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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[BOX][CHECK] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[box] 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 0-14747
XYVISION, INC.
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
04-2751102
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
101 EDGEWATER DRIVE, WAKEFIELD, MA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
01880-1291
(ZIP CODE)
Registrant's telephone number including area code (617) 245-4100
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 No
[check]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of
June 30,1996.
COMMON STOCK, $.03 PAR VALUE
(TITLE OF EACH CLASS)
10,945,799
(NUMBER OF SHARES)
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FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 1996 AND MARCH 31, 1996
2 Consolidated Statements of Operations
for the three months ended June 30, 1996 and 1995
3 Consolidated Statements of Cash Flows
for the three months ended June 30, 1996 and 1995
4 Notes to Consolidated Financial Statements
5 Management's Discussion and Analysis of Financial Condition and Results of
Operations
9
PART II. OTHER INFORMATION ............................................12
2
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XYVISION, INC.
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 1996 AND MARCH 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
(Unaudited) March 31,
June 30, 1996 1996
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 185 $ 332
Accounts receivable: Trade, less allowance for doubtful accounts of $521 at
June 30, 1996 and $938 at March 31, 1996 6,458 5,889
Inventories 287 377
Other current assets 767 756
-------------
Total current assets 7,697 7,354
Property and equipment, net 779 724
Other assets, net, principally software development costs 2,367 2,203
Total assets $ 10,843 $ 10,281
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to a shareholder $ 4,000 $ 3,400
Current portion of long-term debt 8,330 4,064
Accounts payable and accrued expenses 3,572 3,588
Other current liabilities 2,861 3,053
Total current liabilities 18,763 14,105
Long-term debt, less current portion 1,012 5,420
Total liabilities 19,775 19,525
Commitments and contingencies -- --
Stockholders' deficit:
Capital stock:
Series preferred stock, $1.00 par value; 2,700,000 shares authorized; no
shares issued -- --
Series B preferred stock, $1.00 par value; 300,000 shares authorized; 232,049
issued at June 30, 1996 and 222,943 issued at March 31, 1996 (aggregate
liquidation preference of $2,901 and $2,787, respectively) 232 223
Common stock, $.03 par value; 20,000,000 shares authorized; 11,423,464 issued
at June 30, 1996 and 9,300,037 at March 31, 1996 343 279
Additional paid-in capital 41,490 41,262
Accumulated deficit (49,588) (49,599)
(7,523) (7,835)
Less: Treasury stock, at cost; 477,665 shares at June 30, 1996 and 477,865
shares at March 31, 1996 1,172 1,172
Receivable from Employee Stock Ownership Plan 237 237
Total stockholders' deficit (8,932) (9,244)
Total liabilities and stockholders' deficit $ 10,843 $ 10,281
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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XYVISION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
June 30, June 30,
1996 1995
(Unaudited)
Revenues:
Systems $3,743 $3,613
Services 2,300 2,209
Total revenues 6,043 5,822
Cost of sales:
Systems 1,372 1,563
Service 1,685 1,520
Total cost of sales 3,057 3,083
Gross margin 2,986 2,739
---------
Expenses:
Research and development 700 756
Marketing, general and administrative 2,011 2,497
Total operating expenses 2,711 3,253
Income (loss) from operations 275 (514)
Other expense, net: Interest income 1 1
Interest expense - third party (112) (96)
Interest expense - shareholder (130) (77)
Total other expense, net (241) (172)
---------
Income (loss) before income taxes and extraordinary item 34 (686)
Provision for income taxes -- --
Net income (loss) 34 (686)
Series B Preferred Stock dividends 22 19
Net income (loss) allocable to common stockholders $12 $ (705)
Earnings per share:
Income (loss) per share $.00 $ (0.08)
========= =========
Weighted average common and common equivalent shares
outstanding 9,701 8,651
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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XYVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
June 30, June 30
1996 1995
(Unaudited)
Operations:
Net income (loss) $34 $ (686)
Adjustments to reconcile net income to net cash used for operating
activities:
Depreciation and amortization 351 522
Provisions for losses on accounts receivable -- 174
Loss on disposal of property and equipment -- --
Operating assets and liabilities: Accounts receivable (569) (77)
Inventories 89 (62)
Accounts payable and accrued expenses (65) (151)
Other current liabilities (188) (60)
Other assets 4 (209)
--------- --------
Net cash provided from (used for) operations (344) (549)
Investments:
Additions to property and equipment (184) (108)
Proceeds from sale of property and equipment -- --
Additions to customer support spares -- --
Capitalized software (398) (378)
--------- --------
Net cash used for investments (582) (486)
Financing: Proceeds from line of credit from a shareholder 1,100 1,300
Repayment of line of credit to a shareholder (500) (300)
Issuance of common stock -- 3
Issuance of preferred stock 1 --
Exercise of warrants 200 --
Dividends on preferred stock (22) (19)
--------- --------
Net cash provided from (used for) financing 779 984
Net decrease in cash and cash equivalents (147) (51)
Cash and cash equivalents at the beginning of the period 332 174
--------- --------
Cash and cash equivalents at the end of the period $185 $ 123
========= ========
Supplemental Information: Interest paid $103 $ 50
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the accompanying financial statements reflect
all adjustments (including normal recurring adjustments) necessary to present
fairly the Company's consolidated financial position as of June 30, 1996 and
the results of its consolidated operations and consolidated cash flows for
the interim periods ended June 30, 1996 and 1995. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted. These financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1996, as amended.
