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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 September 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
September 30, 1996.
COMMON STOCK, $.03 PAR VALUE
(TITLE OF EACH CLASS)
14,060,292
(NUMBER OF SHARES)
1
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FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1996 AND MARCH 31, 1996
2 Consolidated Statements of Operations
for the three and six months ended September 30, 1996 and 1995
3 Consolidated Statements of Cash Flows
for the six months ended September 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 SEPTEMBER 30, 1996 AND MARCH 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
(Unaudited)
September 30, March 31,
1996 1996
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $115 $ 332
Accounts receivable: Trade, less allowance for doubtful accounts of
$487 at September 30, 1996 and $938 at March 31, 1996 6,504 5,889
Inventories 288 377
Other current assets 788 756
--------------
Total current assets 7,695 7,354
Property and equipment, net 802 724
Other assets, net, principally software development costs 2,336 2,203
Total assets $10,833 $ 10,281
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to a shareholder $4,500 $ 3,400
Current portion of long-term debt 2,415 4,064
Accounts payable and accrued expenses 3,110 3,588
Other current liabilities 2,119 3,053
Total current liabilities 12,144 14,105
Long-term debt, less current portion 186 5,420
Total liabilities 12,330 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;
235,299 issued at September 30, 1996 and 222,943 issued at March 31, 1996
(aggregate liquidation preference of $2,941 and $2,787, respectively) 235 223
Common stock, $.03 par value; 50,000,000 shares authorized; 14,537,357
issued at September 30, 1996 and 9,300,037 at March 31, 1996 436 279
Additional paid-in capital 48,579 41,262
Accumulated deficit (49,578) (49,599)
(328) (7,835)
Less: Treasury stock, at cost; 477,065 shares at September 30, 1996 and
477,865 shares at March 31, 1996 1,169 1,172
Receivable from Employee Stock Ownership Plan -- 237
Total stockholders' deficit (1,497) (9,244)
Total liabilities and stockholders' deficit $10,833 $ 10,281
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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XYVISION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
Revenues:
Systems $2,953 $ 3,375 $6,696 $ 6,988
Services 2,514 2,486 4,814 4,695
Total revenues 5,467 5,861 11,510 11,683
Cost of sales:
Systems 1,057 1,115 2,429 2,678
Service 1,765 1,579 3,451 3,099
Total cost of sales 2,822 2,694 5,880 5,777
Gross margin 2,645 3,167 5,630 5,906
-------------- --------------
Expenses:
Research and development 769 781 1,469 1,537
Marketing, general and administrative 1,723 2,468 3,733 4,965
Total operating expenses 2,492 3,249 5,202 6,502
Income (loss) from operations 153 (82) 428 (596)
Other expense, net: Interest income 2 3 3 4
Interest expense - third party (77) (90) (189) (186)
Interest expense - shareholder (145) (105) (275) (182)
Total other expense, net (220) (192) (461) (364)
-------------- --------------
Income (loss) before income taxes and extraordinary item (67) (274) (33) (960)
Provision for income taxes -- -- -- --
Net income (loss) before extraordinary item (67) (274) (33) (960)
Extraordinary item: Gain on the exchange of convertible
subordinated debentures 100 -- 100 --
Net income (loss) 33 (274) 67 (960)
Series B Preferred Stock dividends 24 22 46 41
Net income (loss) allocable to common stockholders $9 $ (296) $21 $ (1,001)
Earnings per share:
Income (loss) per share $ -- $ (0.03) $ -- $ (0.11)
============== ============== ============== ==============
Weighted average common and common equivalent shares
outstanding 19,064 8,734 14,631 8,693
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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XYVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended
September 30, September 30,
1996 1995
(Unaudited)
Operations:
Net income (loss) $67 $(960)
Adjustments to reconcile net income to net cash used for operating activities:
Gain on the exchange of Convertible Subordinated Debentures (100) --
Depreciation and amortization 776 1,025
Provisions for losses on accounts receivable -- 317
Loss on disposal of property and equipment -- --
Operating assets and liabilities: Accounts receivable (615) (153)
Inventories 88 (94)
Accounts payable and accrued expenses (655) (535)
Other current liabilities (179) (177)
Other assets (19) (83)
---------------- ----------------
Net cash provided from (used for) operations (637) (660)
Investments:
Additions to property and equipment (322) (192)
Proceeds from sale of property and equipment 3 --
Additions to customer support spares -- --
Capitalized software (752) (737)
---------------- ----------------
Net cash used for investments (1,071) (929)
Financing: Proceeds from line of credit from a shareholder 1,900 2,100
Repayment of line of credit to a shareholder (800) (700)
Issuance of common stock -- 3
Issuance of preferred stock 1 --
Exercise of warrants 200 --
Dividends on preferred stock (47) (41)
Principal loan payment from Employee Stock Ownership Plan 237 257
----------------
Net cash provided from (used for) financing 1,491 1,619
Net decrease in cash and cash equivalents (217) 30
Cash and cash equivalents at the beginning of the period 332 174
---------------- ----------------
Cash and cash equivalents at the end of the period $115 $204
================ ================
Supplemental Information: Interest paid $309 $120
Conversion of 6% debentures to equity 2,000 --
Conversion of 4% notes to equity 4,569 --
Conversion of accrued interest on 6% debentures to equity 649 --
</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 September 30, 1996
and the results of its consolidated operations and consolidated cash flows
for the interim periods ended September 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 periods ended
September 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).
6
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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 September 30, 1996, the Company had $4,500,000 outstanding and $500,000
available under the amended line of credit. As of November 13, 1996, the
Company was fully utilizing the credit available under the amended line of
credit. The Company and the investor have agreed in principle on an amendment
to the line of credit that would increase the maximum loan amount thereunder
from $5,000,000 to $6,000,000. Such amendment would also provide that the
investor shall have the sole discretion to decide whether or not to make any
and all advances of funds in excess of $5,000,000, and that the investor
shall have the right to refuse to make any advances of any such funds in
excess of $5,000,000 for any reason or no reason. The Company expects to
complete documentation of this amendment in November 1996, but there can be
no assurance that it will do so.
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 $19,035,000 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.
7
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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 November 13, 1996, no such acceleration had occurred or
been threatened.
