of federal and
foreign net operating loss carryforwards.................. (33.6) 39.5 5.2
----- ----- ----
9.3% 1.5% 46.6%
===== ===== ====
</TABLE>
F-15
<PAGE> 53
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of the components of the Company's deferred income tax
assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred Tax Assets --
Domestic net operating loss carryforwards..... $ 6,917,457 $ 5,443,967
Foreign net operating loss carryforwards...... 1,301,082 1,301,082
Temporary differences --
Intangible and acquired incomplete research
and development related to the Phoenix
acquisition.............................. 932,986 1,009,725
Intangible and acquired incomplete research
and development related to the GCA
acquisition.............................. 1,152,000 1,584,000
Discontinued operations.................... 1,615,053 3,920,000
Allowance for doubtful accounts............ 22,389 140,985
Inventory valuation allowance.............. -- 9,018
Allowance for sales returns................ 88,928 92,000
Other temporary differences, net........... 713,436 314,728
------------ ------------
Total gross deferred tax asset........ 12,743,331 13,815,505
Less -- Valuation allowance..................... (11,713,331) (12,785,505)
------------ ------------
Net deferred tax asset........................ $ 1,030,000 $ 1,030,000
============ ============
</TABLE>
At June 30, 1999, the Company had available net operating loss ("NOL")
carryforwards of approximately $15,800,000 for U.S. income tax purposes, which
may be used to offset future taxable income, if any. The NOL carryforwards begin
to expire in 2009 and are subject to review and possible adjustment by the
Internal Revenue Service. The NOL carryforwards available for use in any given
year may be limited in the event of a significant change in ownership, as
defined by the Internal Revenue Code.
The Company has recorded a deferred tax asset for that portion of their
deferred tax asset for which it is "more likely than not" that it will receive
benefit in the future. The Company has placed a significant valuation allowance
against the remaining net deferred assets totaling approximately $11,713,000. If
realized, approximately $1,490,000 of this amount will be credited to additional
paid-in capital since these amounts were generated from the utilization of
disqualifying dispositions related to the exercise of incentive stock options.
(6) NOTES PAYABLE
In relation to the acquisition of Seaport, the Company entered into two
notes payable with various individuals who were the stockholders of Seaport.
These notes totaled $1,150,000 and are subject to reductions, as defined in the
stock purchase agreement. In the first quarter of fiscal 1999, the Company paid
the first portion of the notes and the remaining portion is due on the second
anniversary of the closing. At June 30, 1999, the outstanding principle balance
of the note was $575,000.
(7) REVOLVING LINE OF CREDIT AND TERM LOAN FACILITY
On September 27, 1995, the Company entered into a $2,000,000 working
capital revolving line of credit (the "Line") and a $1,000,000 term loan
facility with a bank. On February 12, 1999, the Company amended the Line and
term loan facility. The Modification Agreement permits the Company to borrow up
to $5,000,000 under the Line and up to $1,000,000 under the term loan facility.
Under the Modification Agreement, the Line and term loan facility expires on
December 1, 1999. Borrowings under the Line bear interest at the Bank's prime
rate (7.75% at June 30, 1999), and borrowings under the term loan facility bear
interest at prime (7.75% at June 30, 1999) plus 0.5% for qualified equipment
purchases, as defined. Each term
F-16
<PAGE> 54
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loan is repayable over 36 months. Borrowings under the Line and term loan
facility are secured by substantially all assets of the Company, as defined. The
Company is restricted in the payment of any dividends under the Line and term
loan facility. In addition, the Company is required to comply with certain
restrictive covenants, including debt to net worth, capital base, quick ratio
and profitability. The Company was in compliance with all covenants as of June
30, 1999. There are no outstanding borrowings under the Line or term loan
facility as of June 30, 1999.
(8) STOCKHOLDERS' EQUITY
(a) Initial Public Offering
In October 1996, the Company sold, through an underwritten public offering,
2,500,000 shares of its common stock at $12 per share. Also in October 1996, the
Company sold an additional 375,000 shares, at $12 per share, pursuant to an
underwriters' over-allotment provision. The Company received proceeds of
$30,685,000 from its initial public offering, which was net of issuance costs of
$926,439.
(b) Stock and Stock Option Plans
In fiscal 1994, the Company established the 1993 Stock Option Plan (the
"1993 Plan"), and in 1995, the Company established the 1995 Stock Option Plan
(the "1995 Plan"). The plans provide for the grant of incentive stock options
and nonqualified stock options. Options granted under the plans vest over
various periods and expire no later than 10 years from the date of grant. The
Company has reserved common stock shares for the options granted under the 1993
Plan and the 1995 Plan. At June 30, 1999, the aggregate number of shares of
Common Stock available for future grants under the 1993 Plan and the 1995 Plan
is 23,798 and 19,993, respectively.
The Company's 1996 Stock Option Plan (the "1996 Plan") was approved by the
Board of Directors in February 1996 and was adopted by the Company's
stockholders on July 12, 1996. The 1996 Plan was amended by the Board of
Directors on October 10, 1997 to increase the number of shares available for
grants thereunder by 800,000 shares to 1,750,000 shares. The 1996 Plan was
further amended by the Board of Directors on October 5, 1998, to reallocate
334,000 shares then available for issuance under the 1996 Directors Stock Option
Plan (the "Director Plan") to the 1996 Plan, as well as to increase the number
of shares available for issuance thereunder by an additional 500,000 shares of
the Company's Common Stock, over and above any shares reallocated to the 1996
Plan from the Director Plan.
The 1996 Plan provides for the grant or award of options to purchase shares
of the Company's Common Stock. Stock options granted under the 1996 Plan may be
either incentive stock options or nonqualified options. The purpose of the 1996
Plan is to attract and retain outstanding employees, directors and consultants
of the Company through the incentives of stock ownership. All employees
(including officers), directors and consultants of the Company are eligible to
receive stock options under the 1996 Plan.
The 1996 Plan is administered by the Board of Directors. Subject to the
provisions of the 1996 Plan, the Board of Directors has the authority to
designate participants, determine the number of shares to be covered by each
grant, the time at which each stock option is exercisable, the method of payment
and any other terms and conditions of the stock options.
While the Board of Directors determines the prices at which options may be
exercised under the 1996 Plan, the exercise price of an option shall be at least
100% of the fair market value (as determined under the terms of the 1996 Plan)
of a share of Common Stock on the date of grant. At June 30, 1999, the aggregate
number of shares of Common Stock available for future grants under the 1996
Plan, as amended, is 699,431.