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, liabilities and accrued litigation 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 and
would impact future results of operations and cash flows.
The results of consolidated operations for the interim period ended June 30,
1996 are not necessarily indicative of the results of consolidated operations
that may be expected for the complete fiscal year.
Trade receivables do not contain any material amounts collectible over a
period in excess of one year.
The Company sells its products to a wide variety of customers in a variety of
industries. The Company performs ongoing credit evaluations of its customers
but does not require collateral or other security to support customer
receivables. The Company maintains reserves for credit losses and such losses
have been within management's expectations.
Inventories are stated at the lower of cost, determined on a first-in,
first-out method, or market and consist primarily of finished goods.
On June 30, 1992, the Company obtained a $2,000,000 line of credit with Tudor
Trust, a current investor in the Company. The line, which is payable on
demand, is secured by substantially all of the assets of the Company and has
been used for working capital and general business purposes. Interest on the
line of credit is payable monthly. The Company issued 400,000 shares of
common stock and a common stock purchase warrant for 100,000 shares of common
stock at an exercise price of $.50 per share to the investor for no
additional consideration upon signing of the line of credit. In addition, as
required by the line of credit, from September 30, 1992 through June 30,
1993, the Company granted the investor four additional common stock purchase
warrants, each covering 100,000 shares of common stock. On September 28,
1993, the Company and the investor amended the line of credit. Under the
terms of this amendment: (i) the amount available under the line of credit
was increased from $2,000,000 to $2,500,000; (ii) the annual interest rate
was reduced from 13% to 10%; and (iii) the term of the line of credit was
extended from June 30, 1994 to June 30, 1995. In consideration of such
changes, the Company: (i) reduced the exercise price of 200,000 and 100,000
common stock purchase warrants exercisable by the investor from $.50 and $.25
per share, respectively, to $.09 per share (the fair market value of the
common stock on September 28, 1993); (ii) issued 200,000 shares of common
stock and a warrant to purchase 300,000 shares of common stock at an exercise
price of $.09 per share to the investor for no additional consideration; and
(iii) agreed to grant the investor up to eight additional warrants, each
covering 125,000 shares of common stock at an exercise price at the lesser of
the fair market value of the common stock on the date of issue or $1.00 per
share.
On December 3, 1993, the Company and the investor entered into an additional
amendment to the line of credit. Under the terms of this amendment, the
amount available under the line of credit was increased to $3,000,000. In
consideration of this change, the Company: (i) issued 100,000 shares of
common stock and a warrant to purchase 500,000 shares of common stock at the
fair market value of the common stock on December 3, 1993 and (ii) agreed to
grant the investor up to seven additional common stock purchase warrants
between December 31, 1993 and June 30, 1995, each covering 200,000 shares of
common stock at an exercise price at the lesser of the fair market value of
the common stock on the date of grant or $1.00 per share (these warrants are
in lieu of the last seven of the warrants referred to in clause (iii) of the
preceding paragraph).