In addition, as of September 30, 1996 the Company had issued promissory notes
in an aggregate principal amount of $5,815,000 in connection with the
Debenture exchange transactions described above, the interest on which
accrues at a rate of 15% per year and is $2,452,000 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 September 30, 1996, the Company closed exchange
transactions with 15% Promissory Note holders of an aggregate principal
amount of $5,709,000 and accrued interest of $2,353,000, 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 September 30, 1996, 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.
On September 30, 1996, the Company completed transactions with holders of
an aggregate of 80%, or $4,569,000, principal amount of the then outstanding
4% Promissory Notes. Under the terms of the agreement, the holders of the 4%
Promissory Notes exchanged 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 was paid in cash as the time of such exchange).
Subsequent to September 30, 1996 and prior to November 13, 1996, Xyvision
entered into agreements with holders of an additional $285,000 principal
amount of the outstanding 4% Promissory Notes on substantially the same terms
as described above. Accordingly, as of November 13, 1996, the Company had
consummated transactions with holders of an aggregate of $4,854,000 principal
amount of the outstanding 4% Promissory Notes to convert their principal into
equity.
Also, on September 30, 1996, the Company completed transactions with
investors holding an aggregate of 59%, or $2,000,000, principal amount of the
outstanding Debentures. Under the terms of the agreement, holders of the
Debentures exchanged 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. As
of November 13, 1996, a total of $1,375,000 principal amount of Debentures
remained outstanding. Of such Debentures, the Company has identified the
holders of $315,000 principal amount, leaving $1,060,000 principal amount of
Debentures unidentified.
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 restructuring 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.
The Company anticipates that its cash requirements for the remainder of
fiscal 1997 will be satisfied from its
8
<PAGE>
present cash balances, cash flow from existing operations, and its credit
line, assuming the continued forbearance by the Debentureholders and the
availability of increased borrowings under the credit line should the Company
require them. However, there can be no assurance that such forbearance will
continue or that the investor will advance any funds in excess of $5,000,000
under the credit line.
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 six months ended September 30,
1996.
9
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XYVISION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
RESULTS OF OPERATIONS
Revenues for the second quarter of fiscal 1997 were $5,467,000, a decrease
of $395,000, or 7%, from the same quarter of fiscal 1996. Revenues for the
first six months of fiscal 1997 were $11,510,000, a decrease of $173,000, or
1%, from the same period of the previous year. In the second quarter of
fiscal 1997, systems revenues decreased $422,000, or 13% from the same
quarter of the previous fiscal year. For the first six months of fiscal 1997,
systems revenues decreased $292,000, or 4%, for the comparable period of
fiscal 1996. These decreases in revenue are primarily the result of decreased
domestic sales of publishing systems. For the three and six month periods
ended September 30, 1996, service revenues increased $28,000, or 1%, and
$119,000, or 3%, from the comparable periods of fiscal 1996, respectively.
These increases are primarily due to increases in the Contex division's
international maintenance revenues.
For the second quarter of fiscal 1997 gross margin decreased to 48% of
revenues from 54% of revenues for the comparable period of fiscal 1996. For
the first six months of fiscal 1997, gross margins decreased to 49% of
revenues from 51% of revenues for the comparable period of fiscal 1996.
Systems margins for the second quarter of fiscal 1997 decreased to 64% of
revenues from 67% for the same quarter of fiscal 1996. The second quarter
decrease is a result of the Contex European division's decrease in software
sales. For the first six months of fiscal 1997, systems margins increased to
64% of revenues from 62% for the period of fiscal 1996. The six month
increase in margin is partially attributable to an increase in commercial
software sales in the domestic publishing division. For the second quarter of
fiscal 1997, service margins decreased to 30% of revenues from 36% for the
same quarter of fiscal 1996. For the first six months of fiscal 1997, service
margins decreased to 28% of revenues from 34% for the same period of the
previous fiscal year. These decreases in service margins were the result of a
higher level of fixed costs, primarily in Contex's European division.
Research and development expenses, net of capitalized software development
costs, were $769,000 and $1,469,000 for the three and six month periods ended
September 30, 1996. These amounts represent decreases of 2% and 4%,
respectively, from the comparable periods of fiscal 1996. Capitalized
software development costs were $355,000 and $752,000 for the second quarter
and first six months of fiscal 1997, respectively, as compared to $359,000
and $737,000 for the same time periods of fiscal 1996. Research and
development expenses (excluding software development costs) for the second
quarter and first six months of fiscal 1997 were 14% and 13% of revenues,
respectively, as compared to 13% for the same periods of fiscal 1996.
Marketing, general and administrative expenses were $1,723,000 and
$3,733,000, or 32% of revenues, for the second quarter and the first six
months of fiscal 1997. These are decreases from $2,468,000 and $4,965,000
which represented 42% of revenues for the comparable periods of fiscal 1996.
These decreases were primarily the result of decreased sales and marketing
spending in the domestic and European markets associated with the reduction
in sales force which occurred in the third quarter of fiscal 1996.
The increases in interest expense for the second quarter and first six
months of fiscal 1997 were the result of; (1) the impact of the program to
exchange 15% Promissory Notes for 4% Promissory Notes described below and in
Note 5 to the consolidated financial statements, and (2) 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 of its net operating loss
carryforwards. Management has assigned 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 six months of fiscal 1997.
In the second quarter and first six months of fiscal 1997, as a result of
the 15% Promissory Note exchange program described below and in Note 5 to the
consolidated financial statements, the Company accrued dividends of $24,000
and $46,000, respectively, on the Series B Preferred Stock.
The Company recorded net income allocable to common stockholders of $9,000
in the second quarter of fiscal 1997 compared to a net loss of $296,000 for
the second quarter of fiscal 1996. For the first six months of fiscal 1997,
the Company recorded net income allocable to common stockholders of $21,000,
compared to a net loss of $1,001,000 for the same period a year ago.
The Company believes that inflation has not had a material effect on its
results of operations to date.