The Director Plan was approved by the Board of Directors and the Company's
stockholders on July 12, 1996. The Director Plan provides for the automatic
grant of stock options ("Director Stock Options") to
F-17
<PAGE> 55
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase shares of Common Stock of the Company to nonemployee directors of the
Company once annually, for so long as the nonemployee director serves on the
Board of Directors and is not employed by the Company. Director Stock Options
granted under the Director Plan must be nonstatutory options. The Director Plan
authorizes the grant of options to purchase up to a total of 350,000 shares. The
Director plan was amended by the Board of Directors on October 5, 1998 and
approved by the Company's stockholders on November 23, 1998 to reallocate the
remaining 334,000 shares then available for issuance under the Director Plan to
the 1996 Plan.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER EXERCISE PRICE AVERAGE EXERCISE
OF SHARES PER SHARE PRICE PER SHARE
---------- --------------- ----------------
<S> <C> <C> <C>
Outstanding, June 30, 1996.............. 2,510,090 $ 0.20 - 6.50 $ 0.55
---------- --------------- ------
Granted............................... 874,900 10.00 - 15.00 12.77
Terminated............................ (169,494) 0.20 - 14.45 8.83
Exercised............................. (1,182,475) 0.20 - 10.00 0.35
---------- --------------- ------
Outstanding, June 30, 1997.............. 2,033,021 $ 0.20 - 15.00 $ 5.24
---------- --------------- ------
Granted............................... 1,588,588 3.50 - 15.25 4.68
Terminated............................ (1,017,593) 0.68 - 15.25 12.17
Exercised............................. (394,246) 0.20 - 11.25 0.45
---------- --------------- ------
Outstanding, June 30, 1998.............. 2,209,770 $ 0.20 - 15.25 $ 2.52
---------- --------------- ------
Granted............................... 637,175 2.88 - 4.31 3.50
Terminated............................ (248,850) 0.68 - 15.25 3.82
Exercised............................. (331,932) 0.20 - 3.88 0.77
---------- --------------- ------
Outstanding, June 30, 1999.............. 2,266,163 $ 0.20 - $ 6.50 $ 2.94
========== =============== ======
Exercisable, June 30, 1999.............. 1,081,589 $ 0.20 - $ 6.50 $ 2.41
========== =============== ======
</TABLE>
The range of exercise prices for options outstanding and options
exercisable at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
RANGE OF AVERAGE WEIGHTED WEIGHTED
EXERCISE REMAINING AVERAGE AVERAGE
PRICE PER NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
SHARE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.20 - 0.68 417,927 6.18 $0.44 376,052 $0.42
$1.84 - 3.38 308,666 9.13 3.05 53,382 2.15
$3.44 - 3.50 258,931 9.30 3.50 45,335 3.50
$3.56 - 3.56 1,039,827 8.66 3.56 545,628 3.56
$3.63 - 4.19 217,812 8.91 3.82 54,192 3.77
$4.25 - 4.25 20,000 8.71 4.25 6,250 4.25
$4.31 - 4.31 2,000 9.99 4.31 -- --
$6.50 - 6.50 1,000 6.80 6.50 750 6.50
--------- ----- ----- --------- -----
2,266,163 8.37 $2.94 1,081,589 $2.41
========= ===== ===== ========= =====
</TABLE>
F-18
<PAGE> 56
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the stockholders in July 1996
and authorizes the sale of up to a total of 200,000 shares of Common Stock to
participating employees.
All employees of the Company meeting certain eligibility requirements as
defined, are eligible to participate in the Purchase Plan. An employee may elect
to have a whole number percentage from 1% to 10% of his or her base pay withheld
during the payroll deduction period ("Offering Period") for purposes of
purchasing shares under the Purchase Plan. The price at which shares may be
purchased during each offering will be 85% of the fair market value per share of
the common stock on either the first day or the last day of the Offering Period,
whichever is lower. The Compensation Committee of the Board of Directors may, at
its discretion, choose an Offering Period of 12 months or less for each of the
offerings and choose a different Offering Period for each offering. Under the
Purchase Plan, the Company had sold 174,545 shares as of June 30, 1999. As of
June 30, 1999, 25,455 shares of Common Stock were available for future sale
under the Purchase Plan.
(c) Stock -- Based Compensation
The Company accounts for its stock-based compensation plan under APB No.
25, Accounting for Stock Issued to Employees. In October 1995, the FASB issued
SFAS No. 123, Accounting for Stock-Based Compensation, effective for fiscal
years beginning after December 15, 1995. SFAS No. 123 establishes a fair-value
based method of accounting for stock-based compensation plans. The Company has
adopted the disclosure-only alternative under SFAS No. 123, which requires
disclosure of the pro forma effects on earnings and earnings per share as if
SFAS No. 123 had been adopted, as well as certain other information.
The Company has computed the pro forma disclosure required under SFAS No.
123 for all stock compensation plans during the years ended June 30, 1999, 1998
and 1997 using the Black-Scholes option pricing model, as prescribed by SFAS No.
123. The weighted average information and assumptions used are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Risk free interest rate................... 4.18% - 5.76% 5.44% - 6.11% 5.90% - 6.69%
Expected dividend yield................... -- -- --
Expected lives............................ 4 years 4 years 4 years
Expected volatility....................... 85% 65% 65%
Weighted average value at grant date...... $2.26 $4.70 $12.75
Weighted average remaining contractual
life of options outstanding............. 8.37 8.73 8.65
</TABLE>
The pro forma effect of applying SFAS No. 123 would be as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ --------
<S> <C> <C> <C>
Net income (loss) as reported................. $2,817,048 $(16,251,533) $852,349
Pro forma net income (loss) as adjusted....... $1,627,461 $(18,214,462) $ 41,890
Net income (loss) per share as reported:
Basic....................................... $ 0.23 $ (1.37) $ 0.09
========== ============ ========
Diluted..................................... $ 0.22 $ (1.37) $ 0.07
========== ============ ========
Pro forma net income (loss) per share as
adjusted:
Basic....................................... $ 0.13 $ (1.54) $ 0.00
========== ============ ========
Diluted..................................... $ 0.13 $ (1.54) $ 0.00
========== ============ ========
</TABLE>
F-19
<PAGE> 57
XIONICS DOCUMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) OPERATING LEASE COMMITMENTS
The Company leases office facilities and certain equipment under operating
leases which expire at various dates through July 2003. Rent expense for all
operating leases charged to operations was approximately $1,539,000, $1,302,000
and $1,268,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
Future minimum lease payments under operating leases as of June 30, 1999
are approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
JUNE 30,
------------------
<S> <C>
2000................................................... $1,748,000
2001................................................... 1,773,000
2002................................................... 1,746,000
2003................................................... 142,000
2004................................................... --
----------
Total minimum payments...................................... $5,409,000
==========
</TABLE>
(10) RETIREMENT PLAN
Effective January 1992, the Company adopted the Xionics 401(k) Retirement
Plan (the "Plan"). The Company has elected, at its discretion, to contribute up
to a maximum of 50% of the first 6% of pay contributed to the Plan. The
Company's contributions to the Plan were approximately $316,000, $152,000 and
$146,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
(11) REVENUES BY GEOGRAPHIC DESTINATION
Revenues by geographic destination and as a percentage of total revenue are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States............................... $24,981,307 $19,854,302 $22,325,462
Japan....................................... 5,886,326 8,716,175 5,135,131
Other....................................... 535,750 530,659 1,718,873
----------- ----------- -----------
$31,403,383 $29,101,136 $29,179,466
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
United States............................................... 79.6% 68.2% 76.5%
Japan....................................................... 18.7% 30.0% 17.6%
Other....................................................... 1.7% 1.8% 5.9%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
F-20
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Xionics Document Technologies, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Xionics Document Technologies, Inc. and
subsidiaries included in this Form 10-K, and have issued our report thereon
dated July 22, 1999 (except with respect to the matter discussed in Note 1 as to
which the date is July 29, 1999). Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in the index of this Form 10-K is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and regulations and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth herein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 22, 1999
F-21
<PAGE> 59
SCHEDULE II
XIONICS DOCUMENT TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
BALANCE
ALLOWANCE FOR DOUBTFUL ACCOUNTS FOR BEGINNING OF CHARGED TO BALANCE
CONTINUING OPERATIONS: YEAR EXPENSE WRITE-OFFS END OF YEAR