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On February 29, 1996, the Company and the investor entered into an additional
amendment to the line of credit. Under the terms on this amendment, the
amount available under the line of credit was increased to $4,000,000 and the
term of the line of credit was extended to December 31, 1997. In
consideration of these changes, the Company granted the investor a common
stock purchase warrant for 200,000 shares of common stock at an exercise
price of $.10 per share (the fair market value of the common stock on the
date of issuance of such warrant) and agreed to continue to grant the
investor, for each fiscal quarter for which amounts are outstanding under the
credit line, a common stock purchase warrant for 200,000 shares of common
stock, provided that the number of shares subject to the warrant shall be
325,000 (rather than 200,000 shares) in the event that the maximum amount of
outstanding credit line advances on one or more dates during the quarter
ending on the issue date of such warrant exceeds $3,000,000. The exercise
price of the first five warrants (beginning with the warrant for the quarter
ended September 30, 1995) will be the lesser of the fair market value of the
common stock on the date of the grant or $1.00 per share while the exercise
price of the final five warrants will be the fair market value of the common
stock on the date of the grant.
Late in fiscal 1996, management of the Company concluded that, due
principally to the significant losses from operations in the third and fourth
quarters of fiscal 1996 (which amounted to approximately $1.8 million and
$2.5 million, respectively), the Company's $4,000,000 credit line would be
insufficient to finance the Company's cash needs during the first quarter of
fiscal 1997. Accordingly, after investigating a number of alternative sources
of financing, the Company entered into an amendment to its line of credit
agreement, effective as of May 31, 1996, pursuant to which (a) the investor
agreed to (i) increase the maximum loan amount to $5,000,000, (ii) reduce the
interest rate on the line of credit from 10% to 8% per annum, (iii) eliminate
any borrowing covenants or conditions that would prevent the Company from
accessing the full $5,000,000 of available credit, and (iv) eliminate the
requirement for the issuance of additional warrants under the line of credit
(which were issuable on a quarterly basis), and (b) in consideration
therefor, the Company issued to the investor warrants for 10,000,000 shares
of common stock of the Company at an exercise price of $.10 per share
(representing the fair market value of the common stock of the Company as of
the date of warrant issuance). The Company concludes that no interest charge
is necessary regarding this transaction because the exercise price of the
warrants is approximately equal to the fair market value of the Common Stock
at the time the commitment to issue the warrants arose. In connection with
this line of credit amendment, the investor exercised warrants for the
purchase of 2,092,500 shares of common stock of the Company, for an aggregate
purchase price of $200,000.
As of June 30, 1996, the Company had $4,000,000 outstanding and $1,000,000
available under the amended line of credit. As of August 13, 1996, the
Company had $400,000 available under the amended line of credit.
In May 1987, the Company issued $25,000,000 of 6% Convertible Subordinated
Debentures due 2002 (the "Debentures") convertible into common stock at a
conversion price of $22.50 per share. Interest on the Debentures is payable
annually (on May 5th) and the Debentures may be called by the Company under
certain conditions. At the beginning of fiscal 1992, the Company had
outstanding $22,410,000 of these Debentures. This was a significant amount of
debt for the Company and represented an annual cash interest payment
obligation of $1,344,600. During fiscal 1992, the Company began a program to
restructure its financial position, specifically, these Debentures.
Since March 10, 1992, the Company has consummated restructuring transactions
with the holders of a total of $18,790,000 principal amount of Debentures.
Substantially all of these transactions involved the exchange of outstanding
Debentures for (i) an unsecured, unsubordinated promissory note of Xyvision
in a principal amount equal to 30% of the principal amount of the Debentures
delivered for exchange, bearing interest (payable at maturity) at 15% per
year (compounded annually) and maturing 30 months from issuance and (ii)
107,095 shares of common stock of Xyvision per $1,000,000 principal amount of
Debentures. As of August 13th, 1996, a total of $3,620,000 principal amount
of Debentures remained outstanding. Of such Debentures, the Company has
identified the holders of $2,560,000 principal amount, leaving $1,060,000
principal amount of Debentures unidentified.
During the course of its attempts to restructure the Debentures and negotiate
transactions with Debentureholders, the Company did not make the interest
payment due on the Debentures on May 5 of 1992, 1993, 1994, 1995 or 1996.