10
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash of $115,000, which is a
decrease of $217,000 from March 31, 1996. During the first six months of
fiscal 1997, the Company's operating and investment activities used
$1,708,000 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 September 30, 1996
the Company had an outstanding line of credit balance of $4,500,000. As of
November 13, 1996 the Company was fully utilizing the credit available under
the amended line of credit. The Company and the investor have agreed in
principle on an amendment to the line of credit that would increase the
maximum loan amount thereunder from $5,000,000 to $6,000,000. Such amendment
would also provide that the investor shall have the sole discretion to decide
whether or not to make any and all advances of funds in excess of $5,000,000,
and that the investor shall have the right to refuse to make any advances of
any such funds in excess of $5,000,000 for any reason or no reason. The
Company expects to complete documentation of this amendment in November 1996,
but there can be no assurance that it will do so.
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 $19,035,000 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.
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 November 13, 1996, no such acceleration had
occurred or been threatened.
In addition, as of September 30, 1996 the Company had issued promissory
notes in an aggregate principal amount of $5,815,000 in connection with the
Debenture exchange transactions described above, the interest on which
accrues at a rate of 15% per year and is $2,452,000 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 September 30, 1996, the Company closed exchange
transactions with 15% Promissory Note holders of an aggregate principal
amount of $5,709,000 and accrued interest of $2,353,000, 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 September 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.
On September 30, 1996, the Company completed transactions with holders of
an aggregate of 80%, or $4,569,000 principle amount of the then outstanding
4% Promissory Notes. Under the terms of the agreement, the holders of the 4%
Promissory Notes exchanged their 4% Promissory Notes for such number of
shares of common
11
<PAGE>
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 was paid in
cash as the time of such exchange).
Subsequent to September 30, 1996 and prior to November 13, 1996, Xyvision
entered into agreements with holders of an additional $285,000 principal
amount of the outstanding 4% Promissory Notes on substantially the same terms
as described above. Accordingly, as of November 13, 1996, the Company had
consummated transactions with holders of an aggregate of $4,854,000 principal
amount of the then outstanding 4% Promissory Notes to convert their principle
into equity.
Also, on September 30, 1996, the Company completed transactions with
investors holding an aggregate amount of 59%, or $2,000,000 principal amount
of the Debentures. Under the terms of the agreement, holders of the
Debentures exchanged 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. As
of November 13, 1996, a total of $1,375,000 principal amount of Debentures
remained outstanding. Of such Debentures, the Company has identified the
holders of $315,000 principal amount, leaving $1,060,000 principal amount of
Debentures unidentified.
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 restructuring 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.
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 and the availability of increased borrowings under
the credit line should the Company require them. However, there can be no
assurance that such forbearance will continue or that the investor will
advance any funds in excess of $5,000,000 under the credit line.
12
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS: NOT APPLICABLE.
Item 2. Changes in Securities: On September 26, 1996, the Company filed a
Certificate of Amendment of Amended and Restated Certificate of Incorporation
(the "Charter Amendment") increasing the authorized number of shares of
common stock, par value $.03 per share, of the Company from 20,000,000 to
50,000,000 shares. A copy of the Charter Amendment has been filed herewith as
Exhibit 3.6.
Item 3. Defaults upon Senior Securities: Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders: The Company
held its Annual Meeting of Stockholders on September 26, 1996. At the Annual
Meeting, the stockholders of the Company:
1. Elected James S. Saltzman (by a vote of 9,502,227 shares in favor and
147,946 shares withheld) as a Class I director of the Company, to serve until
the 1999 Annual Meeting of Stockholders (subject to the election and
qualification of his successor and to his earlier death, resignation or
removal);
2. Approved an amendment to the Company's Certificate of Incorporation
increasing the authorized number of shares of Common Stock from 20,000,000 to
50,000,000 shares (by a vote of 9,398,718 shares in favor, 191,934 shares
against, 59,121 shares abstaining, and 400 broker non-votes); and
3. Ratified the selection by the Board of Directors of Coopers & Lybrand
L.L.P. as the Company's independent public accountants for the fiscal year
ending March 31, 1997 (by a vote of 9,576,355 shares in favor, 31,997 shares
against, and 41,821 shares abstaining; there were no broker non-votes with
respect to this matter).
ITEM 5. OTHER INFORMATION: SIGNIFICANT MANAGEMENT CHANGES: DURING THE PERIOD
FROM JULY 1, 1996 THROUGH NOVEMBER 13, 1996, THE FOLLOWING SIGNIFICANT
CHANGES IN THE COMPANY'S MANAGEMENT OCCURRED: 1. MR. THOMAS H. CONWAY
RESIGNED AS ACTING PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE
BOARD OF DIRECTORS.
2. MR. KEVIN DUFFY WAS ELECTED PRESIDENT AND CHIEF OPERATING OFFICER. MR.
DUFFY PREVIOUSLY SERVED AS SENIOR VICE PRESIDENT AND GENERAL MANAGER OF THE
COMPANY'S PUBLISHING DIVISION.
3. MR. DUFFY WAS ALSO ELECTED TO SERVE AS A MEMBER OF THE BOARD OF DIRECTORS
OF THE COMPANY.
4. MR. JEFFREY L. NEUMAN WAS ELECTED TO SERVE AS CHAIRMAN OF THE BOARD OF
DIRECTORS OF THE COMPANY.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Exhibit Number Description
Certificate of Amendment of Amended and Restated
3.6 Certificate of Incorporation
10.15 Form of Exchange Agreement for 4% Promissory Notes
Form of Exchange Agreement for 6% Convertible
10.16 Subordinated Debentures due 2002
27 Financial Data Schedule
(B) the Company filed no reports on Form 8-K during the quarter for which this
report is filed.
</TABLE>
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)
November 13, 1996
/s/ Eugene P. Seneta
- -----------------------------------------------------------------------------
Eugene P. Seneta
Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer)
14
<PAGE>
XYVISION, INC.
EXCHANGE AGREEMENT
This Agreement is made among Xyvision, Inc., a Delaware corporation (the
"Company"), and the persons and entities listed on Schedule I attached hereto
(the "Holders").