- ----------------------------------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
June 30, 1997........................... $ 56,000 $ -- $ -- $ 56,000
June 30, 1998........................... 56,000 -- -- 56,000
June 30, 1999........................... 56,000 -- -- 56,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE,
ALLOWANCE FOR DOUBTFUL ACCOUNTS FOR BEGINNING OF CHARGED TO BALANCE,
DISCONTINUED OPERATIONS: YEAR EXPENSE WRITE-OFFS END OF YEAR
- ----------------------------------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
June 30, 1997........................... $ 84,000 $ 67,000 $ (88,000) $ 63,000
June 30, 1998........................... 63,000 933,000 (996,000) --
June 30, 1999........................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
BALANCE CHARGED
BEGINNING OF CHARGED TO TO THE BALANCE
DISCONTINUED OPERATIONS ACCRUAL: YEAR EXPENSE ACCRUAL END OF YEAR
- -------------------------------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
June 30, 1997........................... $ -- $ -- $ -- $ --
June 30, 1998........................... -- 1,045,000 -- 1,045,000
June 30, 1999........................... 1,045,000 -- (486,712) 558,288
</TABLE>
<TABLE>
<CAPTION>
BALANCE CHARGED
BEGINNING OF CHARGED TO TO THE BALANCE
RESERVES FOR RESTRUCTURING: YEAR EXPENSE ACCRUAL END OF YEAR
- --------------------------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
June 30, 1997........................... $ -- $ -- $ -- $ --
June 30, 1998........................... -- 1,399,000 (479,000) 920,000
June 30, 1999........................... 920,000 -- (471,981) 448,019
</TABLE>
F-22
<PAGE> 1
Exhibit 10.23
THIRD LOAN MODIFICATION AGREEMENT
This Third Loan Modification Agreement ("this Agreement") is made as of
February 12, 1999 between Xionics Document Technologies, Inc., a Delaware
corporation (the "Borrower") and Fleet National Bank (the "Bank") (being the
successor by merger to Fleet Bank of Massachusetts, N.A.). For good and valuable
consideration, receipt and sufficiency of which are hereby acknowledged, the
Borrower and the Bank act and agree as follows:
1. Reference is made to: (i) that certain letter agreement dated
September 27, 1995 among the Borrower, Xionics, Inc. ("Xionics") and Fleet Bank
of Massachusetts, N.A., as amended by letter dated May 9, 1996, by Loan
Modification Agreement dated as of August 21, 1996 and by Second Loan
Modification Agreement dated as of December 31, 1997 (as so amended, the "Letter
Agreement"), the Bank having succeeded to the rights of Fleet Bank of
Massachusetts, N.A. thereunder and Xionics having been merged with and into the
Borrower; (ii) that certain $4,000,000 face principal amount promissory note
dated December 31, 1997 (the "1997 Revolving Note") made by the Borrower and
payable to the order of the Bank; (iii) that certain $2,000,000 face principal
amount promissory note dated December 31, 1997 (the "1997 Term Note") made by
the Borrower and payable to the order of the Bank; (iv) that certain Inventory,
Accounts Receivable and Intangibles Security Agreement dated September 27, 1995,
as amended (as so amended, the "IAR Security Agreement") given by the Borrower
to Fleet Bank of Massachusetts, N.A., the Bank having succeeded to the rights of
Fleet Bank of Massachusetts, N.A. thereunder; (v) that certain Supplementary
Security Agreement - Security Interest in Goods and Chattels dated September 27,
1995, as amended (as so amended, the "Supplementary Security Agreement") given
by the Borrower to Fleet Bank of Massachusetts, N.A., the Bank having succeeded
to the rights of Fleet Bank of Massachusetts, N.A. thereunder; (vi) that certain
Notice of Security Interest in Trademarks dated September 27, 1995, as amended
(as so amended, the "Trademark Notice") given by the Borrower to Fleet Bank of
Massachusetts, N.A., the Bank having succeeded to the rights of Fleet Bank of
Massachusetts, N.A. thereunder; (vii) that certain Collateral Assignment of
License dated September 27, 1995, as amended (as so amended, the "Xionics
License Assignment") relating to the "Xionics" name and mark given by the
Borrower to Fleet Bank of Massachusetts, N.A., the Bank having succeeded to the
rights of Fleet Bank of Massachusetts, N.A. thereunder; (viii) that certain
Agreement and Consent to Collateral Assignment of License dated September 27,
1995, as amended (as so amended, the "Xionics Consent") relating to the
"Xionics" name and mark given by Xionics Limited, an English corporation, to
Fleet Bank of Massachusetts, N.A., the Bank having succeeded to the rights of
Fleet Bank of Massachusetts, N.A. thereunder; (ix) that certain Notice of
Collateral Assignment of License dated September 27, 1995, as amended (as so
amended, the "Xionics License Notice") relating to the "Xionics" name and mark
given by the Borrower to Fleet Bank of Massachusetts, N.A., the Bank having
succeeded to the rights of Fleet Bank of Massachusetts, N.A. thereunder; (x)
that certain Collateral Assignment of License dated September 27, 1995, as
amended (as so amended, the "Phoenix License Assignment") relating to the
"PhoenixPage" name and mark given by the Borrower to Fleet Bank of
Massachusetts, N.A., the Bank having succeeded to the rights of Fleet Bank of
Massachusetts, N.A. thereunder; (xi) that certain Agreement and Consent to
Collateral Assignment of License dated September 21, 1995, as
<PAGE> 2
amended (as so amended, the "Phoenix Agreement") between Phoenix Technologies
Ltd.("Phoenix") and Fleet Bank of Massachusetts, N.A., the Bank having succeeded
to the rights of Fleet Bank of Massachusetts, N.A. thereunder; (xii) that
certain Notice of Collateral Assignment of License dated September 27, 1995, as
amended (as so amended, the "Phoenix License Notice") relating to the
"PhoenixPage" name and mark given by the Borrower to Fleet Bank of
Massachusetts, N.A., the Bank having succeeded to the rights of Fleet Bank of
Massachusetts, N.A. thereunder; (xiii) that certain Notice of Security Interest
in Patents dated September 27, 1995, as amended (as so amended, the "Patent
Notice") given by the Borrower to Fleet Bank of Massachusetts, N.A., the Bank
having succeeded to the rights of Fleet Bank of Massachusetts, N.A. thereunder;
(xiv) that certain $5,000,000 face principal amount promissory note of even date
herewith (the "1999 Revolving Note") made by the Borrower and payable to the
order of the Bank; and (xv) that certain $1,000,000 face principal amount term
note of even date herewith (the "1999 Term Note") made by the Borrower and
payable to the order of the Bank. The Letter Agreement, the IAR Security
Agreement, the Supplementary Security Agreement, the Trademark Notice, the
Xionics License Assignment, the Xionics Consent, the Xionics License Notice, the
Phoenix License Assignment, the Phoenix Agreement, the Phoenix License Notice,
the Patent Notice, the 1999 Revolving Note and the 1999 Term Note are
hereinafter collectively referred to as the "Financing Documents". The aforesaid
Loan Modification Agreement dated as of August 21, 1996 is hereinafter referred
to as the "First Modification"; and the aforesaid Second Loan Modification
Agreement dated as of December 31, 1997 is hereinafter referred to as the
"Second Modification".
2. The Letter Agreement is hereby amended, effective as of the date
hereof:
a. By deleting in its entirety clause (i) of Section 1.1 of the
Letter Agreement (said clause having been amended by the Second Modification)
and by substituting in its stead the following:
"(i) that certain $5,000,000 face principal amount promissory
note (the `Revolving Note') dated February 12, 1999 made by the
Borrower and payable to the order of the Bank,"
As a result, all references in the Letter Agreement to a "Revolving Note" will
be deemed to refer to the 1999 Revolving Note.
b. By deleting in its entirety clause (ii) of Section 1.1 of the
Letter Agreement (said clause having been amended by the Second Modification)
and by substituting in its stead the following:
"(ii) that certain $1,000,000 face principal amount promissory
note (the `Term Note') dated February 12,1999 made by the
Borrower and payable to the order of the Bank,"
As a result, all references in the Letter Agreement to a "Term Note" will be
deemed to refer to the 1999 Term Note.
-2-
<PAGE> 3
c. By adding to Section 1.2 of the Letter Agreement, at the end of
such Section, the following:
"Overdue principal of any Revolving Loan and, to the extent
permitted by law, overdue interest shall bear interest at a
fluctuating rate per annum which at all times shall be equal to
the sum of (i) four (4%) percent per annum PLUS (ii) the per
annum rate otherwise payable under the Revolving Note (but in no
event in excess of the maximum rate from time to time permitted
by then applicable law), compounded monthly and payable on
demand. The Borrower hereby irrevocably authorizes the Bank to
make or cause to be made, on a schedule attached to the
Revolving Note or on the books of the Bank, at or following the
time of making each Revolving Loan and of receiving any payment
of principal, an appropriate notation reflecting such
transaction and the then aggregate unpaid principal balance of
the Revolving Loans. The amount so noted shall constitute
presumptive evidence as to the amount owed by the Borrower with
respect to principal of the Revolving Loans. Failure of the Bank
to make any such notation shall not, however, affect any
obligation of the Borrower or any right of the Bank hereunder or
under the Revolving Note."