Under the terms of the Indenture covering the Debentures, the Trustee or the
holders of not less than 25% of the outstanding principal amount of the
Debentures have the right to accelerate the maturity date of the remaining
Debentures. As of August 13, 1996, no such acceleration had occurred or been
threatened.
The Company continues to negotiate, in good faith, with as many of the
remaining Debentureholders as
7
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possible. However, despite the progress that has been made, the Company can
still give no assurance about the outcome of the Debenture conversion efforts
and does not expect the matter to be resolved in the near future. If the
Company is unable to enter into exchange transactions with the remaining
Debentureholders, and such Debentureholders seek to pursue legal remedies
against the Company, the Company may have to seek protection under applicable
laws, including the Bankruptcy Code, while it develops, analyzes and
completes alternative restructuring strategies.
In addition, as of June 30, 1996 the Company had issued promissory notes in
an aggregate principal amount of $5,742,000 in connection with the Debenture
exchange transactions described above, the interest on which accrues at a
rate of 15% per year and is $2,346,000 payable at maturity. Such 15%
Promissory Notes in an aggregate principal amount of $4,542,000 were to
mature on September 30, 1994, and the remainder of these 15% Promissory Notes
were to mature at various dates between September 30, 1994 and December 30,
1998. In order to relieve itself of the payment obligations on the Promissory
Notes, in fiscal 1995 the Company began a program to restructure the
Promissory Notes. Prior to June 30, 1996, the Company closed exchange
transactions with 15% Promissory Note holders of an aggregate principal
amount of $5,634,000 and accrued interest of $2,320,000, in which, in
exchange for the delivery of a 15% Promissory Note (including all rights to
receive any interest accrued thereon) for cancellation, the Company issued
(i) a new Promissory Note that will mature 30 months from the date of
issuance and bears interest at 4% per annum, (ii) one share of common stock
for each $10.00 of principal amount of 15% Promissory Note delivered and
(iii) one share of Series B Preferred Stock for each $10.00 of interest due
on the 15% Promissory Note delivered. The Series B Preferred Stock accrues a
cumulative dividend in the amount of $.40 per share per annum, whether or not
declared, and has a liquidation preference of $12.50 per share, plus any
dividends declared or accrued but unpaid. Each share of Series B Preferred
Stock is convertible into two shares of common stock, subject to adjustment
for certain events. Additionally, holders of outstanding shares of Series B
Preferred Stock are entitled to voting rights equivalent to the rights
attributable to the whole shares of common stock into which the shares of
Series B Preferred Stock are convertible. The exchange transactions were
completed assuming a fair value of $10 per share of Series B Preferred Stock.
As of June 30, 15% Promissory Notes in an aggregate principle amount of
$60,000 and accrued interest of $26,000 were overdue. The Company may seek to
restructure the remaining 15% Promissory Notes.
Tudor Trust and Saltzman Partners, both of whom are significant
stockholders of the Company and own a significant portion of the outstanding
Debentures and/or 4% Promissory Notes, have presented to the Company the
following proposal relating to the exchange of Debentures and 4% Promissory
Notes for common stock of the Company: they, along with certain other holders
of the Debentures, would exchange their Debentures for such number of shares
of common stock of the Company as is equal to the sum of the principal amount
of the Debentures exchanged plus the accrued interest thereon, divided by
$3.33; and they, along with certain other holders of the 4% Promissory Notes,
would exchange their 4% Promissory Notes for such number of shares of common
stock of the Company as is equal to the principal amount of the 4% Promissory
Notes exchanged divided by $2.00 (any accrued but unpaid interest would be
paid in cash at the time of such exchange). The consummation of the exchange
transaction for the Debentures would be contingent upon the participation in
such exchange by the holders of at least 50% of the principal amount of the
outstanding Debentures; and the consummation of the exchange transaction for
the 4% Promissory Notes would be contingent upon the participation in such
exchange by the holders of at least 75% of the principal amount of the
outstanding 4% Promissory Notes. Together, Tudor Trust and Saltzman Partners
currently own approximately 40% of the principal amount of the outstanding
Debentures and 46% of the principal amount of the outstanding 4% Promissory
Notes. The Board of Directors of the Company has voted to accept the terms of
the exchange proposal made by Tudor Trust and Saltzman Partners and to
proceed with such exchange transactions, assuming the requisite number of
holders of the Debentures and 4% Promissory Notes agree to the terms of such
exchanges. While the Company believes that such exchange transactions would
be very beneficial to the Company and its stockholders and would
significantly improve the Company's balance sheet and liquidity position,
there can be no assurance that such exchange transactions will be
consummated.