WHEREAS, each of the Holders is the owner of a Promissory Note issued by
the Company bearing interest at 4% per year and maturing 30 months from
issuance (the "Promissory Notes") principal amount set forth opposite such
Holder's name on Schedule I; and
WHEREAS, the Company and the Holders desire to exchange the Promissory
Notes for common stock of the Company;
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement, the Company and the Holders agree as follows:
Exchange of Securities. Pursuant to the terms and conditions set forth in
this Agreement, at the Closing (as defined below) each Holder shall exchange
his, her or its Promissory Note for (a) such number of shares of common
stock, par value $.03 per share (the "Common Stock"), of the Company as is
equal to the principal amount of the Promissory Note delivered by such Holder
for cancellation pursuant to this Section 1, divided by $2.00 and (b) the
payment of all accrued and unpaid interest on such Promissory Note.
Representations of the Company. The Company represents to and agrees with the
Holders as follows:
2.1 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Company has the corporate power and authority to own its properties and
conduct its business as described in the Company Reports (as defined in
Section 2.5 below).
2.2 Capitalization. The authorized capital stock of the Company consists of
(a) 50,000,000 shares of Common Stock, of which 8,844,099 shares were issued
and outstanding as of May 31, 1996, and (b) 3,000,000 shares of Preferred
Stock, $1.00 par value per share, of which (i) 100,000 shares have been
designated as Series A Junior Participating Preferred Stock (none of which
shares are issued or outstanding) and (ii) 300,000 shares have been
designated as Series B Preferred Stock, of which 232,049 shares were issued
and outstanding as of May 31, 1996. All of the issued and outstanding shares
of Common Stock are duly authorized, validly issued, fully paid and
nonassessable, and none of such shares have any pre-emptive rights.
2.3 Authority and Enforceability. The execution, delivery and performance by
the Company of this Agreement has been duly authorized by all necessary
corporate action. This Agreement has been duly executed and delivered by the
Company and constitutes the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms. The execution,
delivery and performance by the Company of this Agreement will not conflict
with any of the terms, conditions or provisions of, or require a consent or
waiver under, its Certificate of Incorporation or By-Laws (each as amended to
date) or any indenture, lease, agreement or other instrument to which the
Company is a party or by which it or any of its properties is bound, or any
law, statute, regulation, decree, judgment or order applicable to the
Company.
2.4 Issuance of Stock. The shares of Common Stock to be issued pursuant to
this Agreement, when so issued, will be duly authorized, validly issued,
fully paid and nonassessable. The issuance of such shares will not be subject
to any pre-emptive rights.
2.5 Reports and Financial Statements. The Company has previously furnished to
each Holder
copies (excluding exhibits) of its (i) Annual Report on Form 10-K for the
fiscal year ended March 31, 1996, as filed with the Securities and Exchange
Commission (the "SEC"), and (ii) any other reports or registration statements
(other than Registration Statements on Form S-8) filed by the Company with
the SEC since March 31, 1996 (such report and other filings are referred to
as the "Company Reports"). As of their respective dates, the Company Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited financial statements and unaudited interim
financial statements of the Company included in the Company Reports (i)
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, (ii) have been prepared in accordance with United States generally
accepted accounting principles (except as may be indicated therein or in the
notes thereto, and in the case of quarterly financial statements, as
permitted by Form 10-Q under the Securities Exchange Act of 1934), and (iii)
fairly present the
1
<PAGE>
consolidated financial condition, results of operations and cash flows of the
Company as of the respective dates thereof and for the periods referred to
therein. The Company has filed with the SEC all of the documents required to
be filed by the Company with the SEC since March 31, 1995.
2.6 Litigation. There is no action or proceeding pending or, to the knowledge
of the Company, threatened against the Company before any court or
administrative agency which challenges the transactions contemplated by this
Agreement or which might reasonably be foreseen to have a material adverse
effect on the consummation of the transactions contemplated by this
Agreement.
2.7 Adverse Changes. Since March 31, 1996, (i) there has not occurred any
material adverse change, or any development which could reasonably be
foreseen to result in a material adverse change, in the condition (financial
or otherwise) of the Company, except as may be otherwise contemplated in the
Company Reports, and (ii) the Company has not entered into a material
transaction outside the ordinary course of its business, except as
contemplated by the Company Reports or this Agreement.
2.8 Resale of Common Stock. The shares of Common Stock issued to the Holders
pursuant to this Agreement will not be "restricted securities" within the
meaning of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), because they are being issued pursuant to the exemption to
the registration requirements of the Securities Act provided by Section
3(a)(9) of the Securities Act. Such shares of Common Stock may be freely
resold or transferred by the Holders who are not affiliates of the Company.
Those Holders who are deemed to be affiliates of the Company may resell the
shares of Common Stock issuable to him, her or it under this Agreement
subject to the provisions of Rule 144 (except for the holding period
requirement), absent registration or an appropriate exemption.
Representations of the Holders. Each Holder represents to and agrees with the
Company as follows:
3.1 Investment Intent. Such Holder is acquiring the shares of Common Stock
issuable to him, her or it under this Agreement for his, her or its own
account for investment and not with a view to, or for sale in connection
with, any distribution thereof; and such Holder has no present intention of
distributing or selling such shares.
3.2 Authority. Such Holder has full power and authority to enter into and to
perform this Agreement in accordance with its terms. Any required corporate
or other authorizations of the execution, delivery and performance by such
Holder of this Agreement have been obtained. This Agreement has been duly
executed and delivered by such Holder and constitutes the valid and binding
obligation of such Holder, enforceable in accordance with its terms. The
execution, delivery and performance by such Holder of this Agreement will not
violate any law, agreement or instrument to which such Holder is a party or
by which he, she or it is bound.
3.3 Ownership of Promissory Notes. Such Holder has good and marketable title
to the Promissory Note listed on Schedule I as owned by such Holder, free and
clear of any and all liens, encumbrances or adverse claims. The delivery by
such Holder of such Promissory Note to the Company for cancellation pursuant
to this Agreement shall extinguish all liability of the Company for amounts
owed under such Promissory Note or for other obligations with respect to such
Promissory Note.
3.4 Accredited Investor. Such Holder, or his, her or its financial advisor is
an "accredited investor" within the meaning of Rule 501(a) under the
Securities Act of 1933, as amended (the "Securities Act").
3.5 Investment Experience. Such Holder (i) is familiar with the Company, its
business and its recent financial performance, (ii) has obtained such
information concerning the Company as he, she or it or such financial advisor
has requested from representatives of the Company, and (iii) has sufficient
knowledge and experience in financial and business matters that he, she or it
is capable of evaluating the merits and risks of the transactions
contemplated by this Agreement.