d. By deleting in their entireties Sections 1.4 and 1.5 of the
Letter Agreement and by substituting in their stead the following:
"1.4. TERM LOANS; TERM NOTE. In addition to the foregoing, the
Bank may make one or more loans (the `Term Loans') to the
Borrower in an aggregate principal amount up to $100,000. A
Term Loan shall be made, no more than once per calendar quarter
(except that more than one Term Loan may be made in any calendar
quarter provided that any additional Term Loan in any one
calendar quarter is in an amount of at least $100,000), in
order to finance costs of Qualifying Equipment acquired by the
Borrower within the 60 days preceding the request for such Term
Loan (except that Term Loans made prior to March 10, 1999 may be
used by the Borrower to reimburse the acquisition costs of
Qualifying Equipment acquired at any time after October 1,
1998), each such Term Loan to be in such amount as may be
requested by the Borrower; provided that (i) no Term Loan will
be made after the earlier of (A) March 31, 2000 or (B) the
earlier termination of the within-described term loan facility
pursuant to Section 5.2 or Section 6.7; (ii) the aggregate
original principal amounts of all Term Loans will not exceed
$1,000,000; and (iii) no Term Loan will be in an amount more
than 80% of the invoiced actual costs of the items of Qualifying
Equipment with respect to which such Term Loan is made
(excluding taxes, shipping, installation charges, training fees
-3-
<PAGE> 4
and other `soft costs' and excluding software except as
expressly permitted by the next following sentence). The
Borrower may include within `Qualifying Equipment' copies of
software (not including `shrink-wrapped' software) purchased by
the Borrower for use in connection with the equipment otherwise
included in `Qualifying Equipment'; provided that the total
amount of the Term Loans advanced for such software will never
exceed 30% of the total principal amount of the Term Loans
outstanding. Prior to the making of each Term Loan, and as a
precondition thereto, the Borrower will provide the Bank with:
(i) invoices supporting the costs of the relevant Qualifying
Equipment; (ii) such evidence as the Bank may reasonably require
showing that the Qualifying Equipment has been delivered to and
installed at the Borrower's Burlington, MA premises, has become
fully operational, has been paid for by the Borrower and is
owned by the Borrower free of all liens and interests of any
other Person (other than the security interest of the Bank
pursuant to the Security Agreement); (iii) Uniform Commercial
Code financing statements, if needed, reflecting the relevant
Qualifying Equipment with respect to which such Term Loan is
being made; and (iv) evidence satisfactory to the Bank that the
Qualifying Equipment is fully insured against casualty loss,
with insurance naming the Bank as secured party and first loss
payee. The Term Loans will be evidenced by the Term Note.
Interest on the Term Loans shall be payable at the times and at
the rate provided for in the Term Note. Overdue principal of any
Term Loan and, to the extent permitted by law, overdue interest
shall bear interest at a fluctuating rate per annum which at all
times shall be equal to the sum of (i) four (4%) percent per
annum PLUS (ii) the per annum rate otherwise payable under the
Term Note (but in no event in excess of the maximum rate from
time to time permitted by then applicable law), compounded
monthly and payable on demand. The Borrower hereby irrevocably
authorizes the Bank to make or cause to be made, on a schedule
attached to the Term Note or on the books of the Bank, at or
following the time of making each Term Loan and of receiving any
payment of principal, an appropriate notation reflecting such
transaction and the then aggregate unpaid principal balance of
the Term Loans. The amount so noted shall constitute presumptive
evidence as to the amount owed by the Borrower with respect to
principal of the Term Loans. Failure of the Bank to make any
such notation shall not, however, affect any obligation of the
Borrower or any right of the Bank hereunder or under the Term
Note.
1.5. PRINCIPAL REPAYMENT OF TERM LOANS. The Borrower shall repay
principal of the Term Loans in 35 equal consecutive monthly
-4-
<PAGE> 5
installments (each in an amount equal to 1/36th of the aggregate
principal amount of the Term Loans outstanding at the close of
business on March 31, 2000), such installments to commence April
1, 2000 and to continue thereafter on the first day of each
month through and including February 1, 2003, PLUS a 36th and
final payment due and payable on March 1, 2003 in an amount
equal to all principal of the Term Loans then remaining
outstanding and all interest accrued but unpaid thereon. The
Borrower may prepay, at any time or from time to time, without
premium or penalty, the whole or any portion of any Term Loan;
provided that each such principal prepayment shall be
accompanied by payment of all interest on the sum so prepaid
accrued but unpaid to the date of payment. Any partial
prepayment of principal of the Term Loans will be applied to
installments of principal of the Term Loans thereafter coming
due in inverse order of normal maturity. Amounts repaid or
prepaid with respect to the Term Loans are not available for
reborrowing."
e. By deleting from the first sentence of Section 1.7 of the Letter
Agreement the amount "$4,000,000" (such amount having been inserted by the First
Modification) and by substituting in its stead the following:
"$5,000,000"
f. By adding to Section 2.1 of the Letter Agreement, at the end of
such Section, the following:
"(n) The Borrower's 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. It is therefore believed that the
Borrower's ISP/2000 software will not encounter problems
executing any of its functions at least until the year 9999. The
Borrower has also reviewed certain critical software systems
which it uses in its business operations (i.e., phone systems,
etc.) for `Year 2000' compliance, and, based upon the
information received by the Borrower to date, the Borrower
believes that such software systems will continue to function in
the manner intended, without material interruption of service or
other difficulty resulting from the `Year 2000' problem. The
Borrower is also in the process of contacting others of its
critical customers, suppliers, financial institutions and
development partners to determine if other operations and the
products and services that they provide to the Borrower are
`Year 2000' compliant. However, it should be noted that there
could be undetected, unknown and/or unforeseen problems
(including failure
-5-
<PAGE> 6
of systems, equipment, software, firmware and/or devices to
operate properly with regard to dates in the year 2000 and
after) in the Borrower's own IPS/2000 products and the software
which the Borrower utilizes in its business operations, as well
as that of its critical customers, suppliers, financial
institutions and development partners. The Borrower will, at the
request of the Bank, provide such reports and other information
in its possession as the Bank may reasonably request in order to
evidence such Year 2000 compliance."
g. By deleting from clause (i) of Section 3.6 of the Letter
Agreement the words "120 days" and by substituting in their stead the following:
"90 days"
h. By adding to clause (v) of Section 3.6 of the Letter Agreement,
at the end of such clause, the following:
"The Borrower will deliver to the Bank on an annual basis a
`management letter' prepared by the Borrower's accountants (in
whatever form same appears, including as a section of another
report), with the management letter for the fiscal year ended
June 30, 1998 to be delivered prior to February 16, 1999."
i. By deleting their entireties Sections 3.7, 3.8, 3.9 and 3.10 of
the Letter Agreement and by substituting in their stead the following:
"3.7. DEBT TO WORTH. The Borrower will maintain as at the end of
each fiscal quarter of the Borrower (commencing with its results
as at December 31, 1998) on a consolidated basis a Leverage
Ratio of not more than 1.0 to 1. As used herein, `Leverage
Ratio' means, as at any date when same is to be determined, the
ratio of(x) the outstanding consolidated Senior Debt of the
Borrower and its Subsidiaries to (y) the Borrower's consolidated
Capital Base at such date.
3.8. CAPITAL BASE. The Borrower will maintain as at the end of
each fiscal quarter of the Borrower (commencing with its results
as at December 31, 1998) a consolidated Capital Base which shall
not be less than the then-effective Capital Base Requirement. As
used in this Section 3.8, the `Capital Base Requirement' will be
deemed to have been $17,000,000 as at September 30, 1998; and as
at the last day of each fiscal quarter thereafter (beginning
with December 31, 1998) the Capital Base Requirement will be
deemed to become an amount equal to the sum of: (i) that Capital
Base Requirement which had
-6-
<PAGE> 7
been in effect on the last day of the immediately preceding
fiscal quarter, PLUS (ii) 75% of the net proceeds of any equity
securities sold by the Borrower during the fiscal quarter then
ended and 75% of the net proceeds of any Subordinated Debt
issued by the Borrower and/or any of its Subsidiaries during
said fiscal quarter then ended (nothing contained herein being
deemed to approve the issuance of any such Subordinated Debt),
PLUS (iii) 75% of the consolidated quarterly Net Income of the
Borrower and Subsidiaries for said fiscal quarter then ended
(but without giving effect to any such quarterly Net Income
which is less than zero as to any fiscal quarter).