The Company anticipates that its cash requirements for the remainder of
fiscal 1997 will be satisfied from its present cash balances, cash flow from
existing operations, and its credit line, assuming the continued forbearance
by the Debentureholders. The Company can give no assurance on the outcome of
the debt restructuring efforts. The above uncertainties raise substantial
doubt about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments relating to the recovery
and
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classifications of recorded asset amounts or the amounts and classifications
of liabilities that might be necessary should the Company be unable to
continue as a going concern.
The Company's long term liquidity needs cannot reasonably be determined at
this time principally because these needs are dependent, in a large part,
upon the outcome of the Company's attempt to convert into equity its
outstanding Debentures and 4% Promissory Notes and the ability of the Company
to obtain financing to repay or otherwise restructure the remaining
outstanding 15% Promissory Notes. While the Company remains confident about
its future, it can give no assurance regarding the ultimate success of its
strategy.
The Company's deferred tax assets consist primarily of its net operating loss
carryforwards. Management has assigned a valuation allowance to fully offset
the future tax benefits of these deferred tax assets. There has been no
change to the valuation allowance during the three months ended June 30,
1996.
9
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XYVISION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
RESULTS OF OPERATIONS
Revenues for the first quarter of fiscal 1997 were $6,043,000, an increase
of $221,000, or 4%, from the same quarter of fiscal 1996. In the first
quarter of fiscal 1997, systems revenues increased $130,000, or 4% from the
same quarter of fiscal 1996. This increase in revenues is partially
attributable to the continuing strategy of growing a network of domestic and
international resellers, particularly in the Contex division. During the
first quarter of fiscal 1997, the publishing division experienced an increase
in revenues of its Document Management technology, particularly in the
technical documentation market. The total publishing systems revenues for the
first quarter of the current fiscal year, however, remained relatively
unchanged from the same quarter of the prior fiscal year as the product mix
is shifting toward lower cost, PC based software products. Service revenues
increased $91,000, or 4%, from the same quarter of fiscal 1996. This increase
is primarily due to an increase in the Contex division international
maintenance revenues.
In the first quarter of fiscal 1997 gross margin increased to 49% of
revenues from 47% in the comparable quarter of fiscal 1996. Systems margins
were 63% and 57% of revenues for the first quarter of fiscal 1997 and 1996,
respectively. This increase in systems margins is partially attributable to
an increase in software sales in the domestic Publishing division. Service
margins decreased to 27% of revenues from 31% for the same quarter of fiscal
1996, as a result of a higher level of fixed costs in the European Contex
division.
In the first quarter of fiscal 1997, research and development expenses,
net of capitalized software development costs, were $700,000, a decrease of
$56,000 or 7% from the comparable quarter of fiscal 1996. Capitalized
software development costs were $398,000 and $378,000 for the first quarter
of fiscal 1997 and 1996, respectively. Research and development expenses
(excluding software development costs) were 12% and 13% of revenues for the
first quarters of fiscal 1997 and 1996, respectively.
Marketing, general and administrative expenses were $2,011,000 for the
first quarter of fiscal 1997, a decrease of $486,000 or 19% from the
comparable quarter of fiscal 1996. These expenses represented 33% and 43% of
revenues, in the first quarter of fiscal 1997 and 1996, respectively. The
decrease was primarily due to decreased sales and marketing spending in the
domestic and European markets, as a result of the December 1995 reduction in
force.
The increase in interest expense for the first quarter of fiscal 1997 was
the result of the impact of the program to exchange 15% Promissory Notes for
equity securities and 4% Promissory Notes described below and in Note 5 to
the consolidated financial statements, and a higher average balance in the
credit line described below and in Note 4 to the consolidated financial
statements. The interest expense to maturity of the 15% Promissory Notes was
recognized when the exchanges occurred. The interest expense of the 4%
Promissory Notes is recognized ratably over the terms of the notes.