Closing.
4.1 Closing Conditions. The Closing shall not occur unless and until this
Agreement has been executed by holders of an aggregate of at least 75% of the
principal amount of the Promissory Notes then outstanding. Following the
satisfaction of such condition, the Company shall deliver a written notice to
each Holder that such condition has been satisfied.
4.2 Closing Date. The Closing shall take place at the offices of Hale and
Dorr at 10:00 a.m. on the date designated in the written notice delivered by
the Company to the Holders pursuant to Section 4.1 (provided that such date
shall not be less than five business days following the delivery of such
written notice by the Company).
2
<PAGE>
4.3 Closing Deliveries. At the Closing:
(a) Each Holder shall deliver to the Company for cancellation the Promissory
Note(s) owned by such Holder.
(b) The Company shall deliver (or cause to be delivered) to each Holder:
(i) A certificate representing the shares of Common Stock to which such
Holder is entitled pursuant to the terms of Section 1;
(ii) A check in payment of the accrued but unpaid interest on such Holder's
Promissory Note;
(iii) A certificate executed by the President of the Company, dated as of the
date of the Closing, certifying that the representations of the Company
contained in Section 2 remain true as of the date of the Closing;
(iv) An opinion of Hale and Dorr, counsel to the Company, dated as of the
date of the Closing, as to the following matters:
(A) The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. The Company has the
corporate power and authority to own its properties and conduct its business
as described in the Company Reports.
(B) The authorized capital stock of the Company consists of (a) 50,000,000
shares of Common Stock, $.03 par value per share, and (b) 3,000,000 shares of
Preferred Stock, $1.00 par value per share, of which 100,000 shares have been
designated as Series A Junior Participating Preferred Stock and 300,000
shares have been designated as Series B Preferred Stock.
(C) The execution, delivery and performance by the Company of the Exchange
Agreement have been duly authorized by all necessary corporate action on the
part of the Company. The Exchange Agreement constitutes a valid and binding
obligation of the Company, enforceable in accordance with its terms. The
execution, delivery and performance by the Company of the Exchange Agreement
(including the issuance of the Common Stock) will not conflict with or result
in a reach of any of the terms or provisions of, or constitute a default
under, the Certificate of Incorporation or the By-laws of the Company.
(D) The shares of Common Stock to be issued pursuant to the Exchange
Agreement have been duly authorized and, when so issued, will be validly
issued, fully paid and nonassessable (assuming the simultaneous consummation
of the other transactions contemplated by Section 4.3 of the Exchange
Agreement).
(E) To the knowledge of such counsel, there are no material legal or
administrative proceedings pending or threatened against the Company which
challenges, or might reasonably be foreseen to have a material adverse effect
on, the consummation of the transactions contemplated by the Exchange
Agreement.
(c) All of the transactions to take place at the Closing shall be deemed to
occur simultaneously. The Company and the Holder shall not be obligated to
proceed with the Closing unless all of the closing deliveries provided for in
this Section 4.3 are delivered as provided.
4.4 Termination. If the Closing has not occurred by September 30, 1996, this
Agreement shall terminate and the parties hereto shall have no further
obligations under this Agreement (provided that such termination shall not
relieve the parties of liability for breaches of this Agreement prior to such
termination).
Covenants.
5.1 Information Requirements. The Company shall use its best efforts to
comply with the current public information requirements set forth in section
(c) of Rule 144 under the Securities Act of 1933.
5.2 Listing of Common Stock. The Company shall use its best efforts to have
the Common Stock quoted on the OTC Bulletin Board display service operated by
the National Association of Securities Dealers, Inc., the Nasdaq Stock Market
or a national securities exchange.
Miscellaneous.
6.1 Notices. All notices and other communications given under this Agreement
shall be in writing. Any such notice or communication shall be deemed
delivered upon personal delivery, one
3
<PAGE>
business day after it is sent via a reputable nationwide overnight courier
service, or two business days after it is sent by registered or certified
mail, return receipt requested, in each case to the address set forth below:
If to the Company at: 101 Edgewater Drive
Wakefield, MA 01880-1291
Attention: President
with a copy to: Hale and Dorr 60 State Street
Boston, MA 02109
Attn: Patrick J. Rondeau, Esq.
or if to a Holder at: his or its address set forth on
Schedule I.
6.2 Brokers. The Company and each Holder agree to indemnify the other parties
to this Agreement for and against any claims or liabilities relating to
broker's or finder's fees or commissions or consulting fees relating to the
transactions contemplated by this Agreement which may be asserted by any
person or entity on the basis of any agreement or representation alleged to
have been made by the Company or such Holder, respectively.
6.3 Amendments and Waivers. Any term of this Agreement may be amended, and
the observance of any term of this Agreement may be waived, with the written
consent of the Company and Holders owning an aggregate of at least 66 2/3 of
the aggregate principal amount of the Promissory Notes owned by all Holders
then a party to this Agreement; provided, that this Agreement may be amended
with the consent of less than all of the Holders only in a manner that
affects all Holders in the same fashion. In the event that this Agreement is
amended with the consent of less than all of the Holders, the Company shall
promptly give notice of such amendment to those Holders who did not consent
to such amendment. Any such amendment or waiver shall be binding upon all
Holders.
6.4 Successors and Assigns. This Agreement, and the rights and obligations
hereunder, shall be binding upon, and shall inure to the benefit of, the
respective successors, assigns and heirs of the parties hereto.
6.5 Entire Agreement. This Agreement, together with the exhibits hereto,
embodies the entire agreement and understanding between the Company and the
Holders with respect to the subject matter hereof, and supersedes all prior
agreements and understandings relating thereto.
6.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of
which shall be one and the same document.
6.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
Executed as of the dates written below.
COMPANY:
XYVISION, INC.