3.9. QUICK RATIO. The Borrower will maintain as at the end of
each fiscal quarter (commencing with its results as at December
31, 1998) a Quick Ratio of not less than 1.75 to 1. As used in
this Section 3.9, `Quick Ratio' means, as at any date when same
is to be determined the ratio of (x) the Borrower's Net Quick
Assets to (y) Current Liabilities of the Borrower and/or its
Subsidiaries then outstanding.
3.10. PROFITABILITY. The Borrower will achieve consolidated
quarterly Net Income of at least $250,000 for its fiscal quarter
ending March 31, 1999 and for each fiscal quarter thereafter.
Without limitation of the foregoing, the Borrower will achieve
consolidated annual Net Income of at least $1,000,000 for its
fiscal year ending June 30, 1999 and will achieve consolidated
annual Net Income of at least $2,000,000 for its fiscal year
ending June 30, 2000 and for each fiscal year thereafter."
j. By deleting from clause (i) of Section 5.1 of the Letter
Agreement the amount "$150,000" and by substituting in its stead the following:
"$300,000"
k. By deleting the last sentence of Section 5.3 of the Letter
Agreement and by substituting in its stead the following:
"The Borrower hereby grants to the Bank a lien, security
interest and right of setoff as security for all liabilities and
obligations to the Bank, whether now existing or hereafter
arising, upon and against all deposits, credits, collateral and
property, now or hereafter in the possession, custody,
safekeeping or control of the Bank or any entity under the
control of Fleet Financial Group, Inc. or in transit to any of
them. At any time after the occurrence and during the
continuance of an Event of Default, without further demand or
notice, the Bank may set off the same or any part thereof and
apply
-7-
<PAGE> 8
the same to any liability or obligation of the Borrower, even
though unmatured and regardless of the adequacy of any other
collateral securing any of the Loans or other Obligations. ANY
AND ALL RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR
REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES ANY
LOAN OR OTHER OBLIGATION PRIOR TO EXERCISING ITS RIGHT OF SETOFF
WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE
BORROWER ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY
WAIVED."
1. By deleting the period at the end of the first sentence of
Section 6.3 of the Letter Agreement (as amended by the First Modification) and
by substituting in its stead the following:
"; and further provided that, notwithstanding the foregoing
provisions of this sentence, commencing with the quarterly
facility fee payment due April 1, 1999 the quarterly facility
fee shall be $4,687.50 per calendar quarter (appropriately
prorated for any partial calendar quarter) and the Borrower will
also pay on February 12, 1999 the sum of $500, representing the
prorated increased facility fee (resulting from the increase in
maximum amount of revolving credit available) for the period
February 12, 1999 - March 31,1999."
m. By changing the notice of address of the Borrower, pursuant to
Section 6.6 of the Letter Agreement, to the following:
"Xionics Document Technologies, Inc.
70 Blanchard Road
Burlington, MA 01803
Attention: Robert L. Lentz, Senior Vice President,
Finance and Administration"
n. By changing the Bank's notice address, pursuant to Section 6.6
of the Letter Agreement, to:
"Fleet National Bank
High Technology Division
One Federal Street
Mail Code: MA OF D07A
Boston, MA 02110
Attention: Lucie Burke, Vice President"
-8-
<PAGE> 9
o. By inserting into Section 6.7 of the Letter Agreement,
immediately after the fourth sentence of such Section, the following:
"Without limitation of the foregoing generality,
(i) The Bank may at any time pledge all or any portion of its
rights under the Loan Documents (including any portion of any
Note) to any of the 12 Federal Reserve Banks organized under
Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No
such pledge or the enforcement thereof by any party shall
release the Bank from its obligations under any of the Loan
Documents.
(ii) The Bank shall have the unrestricted right at any time
and from time to time, and without the consent of or notice to
the Borrower, to grant to one or more banks or other financial
institutions (each, a `Participant') participating interests in
the Bank's obligation to lend hereunder and/or any or all of the
Loans held by the Bank hereunder. In the event of any such grant
by the Bank of a participating interest to a Participant,
whether or not upon notice to the Borrower, notwithstanding any
such grant of a participation to a Participant the Bank shall
remain fully responsible for the performance of its obligations
hereunder and the Borrower shall continue to deal solely and
directly with the Bank in connection with the Bank's rights and
obligations hereunder. The Bank may furnish any information
concerning the Borrower in its possession from time to time to
prospective assignees and Participants; provided that the Bank
shall require any such prospective assignee or Participant to
agree in writing to maintain the confidentiality of such
information to the same extent as the Bank would be required to
maintain such confidentiality."
p. By inserting into Article VI of the Letter Agreement, at the end
of such Article, the following:
"6.10. REPLACEMENT NOTES. Upon receipt of an affidavit of an
officer of the Bank as to the loss, theft, destruction or
mutilation of any Note or of any other Loan Document which is
not of public record and, in the case of any such mutilation,
upon surrender and cancellation of the relevant Note or other
Loan Document, the Borrower will issue, in lieu thereof, a
replacement Note or other Loan Document in the same principal
amount (as to any Note) and upon the same terms and conditions.
6.11. USURY. All agreements between the Borrower and the Bank
are hereby expressly limited so that in no contingency or event
whatsoever, whether by reason of acceleration of maturity of any
Note or otherwise, shall the amount paid or agreed to be paid to
the Bank for the use or the forbearance of the Indebtedness
represented by any Note exceed the
-9-
<PAGE> 10
maximum permissible under applicable law. In this regard, it is
expressly agreed that it is the intent of the Borrower and the
Bank, in the execution, delivery and acceptance of the Notes, to
contract in strict compliance with the laws of The Commonwealth
of Massachusetts. If, under any circumstances whatsoever,
performance or fulfillment of any provision of any Note or any
of the other Loan Documents at the time such provision is to be
performed or fulfilled shall involve exceeding the limit of
validity prescribed by applicable law, then the obligation so to
be performed or fulfilled shall be reduced automatically to the
limit of such validity, and if under any circumstances
whatsoever the Bank should ever receive as interest an amount
which would exceed the highest lawful rate, such amount which
would be excessive interest shall be applied to the reduction of
the principal balance evidenced by the Notes and not to the
payment of interest. The provisions of this Section 6.11 shall
control every other provision of this Agreement and of each
Note.
6.12. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON,
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS LETTER
AGREEMENT, ANY NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL
OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR THE BANK TO ENTER INTO THIS LETTER
AGREEMENT AND TO MAKE LOANS AS CONTEMPLATED HEREIN."
q. By deleting from the definition of "Expiration Date" appearing
in Section 7.1 of the Letter Agreement the date "December 1, 1998" (said date
having been inserted by the Second Modification) and by substituting in its
stead the following:
"December 1, 1999"
As a result, from and after the date hereof, for the purposes of the Letter
Agreement and the other Financing Documents, the "Expiration Date" will be
deemed to be December 1, 1999.
r. By deleting from the definition of "Maximum Revolving Amount"
appearing in Section 7.1 of the Letter Agreement the amount "$4,000,000" (said
amount having been inserted by the First Modification) and by substituting in
its stead the following:
"$5,000,000"
-10-
<PAGE> 11
s. By deleting from the definition of "Qualifying Equipment"
appearing in Section 7.1 of the Letter Agreement the date "September 1, 1997"
(such date having been inserted by the Second Modification) and by substituting
in its stead the following:
"October 1, 1998"
t. By inserting into the definition of "Qualifying Equipment"
appearing in Section 7.1 of the Letter Agreement, at the end of such definition,
the following:
"The Borrower may include within the `equipment' described in
clauses (i)-(iii) above software (not including `shrink-wrapped'
software) relating to the tangible items of equipment purchased
with proceeds of the Term Loans; provided that the total cost of
software financed by the Term Loans shall at no time exceed 30%
of the outstanding principal amount of the Term Loans."
3. Wherever in any Financing Document, or in any certificate or
opinion to be delivered in connection therewith, reference is made to a "letter
agreement" or to the "Letter Agreement", from and after the date hereof same
will be deemed to refer to the Letter Agreement, as hereby amended.