The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. The Company has a valuation allowance to fully offset
future tax benefits of these deferred tax assets. There has been no change to
the valuation allowance for the first quarter of fiscal 1997.
The Company accrued a dividend of $22,000 and declared a dividend of
$19,000 on the Series B Preferred Stock, in the first quarter of fiscal 1997
and 1996, respectively.
The Company recorded net income allocable to common stockholders of
$12,000 for the first quarter of fiscal 1997, compared to a net loss
allocable to common stockholders of $705,000 for the first quarter of fiscal
1996.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash of $185,000, which is a decrease of
$147,000 from March 31, 1996. During the first three months of fiscal 1997,
the Company's operating and investment activities used $926,000 of cash.
The Company has a $5,000,000 amended line of credit with a stockholder of
the Company. This credit line, which is payable on demand, is secured by
substantially all of the assets of the Company and has been used for working
capital and general business purposes. The credit line currently bears
interest at a rate of 8% per year, payable monthly. As of June 30, 1996 the
Company had an outstanding line of credit balance of $4,000,000. As of August
13, 1996 the Company had $400,000 available under the amended line of credit.
See Note 4 to the consolidated financial statements.
At the beginning of fiscal 1992, the Company had outstanding $22,410,000
of Debentures. This was a significant amount of debt for the Company and
represented an annual cash interest payment obligation of $1,344,600. During
fiscal 1992, the Company began a program to restructure its financial
position, specifically, these Debentures.
Since March 10, 1992, the Company has consummated restructuring
transactions with the holders of a total of $18,790,000 principal amount of
Debentures. Substantially all of these transactions involved the exchange of
outstanding Debentures for (i) an unsecured, unsubordinated promissory note
of Xyvision in a principal amount equal to 30% of the principal amount of the
Debentures delivered for exchange, bearing interest (payable at maturity) at
15% per year (compounded annually) and maturing 30 months from issuance and
(ii) 107,095 shares of common stock of Xyvision per $1,000,000 principal
amount of Debentures. As of August 13th, 1996, a total of $3,620,000
principal amount of Debentures remained outstanding. Of such Debentures, the
Company has identified the holders of $2,560,000 principal amount, leaving
$1,060,000 principal amount of Debentures unidentified.
During the course of its attempts to restructure the Debentures and
negotiate transactions with Debentureholders, the Company did not make the
interest payment due on the Debentures on May 5 of 1992, 1993, 1994, 1995 or
1996. Under the terms of the Indenture covering the Debentures, the Trustee
or the holders of not less than 25% of the outstanding principal amount of
the Debentures have the right to accelerate the maturity date of the
remaining Debentures. As of August 13, 1996, no such acceleration had
occurred or been threatened.
The Company continues to negotiate, in good faith, with as many of the
remaining Debentureholders as possible. However, despite the progress that
has been made, the Company can still give no assurance about the outcome of
the Debenture conversion efforts and does not expect the matter to be
resolved in the near future. If the Company is unable to enter into exchange
transactions with the remaining Debentureholders, and such Debentureholders
seek to pursue legal remedies against the Company, the Company may have to
seek protection under applicable laws, including the Bankruptcy Code, while
it develops, analyzes and completes alternative restructuring strategies.
In addition, as of June 30, 1996 the Company had issued promissory notes
in an aggregate principal amount of $5,742,000 in connection with the
Debenture exchange transactions described above, the interest on which
accrues at a rate of 15% per year and is $2,346,000 payable at maturity. Such
15% Promissory Notes in an aggregate principal amount of $4,542,000 were to
mature on September 30, 1994, and the remainder of these 15% Promissory Notes
were to mature at various dates between September 30, 1994 and December 30,
1998. In order to relieve itself of the payment obligations on the Promissory
Notes, in fiscal 1995 the Company began a program to restructure the
Promissory Notes. Prior to June 30, 1996, the Company closed exchange
transactions with 15% Promissory Note holders of an aggregate principal
amount of $5,634,000 and accrued interest of $2,320,000, in which, in
exchange for the delivery of a 15% Promissory Note (including all rights to
receive any interest accrued thereon) for cancellation, the Company issued
(i) a new Promissory Note that will mature 30 months from the date of
issuance and bears interest at 4% per annum, (ii) one share of common stock
for each $10.00 of principal amount of 15% Promissory Note delivered and
(iii) one share of Series B Preferred Stock for each $10.00 of interest due
on the 15% Promissory Note delivered. The Series B Preferred Stock accrues a
cumulative dividend in the amount of $.40 per share per annum, whether or not
declared, and has a liquidation preference of $12.50 per share, plus any
dividends declared or accrued but unpaid. Each share of Series B Preferred
Stock is convertible into two shares of common stock, subject to adjustment
for certain events. Additionally, holders of outstanding shares of Series B
Preferred Stock are entitled to voting rights equivalent to the rights
attributable to the whole shares of common stock into which the shares of
Series B Preferred Stock are convertible. The exchange transactions were
completed assuming a fair value of $10 per share of Series B Preferred Stock.