Date:_______________, 1996 By: __________________________
Thomas H. Conway
Chairman and Chief Executive Officer
4
<PAGE>
HOLDER:
Date:_____________________, 1996 ____________________________________
(print name of Holder)
_____________________________________
(Signature)
_____________________________________
(Print title, if applicable)
5
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
<S> <C>
NAME AND ADDRESS PRINCIPAL AMOUNT OF OF HOLDERS 4% NOTES OWNED
Tudor Trust under agreement 81186 $2,378,500
Jeffrey L. Neuman, Trustee c/o Braverman &
Codron 450 N. Roxbury Avenue Los Angeles,
California 90210 Tel: 310-278-5850 SS#
###-##-####
Saltzman Partners 1,087,500
621 Germantown Pike, Suite 105 Plymouth Valley,
PA 19401 Tel: 215-674-4264
Gerlach & Co. 340,500
c/o Vilas-Fischer Associates One World Trade
Ctr. Suite 2101 New York, NY 10048 Tel: (212)
486-0710
Ashkirk Ltd. 150,000
c/o Marco Elser Via Marcho Aurelio 37 Rome
Italy 00184 Tel: 396-6994-1219
Austin Friars (FP Financial Services, Inc.) 120,000
c/o Vilas-Fischer Associates One World Trade
Ctr. Suite 2101 New York, NY 10048 Tel: (212)
486-0710
Carlisle Investment 112,500
c/o Marco Elser Via Marcho Aurelio 37 Rome
Italy 00184 Tel: 011-396-6994-1219
Credit Suisse Luxembourg 90,000
Reg Comm B11 756 Sieg Social 56 Grand-Rue 1160
Luxembourg Contact: Mr. E. Terres Tel:
011-352-46-00-111
Umberta da Passano 72,000
c/o Marco Elser Via Marcho Aurelio 37 Rome
Italy 00184 Tel: 011-396-6994-1219
Count Stefano Campello 70,500
7
<PAGE>
Merrill Lynch Largo della Fontella di Borgese
19 00186 Rome Italy Tel: 011-396-683-931
Boganan Ltd. 46,5002
Merrill Lynch Via Arche Mede #59 00917 Rome
Italy Attn: Marco Elser
Nina Bremer 30,000
c/o Fairfield Research 50 Locust Avenue New
Canaan, CT 06840 Tel: 203-972-0404
Count Mario Campello 30,000
Merrill Lynch Largo della Fontella di Borgese
19 00186 Rome Italy Attn: Marco Elser Tel:
011-396-683-931
David Finnie 15,000
c/o Fairfield Research 50 Locust Avenue New
Canaan, CT 06840 Tel: 203-972-0404
Union Bank of Switzerland 15,000
c/o The Chase Manhattan Bank Global Securities
Services Chase MetroTech Center Brooklyn, NY
11245 Attn: Louis Rinaldi Tel: 212-623-6300
Bank of New York-Geneva 7,500
P.O. Box 16683 5' Quaimont Blanc C 1201 Geneva
Switzerland Attn: TLH Nguyen Tel:
41-22-819-9999
Mel Soloman 3,000
2835 Northeast 23rd Avenue Portland, OR 97212
Tel: 503-282-0720
</TABLE>
1. Comprised of three Notes in the amounts of $773,500, $600,000 and
$30,000, each in the name of Tudor Trust; one Note in the amount of $600,000
originally issued to JTH Associates and acquired by Tudor Trust; and one Note
in the amount of $375,000 originally issued to United Mineworkers of America
and acquired by Tudor Trust.
2. Comprised of two Notes in the amounts of $39,000 and $7,500.
7
<PAGE>
XYVISION, INC.
EXCHANGE AGREEMENT
This Agreement is made among Xyvision, Inc., a Delaware corporation (the
"Company"), and the persons and entities listed on Schedule I attached hereto
(the "Holders").
WHEREAS, each of the Holders is the owner of a 6% Convertible Subordinated
Debenture due 2002 of the Company (the "Debentures") in the principal amount
set forth opposite such Holder's name on Schedule I; and
WHEREAS, the Company and the Holders desire to exchange the Debentures for
common stock of the Company;
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement, the Company and the Holders agree as follows:
Exchange of Securities. Pursuant to the terms and conditions set forth in
this Agreement, at the Closing (as defined below) each Holder shall exchange
his, her or its Debenture for such number of shares of common stock, par
value $.03 per share (the "Common Stock"), of the Company as is equal to (a)
the principal amount of the Debenture delivered by such Holder for
cancellation pursuant to this Section 1 plus all accrued and unpaid interest
on such Debenture through the most recent Interest Payment Date under such
Debenture (May 5, 1996), divided by (b) $3.33.
Representations of the Company. The Company represents to and agrees with the
Holders as follows:
2.1 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Company has the corporate power and authority to own its properties and
conduct its business as described in the Company Reports (as defined in
Section 2.5 below).
2.2 Capitalization. The authorized capital stock of the Company consists of
(a) 50,000,000 shares of Common Stock, of which 8,844,099 shares were issued
and outstanding as of May 31, 1996, and (b) 3,000,000 shares of Preferred
Stock, $1.00 par value per share, of which (i) 100,000 shares have been
designated as Series A Junior Participating Preferred Stock (none of which
shares are issued or outstanding) and (ii) 300,000 shares have been
designated as Series B Preferred Stock, of which 232,049 shares were issued
and outstanding as of May 31, 1996. All of the issued and outstanding shares
of Common Stock are duly authorized, validly issued, fully paid and
nonassessable, and none of such shares have any pre-emptive rights.
2.3 Authority and Enforceability. The execution, delivery and performance by
the Company of this Agreement has been duly authorized by all necessary
corporate action. This Agreement has been duly executed and delivered by the
Company and constitutes the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms. The execution,
delivery and performance by the Company of this Agreement will not conflict
with any of the terms, conditions or provisions of, or require a consent or
waiver under, its Certificate of Incorporation or By-Laws (each as amended to
date) or any indenture, lease, agreement or other instrument to which the
Company is a party or by which it or any of its properties is bound, or any
law, statute, regulation, decree, judgment or order applicable to the
Company.
2.4 Issuance of Stock. The shares of Common Stock to be issued pursuant to
this Agreement, when so issued, will be duly authorized, validly issued,
fully paid and nonassessable. The issuance of such shares will not be subject
to any pre-emptive rights.