4. Simultaneously with the execution and delivery of this
Agreement, the Borrower is executing and delivering to the Bank the 1999
Revolving Note, in substitution for the 1997 Revolving Note. The 1999 Revolving
Note is a $5,000,000 promissory note of the Borrower, substantially in the form
attached hereto as Exhibit 1. Wherever in any of the Financing Documents, or in
any certificate or opinion to be delivered in connection therewith, reference is
made to a "Revolving Note", from and after the date hereof same will be deemed
to refer to the 1999 Revolving Note. Promptly after the Borrower has duly
executed and delivered the 1999 Revolving Note and has given the Bank all
opinions, certificates and other documentation reasonably requested by the Bank
in connection therewith and has paid all interest then accrued under the 1997
Revolving Note, the Bank will mark the 1997 Revolving Note "cancelled" and will
return same to the Borrower.
5. Simultaneously with the execution and delivery of this
Agreement, the Borrower is executing and delivering to the Bank the 1999 Term
Note, in substitution for the 1997 Term Note. The 1999 Term Note is a $1,000,000
promissory note of the Borrower, substantially in the form attached hereto as
Exhibit 2. Wherever in any of the Financing Documents, or in any certificate or
opinion to be delivered in connection therewith, reference is made to a "Term
Note", from and after the date hereof same will be deemed to refer to the 1999
Term Note. The Bank will, promptly after the execution and delivery of this
Agreement, cancel the 1997 Term Note and return same to the Borrower.
6. In consideration of the term loan facility to be represented by
the 1999 Term Note, the Borrower is paying to the Bank, at the date of this
Agreement, a facility fee of $5,000. This fee is non-refundable and is not to be
reduced by, nor applied against, any interest, fees,
-11-
<PAGE> 12
charges or other amounts now or hereafter paid or payable by the Borrower under
or in connection with the Letter Agreement and/or any promissory notes now or
hereafter issued under the Letter Agreement.
7. By its execution below, Xionics International Limited represents
to the Bank that it has become the assignee of the "Xionics" name and mark,
subject to the license to such name and mark theretofore given to the Borrower
by Xionics Limited. Xionics Limited International confirms that such license to
the Borrower remains in full force and effect and confirms the Bank's rights
under the Xionics License Assignment. Xionics International Limited acknowledges
and agrees that the Xionics Consent remains in full force and effect for the
benefit of the Bank, and agrees to be bound thereby as effectively as if it has
been an original party thereto.
8. In order to induce the Bank to enter into this Agreement, the
Borrower further represents and warrants as follows:
a. The execution, delivery and performance of this Agreement, the
1999 Revolving Note and the 1999 Term Note have been duly authorized by the
Borrower by all necessary corporate and other action, will not require the
consent of any third party (except any such consents which have already been
received) and will not conflict with, violate the provisions of, or cause a
default or constitute an event which, with the passage of time or the giving of
notice or both, could cause a default on the part of the Borrower under its
charter documents or by-laws or under any contract, agreement, law, rule, order,
ordinance, franchise, instrument or other document, or result in the imposition
of any lien or encumbrance (except in favor of the Bank) on any property or
assets of the Borrower.
b. The Borrower has duly executed and delivered each of this
Agreement, the 1999 Revolving Note and the 1999 Term Note.
c. Each of this Agreement, the 1999 Revolving Note and the 1999
Term Note is the legal, valid and binding obligation of the Borrower,
enforceable against the Borrower in accordance with its respective terms.
d. Giving effect to the amendments contained in this Agreement and
except as heretofore disclosed to the Bank, the statements, representations and
warranties made in the Letter Agreement, in the IAR Security Agreement and/or in
the Supplementary Security Agreement continue to be correct as of the date
hereof; except as amended, updated and/or supplemented by the attached
Supplemental Disclosure Schedule.
e. Giving effect to the amendments contained in this Agreement and
except as heretofore disclosed to the Bank, the covenants and agreements of the
Borrower contained in the Letter Agreement, in the IAR Security Agreement and/or
in the Supplementary Security Agreement have been complied with on and as of the
date hereof.
-12-
<PAGE> 13
f. Giving effect to the amendments contained in this Agreement and
except as heretofore disclosed to the Bank, no event which constitutes or which,
with notice or lapse of time, or both, could constitute, an Event of Default (as
defined in the Letter Agreement) has occurred and is continuing.
g. No material adverse change has occurred in the financial
condition of the Borrower from that disclosed in the financial statements of the
Borrower dated September 30, 1998, heretofore furnished to the Bank.
9. Except as expressly affected hereby, the Letter Agreement and
each of the other Financing Documents remains in full force and effect as
heretofore.
10. Nothing contained herein will be deemed to constitute a waiver
or a release of any provision of any of the Financing Documents. Nothing
contained herein will in any event be deemed to constitute an agreement to give
a waiver or release or to agree to any amendment or modification of any
provision of any of the Financing Documents on any other or future occasion.
-13-
<PAGE> 14
Executed, as an instrument under seal, as of the day and year first
above written.
XIONICS DOCUMENT
TECHNOLOGIES, INC.
By: /s/ Robert L. Lentz
------------------------------
Name: Robert L. Lentz
Title: Sr. VP/CFO
XIONICS INTERNATIONAL LIMITED
By: /s/ Robert L. Lentz
------------------------------
Name: Robert L. Lentz
Title: Director
Accepted and agreed:
FLEET NATIONAL BANK
By: /s/ Lucie Burke
------------------------------
Name: Lucie Burke
Title: VP
-14-
<PAGE> 1
EXHIBIT 10.24
AMENDMENT NO. 1
TO EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement (the "Amendment") is made and
entered into this ___ day of November, 1998 by and between Xionics Document
Technologies, Inc. ("Xionics") and Peter J. Simone ("Simone").
WHEREAS, Xionics entered into an Employment Agreement with Simone as of March
18, 1998 (the "Agreement"); and
WHEREAS, the parties now desire to amend the Agreement as set forth herein in
order to effectuate a resolution of Xionics' Board of Directors (the "Board")
adopted on October 28, 1998 regarding the extension of certain executives' and
senior managers' time to exercise vested stock options in the event their
employment is terminated in connection with a change of control of the Company;
NOW THEREFORE, the parties hereby agree that the Agreement is amended by adding
the following to the Agreement as new Section 6.3(d):
"(d) In the event Simone's employment is actually or constructively
terminated in a manner described in Section 6.3(b) above, any and all
of his stock options that were granted on or after February 27, 1998
and that are vested at the date of such termination shall be
exercisable for a period of twenty-four (24) months from and after the
date of such termination, notwithstanding anything to the contrary in
the provision(s) of Simone's Stock Option Agreement(s) governing the
exercisability of his stock options after termination of employment;
provided, that if the Board should determine, upon receipt of a written
opinion of Xionics' independent public accountants, that giving effect
to this Section 6.3(d) would preclude accounting for any proposed
business combination of Xionics with another entity as a pooling of
interests, and the Board otherwise desires to approve such a proposed
business combination which requires as a condition to the closing of
such transaction that it be accounted for as a pooling of interests,
then this Section 6.3(d) shall be null and void, but only if its
absence would preserve the pooling treatment."
Except as amended herein, the Agreement remains in full force and effect as
originally written.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto
have caused this Amendment to be duly executed as of the date first written
above.
EMPLOYER: EMPLOYEE:
XIONICS DOCUMENT TECHNOLOGIES, INC.
By: /s/ Carolyn E. Ramm /s/ Peter J. Simone
----------------------------------------- -------------------------
Title: Secretary Peter J. Simone
By: /s/ Paul R. Low
-----------------------------------------
Title: Chairman of the Board of Directors
<PAGE> 1
EXHIBIT 10.25
AMENDMENT NO. 2
TO EMPLOYMENT AGREEMENT
This Amendment No. 2 to Employment Agreement (the "Amendment") is made and
entered into this ___ day of December, 1998 by and between Xionics Document
Technologies, Inc. ("Xionics") and Peter J. Simone ("Simone").
WHEREAS, Xionics entered into an Employment Agreement with Simone as of March
18, 1998 (the "Agreement"), and amended that Agreement as of November 23, 1998
to provide for an extension of time to exercise stock options in the event Mr.