As of June 30, 15% Promissory Notes in an aggregate principle amount of
$60,000 and accrued interest of $26,000 were overdue. The Company may seek to
restructure the remaining 15% Promissory Notes.
11
<PAGE>
Tudor Trust and Saltzman Partners, both of whom are significant
stockholders of the Company and own a significant portion of the outstanding
Debentures and/or 4% Promissory Notes, have presented to the Company the
following proposal relating to the exchange of Debentures and 4% Promissory
Notes for common stock of the Company: they, along with certain other holders
of the Debentures, would exchange their Debentures for such number of shares
of common stock of the Company as is equal to the sum of the principal amount
of the Debentures exchanged plus the accrued interest thereon, divided by
$3.33; and they, along with certain other holders of the 4% Promissory Notes,
would exchange their 4% Promissory Notes for such number of shares of common
stock of the Company as is equal to the principal amount of the 4% Promissory
Notes exchanged divided by $2.00 (any accrued but unpaid interest would be
paid in cash at the time of such exchange). The consummation of the exchange
transaction for the Debentures would be contingent upon the participation in
such exchange by the holders of at least 50% of the principal amount of the
outstanding Debentures; and the consummation of the exchange transaction for
the 4% Promissory Notes would be contingent upon the participation in such
exchange by the holders of at least 75% of the principal amount of the
outstanding 4% Promissory Notes. Together, Tudor Trust and Saltzman Partners
currently own approximately 40% of the principal amount of the outstanding
Debentures and 46% of the principal amount of the outstanding 4% Promissory
Notes. The Board of Directors of the Company has voted to accept the terms of
the exchange proposal made by Tudor Trust and Saltzman Partners and to
proceed with such exchange transactions, assuming the requisite number of
holders of the Debentures and 4% Promissory Notes agree to the terms of such
exchanges. While the Company believes that such exchange transactions would
be very beneficial to the Company and its stockholders and would
significantly improve the Company's balance sheet and liquidity position,
there can be no assurance that such exchange transactions will be
consummated.
The Company anticipates that its cash requirements for the remainder of
fiscal 1997 will be satisfied from its present cash balances, cash flow from
existing operations, and its credit line, assuming the continued forbearance
by the Debentureholders. The Company can give no assurance on the outcome of
the debt restructuring efforts. The above uncertainties raise substantial
doubt about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments relating to the recovery
and classifications of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company's long term liquidity needs cannot reasonably be determined at
this time principally because these needs are dependent, in a large part,
upon the outcome of the Company's attempt to convert into equity its
outstanding Debentures and 4% Promissory Notes and the ability of the Company
to obtain financing to repay or otherwise restructure the remaining
outstanding 15% Promissory Notes. While the Company remains confident about
its future, it can give no assurance regarding the ultimate success of its
strategy.
12
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS: NOT APPLICABLE.
Item 2. Changes in Securities: Not applicable.
Item 3. Defaults upon Senior Securities: Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders: Not
applicable.
ITEM 5. OTHER INFORMATION: NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
Exhibit 27 - Financial Data Schedule
13
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
XYVISION, INC.
- -----------------------------------------------------------------------------
(Registrant)
August 14, 1996
/s/ Eugene P. Seneta
- -----------------------------------------------------------------------------
Eugene P. Seneta
Vice President, Chief Financial Officer,
Treasurer and Secretary
14
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<PERIOD-END> JUN-30-1996
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<ALLOWANCES> (521)
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<DEPRECIATION> (11,105)
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0
232
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