2.5 Reports and Financial Statements. The Company has previously furnished to
each Holder copies (excluding exhibits), of its (i) Annual Report on Form
10-K for the fiscal year ended March 31, 1996, as filed with the Securities
and Exchange Commission (the "SEC"), and (ii) any other reports or
registration statements (other than Registration Statements on Form S-8)
filed by the Company with the SEC since March 31, 1996 (such report and other
filings are referred to as the ("Company Reports"). As of their respective
dates, the Company Reports did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The audited financial statements and
unaudited interim financial statements of the Company included in the Company
Reports (i) complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, (ii) have been prepared in accordance with United
States generally accepted accounting principles (except as may be indicated
therein or in the notes thereto, and in the case of quarterly financial
statements, as
1
<PAGE>
permitted by Form 10-Q under the Securities Exchange Act of 1934), and (iii)
fairly present the consolidated financial condition, results of operations
and cash flows of the Company as of the respective dates thereof and for the
periods referred to therein. The Company has filed with the SEC all of the
documents required to be filed by the Company with the SEC since March 31,
1995.
2.6 Litigation. There is no action or proceeding pending or, to the knowledge
of the Company, threatened against the Company before any court or
administrative agency which challenges the transactions contemplated by this
Agreement or which might reasonably be foreseen to have a material adverse
effect on the consummation of the transactions contemplated by this
Agreement.
2.7 Adverse Changes. Since March 31, 1996, (i) there has not occurred any
material adverse change, or any development which could reasonably be
foreseen to result in a material adverse change, in the condition (financial
or otherwise) of the Company, except as may be otherwise contemplated in the
Company Reports, and (ii) the Company has not entered into a material
transaction outside the ordinary course of its business, except as
contemplated by the Company Reports or this Agreement.
2.8 Resale of Common Stock. The shares of Common Stock issued to the Holders
pursuant to this Agreement will not be "restricted securities" within the
meaning of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act").
Representations of the Holders. Each Holder represents to and agrees with the
Company as follows:
3.1 Investment Intent. Such Holder is acquiring the shares of Common Stock
issuable to him, her or it under this Agreement for his, her or its own
account for investment and not with a view to, or for sale in connection
with, any distribution thereof; and such Holder has no present intention of
distributing or selling or such shares.
3.2 Authority. Such Holder has full power and authority to enter into and to
perform this Agreement in accordance with its terms. Any required corporate
or other authorizations of the execution, delivery and performance by such
Holder of this Agreement have been obtained. This Agreement has been duly
executed and delivered by such Holder and constitutes the valid and binding
obligation of such Holder, enforceable in accordance with its terms. The
execution, delivery and performance by such Holder of this Agreement will not
violate any law, agreement or instrument to which such Holder is a party or
by which he, she or it is bound.
3.3 Ownership of Debentures. Such Holder has good and marketable title to the
Debenture listed on Schedule I as owned by such Holder, free and clear of any
and all liens, encumbrances or adverse claims. The delivery by such Holder of
such Debenture to the Company for cancellation pursuant to this Agreement
shall extinguish all liability of the Company for amounts owed under such
Debenture or for other obligations with respect to such Debenture.
3.4 Accredited Investor. Such Holder is an "accredited investor" within the
meaning of Rule 501(a) under the Securities Act of 1933, as amended (the
"Securities Act").
3.5 Investment Experience. Such Holder (i) is familiar with the Company, its
business and its recent financial performance, (ii) has obtained such
information concerning the Company as he, she or it has requested from
representatives of the Company, and (iii) has sufficient knowledge and
experience in financial and business matters that he, she or it is capable of
evaluating the merits and risks of the transactions contemplated by this
Agreement.
Closing.
4.1 Closing Conditions. The Closing shall not occur unless and until this
Agreement has been executed by holders of an aggregate of at least 50% of the
principal amount of the Debentures then outstanding. Following the
satisfaction of such condition, the Company shall deliver a written notice to
each Holder that such condition has been satisfied.
4.2 Closing Date. The Closing shall take place at the offices of Hale and
Dorr at 10:00 a.m. on the date designated in the written notice delivered by
the Company to the Holders pursuant to Section 4.1 (provided that such date
shall not be less than five business days following the delivery of such
written notice by the Company).
4.3 Closing Deliveries. At the Closing:
(a) Each Holder shall deliver to the Company for cancellation the
Debenture(s) owned by such Holder.
(b) The Company shall deliver (or cause to be delivered) to each Holder:
2
<PAGE>
(i) A certificate representing the shares of Common Stock to which such
Holder is entitled pursuant to the terms of Section 1;
(ii) A certificate executed by the President of the Company, dated as of the
date of the Closing, certifying that the representations of the Company
contained in Section 2 remain true as of the date of the Closing;
(iii) An opinion of Hale and Dorr, counsel to the Company, dated as of the
date of the Closing, as to the following matters:
(A) The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. The Company has the
corporate power and authority to own its properties and conduct its business
as described in the Company Reports.
(B) The authorized capital stock of the Company consists of (a) 50,000,000
shares of Common Stock, $.03 par value per share, and (b) 3,000,000 shares of
Preferred Stock, $1.00 par value per share, of which 100,000 shares have been
designated as Series A Junior Participating Preferred Stock and 300,000
shares have been designated as Series B Preferred Stock.
(C) The execution, delivery and performance by the Company of the Exchange
Agreement have been duly authorized by all necessary corporate action on the
part of the Company. The Exchange Agreement constitutes a valid and binding
obligation of the Company, enforceable in accordance with its terms. The
execution, delivery and performance by the Company of the Exchange Agreement
(including the issuance of the Common Stock) will not conflict with or result
in a reach of any of the terms or provisions of, or constitute a default
under, the Certificate of Incorporation or the By-laws of the Company.
(D) The shares of Common Stock to be issued pursuant to the Exchange
Agreement have been duly authorized and, when so issued, will be validly
issued, fully paid and nonassessable (assuming the simultaneous consummation
of the other transactions contemplated by Section 4.3 of the Exchange
Agreement).
(E) To the knowledge of such counsel, there are no material legal or
administrative proceedings pending or threatened against the Company which
challenges, or might reasonably be foreseen to have a material adverse effect
on, the consummation of the transactions contemplated by the Exchange
Agreement.