Simone's employment with Xionics is terminated in connection with a change of
control of Xionics (the "Prior Amendment"); and
WHEREAS, the parties now desire to further amend the Agreement as set forth
herein in order to effectuate a resolution of the Compensation Committee of
Xionics' Board of Directors (the "Committee") adopted on October 28, 1998;
NOW THEREFORE, the parties hereby agree as follows:
1. The Agreement is further amended by inserting the following therein as
Section 4.6:
"4.6 COMPANY-PAID AUTOMOBILE. Xionics shall reimburse Simone for
the full cost of a leased automobile of Simone's choice, up to a
maximum of $750.00 per month, for the term of this Agreement."
2. The Agreement is further amended by rewriting Sections 6.3(a), (b) and
(c) thereof in their entirety to read as follows:
"6.3 RIGHTS AND REMEDIES ON TERMINATION.
"(a) If Xionics shall terminate Simone's employment hereunder other
than as provided in Sections 6.1 and 6.2 above, then Simone shall be
entitled to receive, as severance pay and in consideration of his
ongoing obligations under the Invention and Nondisclosure Agreement, in
accordance with Xionics' then-current payroll practices, payment of his
Base Salary in effect at the date of termination for a period of twelve
(12) months after such date, together with reimbursement of the cost of
his group health and dental plan coverage in effect at the date of
termination for the same twelve-month period. Simone shall not accept
any new employment during such twelve-month period in breach of the
Invention and Nondisclosure Agreement.
"(b) For purposes of this Section 6.3, Simone's employment shall be
deemed terminated if, INTER ALIA, any one of the following occurs upon
or within eighteen (18) months after the closing or other completion of
a merger, consolidation, business combination or other reorganization
involving Xionics, an acquisition (whether by stock transfer or asset
purchase) of all or substantially all of Xionics' business, or a change
of control whereby more than fifty percent (50%) of the voting equity
in Xionics becomes beneficially owned by a single person, entity, or
affiliated group of persons or entities: (i) Simone's employment is
actually terminated (other than as provided in Sections 6.1 and
<PAGE> 2
6.2); (ii) Simone is not, or he ceases to be, the chief executive
officer of the surviving entity, and/or the surviving entity is not, or
it ceases to be a publicly traded corporation; or (iii) Simone's
responsibilities, compensation or benefits are materially reduced
without his express consent. In addition, Simone's employment may at
his option be deemed terminated hereunder in the event that Xionics
fails to obtain the agreement of any acquiring entity to assume its
obligations under this Agreement. Xionics agrees to promptly notify
Simone of such failure.
"(c) If Simone shall voluntarily terminate his employment hereunder
after June 30, 1998 but prior to the expiration of the Initial Term, he
shall be entitled to receive up to twelve (12) months' severance pay
and benefits in the amount and subject to the limitations set forth in
subsection (a) above, but only if Simone remains employed with Xionics
and continues to devote his full time, attention and energies to
Xionics' affairs until such time as a suitable successor, as determined
by the Board in its sole discretion, has been hired and has actually
commenced work at Xionics."
Except as amended herein and previously, the Agreement remains in full force and
effect as originally written.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto
have caused this Amendment to be duly executed as of the date first written
above.
EMPLOYER: EMPLOYEE:
XIONICS DOCUMENT TECHNOLOGIES, INC.
By: /s/ Carolyn E. Ramm /s/ Peter J. Simone
----------------------------------------- -------------------------
Title: Secretary Peter J. Simone
By: /s/ Paul R. Low
-----------------------------------------
Title: Chairman of the Board of Directors
<PAGE> 1
EXHIBIT 10.26
[XIONICS LOGO]
June 15, 1999
William E. Meyer
Chief Financial Officer
Phoenix Technologies Ltd.
411 East Plumeria Drive
San Jose, CA 95134
Re: STOCK REPURCHASE
Dear Mr. Meyer:
This letter agreement (the "Agreement") sets forth the agreement of
Xionics Document Technologies, Inc. ("Xionics") and Phoenix Technologies Ltd.
("Phoenix") regarding the repurchase of 1,020,881 shares of Xionics' Common
Stock, par value $.01, currently held by Phoenix (the "Shares"), as follows:
1. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions
hereinafter set forth and in reliance on the representations and warranties
contained herein, Xionics hereby agrees to repurchase from Phoenix, and Phoenix
hereby agrees to sell to Xionics, on the Closing Date (as defined below), all of
the Shares at the closing price of the Shares on the NASDAQ National Stock
Market on Friday, June 11, 1999, of $3.875 per Share.
2. CLOSING. On the Closing Date Xionics will pay to Phoenix, by wire
transfer of immediately available funds to an account specified by Phoenix, the
total purchase price of $3,955,913.80; and Phoenix will deliver to Xionics the
stock certificate evidencing the Shares, together with a duly executed stock
transfer power transferring the Shares to Xionics. The Closing Date shall be the
earliest practicable date on which Phoenix can deliver such stock certificates,
but in no event later than June 18, 1999.
3. REPRESENTATIONS AND WARRANTIES.
3.1. OF XIONICS. As of the date hereof and as of the Closing Date,
Xionics represents and warrants to Phoenix that:
(a) The execution, delivery and performance by Xionics of
this Agreement and the repurchase by Xionics of the Shares hereunder (i) are
within Xionics' corporate power and authority, (ii) have been duly authorized by
all necessary corporate proceedings, and (iii) do not conflict with or result in
any breach of any provision of, or require any consent or approval pursuant to,
the Certificate of Incorporation or By-Laws of Xionics or any law, regulation,
order, judgment, writ, injunction, license, permit, agreement or instrument.
(b) This Agreement constitutes the legally binding
obligation of Xionics, enforceable against Xionics in accordance with the terms
and provisions hereof.
(c) The redemption of the Shares by Xionics hereunder
will comply with all applicable requirements of the Delaware General Corporation
Law.
3.2. OF PHOENIX. As of the date hereof and as of the Closing Date,
Phoenix represents and warrants to Xionics that:
<PAGE> 2
-2-
(a) The execution, delivery and performance by Phoenix of
this Agreement and the sale by Phoenix of the Shares hereunder (i) are within
Phoenix's corporate power and authority, (ii) have been duly authorized by all
necessary corporate proceedings, and (iii) do not conflict with or result in any
breach of any provision of, or require any consent or approval pursuant to, the
charter or bylaws of Phoenix or any law, regulation, order, judgment, writ,
injunction, license, permit, agreement or instrument.
(b) This Agreement constitutes the legally binding
obligation of Phoenix, enforceable against Phoenix in accordance with the terms
and provisions hereof.
(c) Phoenix is the legal and beneficial owner of the
Shares, has good and marketable title to the Shares, and has full right and
authority to sell the Shares hereunder, free and clear of all liens, security
interests and other encumbrances, and free and clear of all options, rights or
claims of any third party.
(d) Phoenix has, based on such financial and other
information as Phoenix has deemed appropriate, and based on its own business
judgment, made its own independent investment decision to sell the Shares to
Xionics on the terms set forth herein. Phoenix has made its decision to enter
into this Agreement and to effect the transactions contemplated hereby with as
much knowledge and information regarding Xionics and its business and affairs as
Phoenix has deemed necessary or desirable.
(e) Other than the representations set forth in Section
3.1 of this Agreement and statements made by Xionics in documents filed in
accordance with the Securities Exchange Act of 1934, Phoenix has not relied on
any representation or warranty, express or implied, from Xionics in entering
into this Agreement.
4. GENERAL. This Agreement may be executed in multiple counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument. The representations and warranties of the parties
set forth herein shall survive the Closing Date. This Agreement contains the
entire understanding of the parties with respect to, and supersedes all prior
agreements and understandings relating to, the subject matter hereof. This
Agreement shall not be amended except by a written instrument hereafter signed
by each of the parties hereto.
If Phoenix is in agreement with the foregoing, please so signify by
signing both originals of this Agreement in the space provided below and return
one original to my attention as soon as possible, retaining the other for your
records.
Sincerely,
XIONICS DOCUMENT TECHNOLOGIES, INC.
/s/ Robert L. Lentz
- ------------------------------
Robert L. Lentz
Senior Vice President, Finance
and Administration and
Chief Financial Officer
AGREED TO AND ACCEPTED:
Phoenix Technologies Limited
By: /s/ William E Meyer Date: June 15, 1999
---------------------------
Title: Vice President/Chief
Financial Officer
<PAGE> 1
EXHIBIT 10.27
AMENDMENT TO RIGHTS AGREEMENT
This AMENDMENT, dated as of July 29, 1999, is between XIONICS DOCUMENT
TECHNOLOGIES, INC., a Delaware corporation (the "COMPANY"), and BANKBOSTON,
N.A., as rights agent (the "RIGHTS AGENT").
RECITALS
A. The Company and the Rights Agent are parties to a Rights
Agreement, dated as of April 15, 1998 (the "RIGHTS AGREEMENT").
B. The Company, Oak Technology, Inc. ("OAK"), and a wholly-owned
subsidiary of Oak ("MERGER SUB") have entered into an Agreement and Plan of
Merger (the "MERGER AGREEMENT"), pursuant to which Sub will merge with the
Company (the "MERGER") and the Company will become a wholly-owned subsidiary of
Oak. The Board of Directors of the Company has approved the Merger Agreement and
the Oak.
C. Pursuant to Section 28 of the Rights Agreement, the Board of
Directors of the Company has determined that an amendment to the Rights
Agreement as set forth herein is necessary and desirable in connection with the
foregoing and the Company and the Rights Agent desire to evidence such amendment
in writing.
Accordingly, the parties agree as follows:
1. AMENDMENTS OF SECTION 1.
(a) The definition of "Acquiring Person" set forth in Section 1 of
the Rights Agreement is amended to add the following sentence at the end
thereof:
"Notwithstanding anything in this Rights Agreement to the
contrary, neither Oak Technology, Inc. ("OAK") nor any of its
existing or future Affiliates or Associates shall be deemed to
be an Acquiring Person solely by virtue of (i) the execution
of the Agreement and Plan of Merger, dated as of July 29,
1999, by and among the Company, Oak and Xionics Acquisition
Corporation ("MERGER SUB") (as the same may be amended from
time to time, the "MERGER AGREEMENT"), pursuant to which
Merger Sub will be merged with the Company (the "MERGER"), and
the Company shall become a wholly-owned subsidiary of Oak,
(ii) the acquisition of Common Shares pursuant to the Merger
Agreement or the consummation of the Merger, or (iii) the
consummation of the other transactions contemplated by the
Merger Agreement."
(b) The definition of "Triggering Event" set forth in Section 1 of
the Rights Agreement is amended to add the following proviso at the end thereof:
"; provided, however, that no Triggering Event shall result
solely by virtue of (i) the execution of the Merger Agreement,
(ii) the acquisition of Common Shares pursuant to the Merger
Agreement or the consummation of the Merger, or (iii) the
consummation of the other transactions contemplated by the
Merger Agreement."
<PAGE> 2
2. AMENDMENT OF SECTION 3(a). Section 3(a) of the Rights
Agreement is amended to add the following sentence at the end thereof:
"Notwithstanding anything in this Rights Agreement to the
contrary, a Distribution Date shall not be deemed to have
occurred solely by virtue of (i) the execution of the Merger
Agreement, (ii) the acquisition of Common Shares pursuant to
the Merger Agreement or the consummation of the Merger, or
(iii) the consummation of the other transactions contemplated
by the Merger Agreement."
3. AMENDMENT OF SECTION 7(a). Section 7(a) of the Rights
Agreement is amended to add the following sentence at the end thereof:
"Notwithstanding anything in this Rights Agreement to the
contrary, neither (i) the execution of the Merger Agreement;
(ii) the acquisition of Common Shares pursuant to the Merger
Agreement or the consummation of the Merger; nor (iii) the
consummation of the other transactions contemplated in the
Merger Agreement, shall be deemed to be events that cause the
Rights to become exercisable pursuant to the provisions of
this Section 7 or otherwise."
4. AMENDMENT OF SECTION 11. Section 11 of the Rights Agreement is
amended to add the following sentence after the first sentence of said Section:
"Notwithstanding anything in this Rights Agreement to the
contrary, neither (i) the execution of the Merger Agreement;
(ii) the acquisition of Common Shares pursuant to the Merger
Agreement or the consummation of the Merger; nor (iii) the
consummation of the other transactions contemplated in the
Merger Agreement, shall be deemed to be a Section 11(a)(i) or
(ii) Event or to cause the Rights to be adjusted or to become
exercisable in accordance with this Section 11."
5. AMENDMENT OF SECTION 13. Section 13 of the Rights Agreement is
amended to add the following sentence at the end thereof:
"Notwithstanding anything in this Rights Agreement to the
contrary, neither (i) the execution of the Merger Agreement;
(ii) the acquisition of Common Shares pursuant to the Merger
Agreement or the consummation of the Merger; nor (iii) the
consummation of the other transactions contemplated in the
Merger Agreement, shall be deemed to be a Section 13 Event or
to cause the Rights to be adjusted or to become exercisable in
accordance with Section 13."
6. AMENDMENT OF SECTION 27. Section 27 of the Rights Agreement is
amended to delete the notice address of the Rights Agent and to insert the
following in lieu thereof:
"BankBoston, N.A.
c/o Equiserve Limited Partnership
150 Royall Street
Canton, MA 02021
Attention: Client Administration"
2
<PAGE> 3
7. EFFECTIVENESS. This Amendment shall be deemed effective as of
the date first written above, as if executed on such date. Except as amended
hereby, the Rights Agreement shall remain in full force and effect and shall be
otherwise unaffected hereby.
8. MISCELLANEOUS. This Amendment shall be deemed to be a contract
made under the laws of The Commonwealth of Massachusetts and for all purposes
shall be governed by and construed in accordance with the laws of such state
applicable to contracts to be made and performed entirely within such state.
This Amendment may be executed in any number of counterparts, each of such
counterparts shall for all purposes be deemed to be an original, and all such
counterparts shall together constitute but one and the same instrument. If any
provisions, covenant or restriction of this Amendment is held by a court of
competent jurisdiction or other authority to be invalid, illegal or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Amendment shall remain in full force and effect and shall
in no way be effected, impaired or invalidated.
EXECUTED under seal as of the date set forth above.
Attest: XIONICS DOCUMENT
TECHNOLOGIES, INC.
/s/ Suzanne M. Foster /s/ Carolyn E. Ramm
- -------------------------- --------------------------------
Name: Suzanne M. Foster Name: Carolyn E. Ramm
Title: Attorney Title: VP & General Counsel
Attest: BANKBOSTON, N.A.
as Rights Agent:
/s/ Mary Ellen Kudera /s/ Tyler H. Haynes
- -------------------------- --------------------------------
Name: Mary Ellen Kudera Name: Tyler H. Haynes
Title: Account Manager Title: Administration Manager
[SEAL]
3
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports in this Form 10-K, into the Company's previously filed Registration
Statements on Form S-8 (file Nos. 333-15467, 333-30223, 333-47437 and
333-72083). It should be noted that we have not audited any financial statements
of the Company subsequent to June 30, 1999.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
September 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM XIONICS'
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K AS OF AND FOR THE YEAR
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 20,317,617
<SECURITIES> 0
<RECEIVABLES> 10,748,426
<ALLOWANCES> 56,000
<INVENTORY> 0
<CURRENT-ASSETS> 31,016,788
<PP&E> 6,921,128
<DEPRECIATION> 4,892,655
<TOTAL-ASSETS> 34,713,261
<CURRENT-LIABILITIES> 15,656,135
<BONDS> 0
0
0
<COMMON> 127,269
<OTHER-SE> 18,929,857
<TOTAL-LIABILITY-AND-EQUITY> 34,713,261
<SALES> 31,403,383
<TOTAL-REVENUES> 31,403,383
<CGS> 9,747,074
<TOTAL-COSTS> 9,747,074
<OTHER-EXPENSES> 19,301,905
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,350
<INCOME-PRETAX> 3,107,022
<INCOME-TAX> 289,974
<INCOME-CONTINUING> 2,817,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,817,048
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.22
</TABLE>