(c) All of the transactions to take place at the Closing shall be deemed to
occur simultaneously. The Company and the Holder shall not be obligated to
proceed with the Closing unless all of the closing deliveries provided for in
this Section 4.3 are delivered as provided.
4.4 Termination. If the Closing has not occurred by September 30, 1996, this
Agreement shall terminate and the parties hereto shall have no further
obligations under this Agreement (provided that such termination shall not
relieve the parties of liability for breaches of this Agreement prior to such
termination).
Covenants.
5.1 Information Requirements. The Company shall use its best efforts to
comply with the current public information requirements set forth in section
(c) of Rule 144 under the Securities Act of 1933.
5.2 Listing of Common Stock. The Company shall use its best efforts to have
the Common Stock quoted on the OTC Bulletin Board display service operated by
the National Association of Securities Dealers, Inc., the Nasdaq Stock Market
or a national securities exchange.
Miscellaneous.
6.1 Notices. All notices and other communications given under this Agreement
shall be in writing. Any such notice or communication shall be deemed
delivered upon personal delivery, one business day after it is sent via a
reputable nationwide overnight courier service, or two business days after it
is sent by registered or certified mail, return receipt requested, in each
case to the address set forth below:
3
<PAGE>
If to the Company at: 101 Edgewater Drive
Wakefield, MA 01880-1291
Attention: President
with a copy to:Hale and Dorr
60 State Street
Boston, MA 02109
Attn: Patrick J. Rondeau, Esq.
or if to a Holder at: his or its address set forth on
Schedule I.
6.2 Brokers. The Company and each Holder agree to indemnify the other parties
to this Agreement for and against any claims or liabilities relating to
broker's or finder's fees or commissions or consulting fees relating to the
transactions contemplated by this Agreement which may be asserted by any
person or entity on the basis of any agreement or representation alleged to
have been made by the Company or such Holder.
6.3 Amendments and Waivers. Any term of this Agreement may be amended, and
the observance of any term of this Agreement may be waived, with the written
consent of the Company and Holders owning an aggregate of at least 66 2/3% of
the aggregate principal amount of the Debentures owned by all Holders then a
party to this Agreement; provided, that this Agreement may be amended with
the consent of less than all of the Holders only in a manner that affects all
Holders in the same fashion. In the event that this Agreement is amended with
the consent of less than all of the Holders, the Company shall promptly give
notice of such amendment to those Holders who did not consent to such
amendment. Any such amendment or waiver shall be binding upon all Holders.
6.4 Successors and Assigns. This Agreement, and the rights and obligations
hereunder, shall be binding upon, and shall inure to the benefit of, the
respective successors, assigns and heirs of the parties hereto.
6.5 Entire Agreement. This Agreement, together with the exhibits hereto,
embodies the entire agreement and understanding between the Company and the
Holders with respect to the subject matter hereof, and supersedes all prior
agreements and understandings relating thereto.
6.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of
which shall be one and the same document.
6.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
Executed as of the dates written below.
COMPANY:
XYVISION, INC.
Date:_______________, 1996 By: __________________________
Thomas H. Conway
Chairman and Chief Executive Officer
HOLDER:
Date:_______________, 1996 __________________________
(Print name of Holder
___________________________
(Signature)
___________________________
(Print title, if applicable)
4
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
<S> <C>
NAME AND ADDRESS PRINCIPAL AMOUNT OF OF HOLDERS DEBENTURES OWNED
Tudor Trust under agreement 81186
Jeffrey L. Neuman, Trustee c/o
Braverman Codran & Company 233 S.
Beverley Drive Beverley Hills,
California 90212 Tel: 310-278-5850
SS# ###-##-#### $1,970,000
Goldman Sachs International
Peterborough Court 133 Fleet Street
London EC4A 2BB Tel: 0171-774-1000 30,000
</TABLE>
5
<PAGE>
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
XYVISION, INC.
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
__________________________________________________
XYVISION, INC. (the "Corporation"), organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, does hereby
certify as follows:
By unanimous written action, the Board of Directors of the Corporation
duly adopted resolutions pursuant to Sections 141(f) and 242 of the General
Corporation Law of the State of Delaware setting forth an amendment to the
Restated Certificate of Incorporation of the Corporation and declaring said
amendment to be advisable. The stockholders of the Corporation duly approved,
pursuant to said Section 242, said proposed amendment at the Annual Meeting
of Stockholders held on September 26, 1996. The amendment to the Restated
Certificate of Incorporation is as follows:
The first paragraph of Article IV of the Restated Certificate of
Incorporation of the Corporation, as amended, be and hereby is deleted and
the following first paragraph of Article IV inserted in lieu thereof: "The
total number of shares of all classes of stock which the Corporation shall
have authority to issue is fifty-three million (53,000,000). All such shares
are to have par value and are classified as follows: three million
(3,000,000) shares of Preferred Stock, par value $1.00 per share ("Preferred
Stock"), and fifty million (50,000,000) shares of Common Stock, par value
$.03 per share ("Common Stock")."
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be executed by its President this 26th day of September, 1996
XYVISION, INC.
By: ______________________________
Kevin Duffy
President
1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 115 115
<SECURITIES> 0 0
<RECEIVABLES> 6,991 6,991
<ALLOWANCES> (487) (487)
<INVENTORY> 288 288
<CURRENT-ASSETS> 788 788
<PP&E> 14,732 14,732
<DEPRECIATION> (11,594) (11,594)
<TOTAL-ASSETS> 10,833 10,833
<CURRENT-LIABILITIES> 12,144 12,144
<BONDS> 186 186
0 0
235 235
<COMMON> (563) (563)
<OTHER-SE> (1,169) (1,169)
<TOTAL-LIABILITY-AND-EQUITY> 10,833 10,833
<SALES> 11,510 5,467
<TOTAL-REVENUES> 11,510 5,467
<CGS> 5,880 2,822
<TOTAL-COSTS> 5,880 2,822
<OTHER-EXPENSES> 5,202 2,492
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 461 220
<INCOME-PRETAX> (33) (67)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 100 100
<CHANGES> 0 0
<NET-INCOME> 67 33
<EPS-PRIMARY> 0.00 0.00
<EPS-DILUTED> 0.00 0.00
</TABLE>
