<PAGE>
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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 December 31, 1995
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
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
December 31,1995.
COMMON STOCK, $.03 PAR VALUE
(TITLE OF EACH CLASS)
8,731,559
(NUMBER OF SHARES)
XYVISION, INC.
1
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1995 AND MARCH 31, 1995
2 Consolidated Statements of Operations
for the three and nine months ended December 31, 1995 and 1994
3 Consolidated Statements of Cash Flows
for the nine months ended December 31, 1995 and 1994
4 Notes to Consolidated Financial Statements
5 Management's Discussion and Analysis of Financial Condition and Results of
Operations
8
PART II. OTHER INFORMATION ............................................12
1
<PAGE>
XYVISION, INC.
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1995 AND MARCH 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
(Unaudited)
December 31, March 31,
1995 1995
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 189 $ 174
Accounts receivable: Trade, less allowance for doubtful accounts of
$890 at December 31, 1995 and $711 at March 31, 1995 7,502 7,861
Inventories 350 188
Other current assets 1,070 1,174
-------------
Total current assets 9,111 9,397
Property and equipment, net 824 1,218
Other assets, net, principally software development costs 2,651 2,522
Total assets $ 12,586 $ 13,137
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to a shareholder $ 3,400 $ 1,100
Current portion of long-term debt 4,051 5,176
Accounts payable and accrued expenses 3,421 3,665
Other current liabilities 2,779 2,656
Total current liabilities 13,651 12,597
Long-term debt, less current portion 5,435 4,655
Total liabilities 19,086 17,252
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;
190,327 issued at December 31, 1995 and 189,875 issued at March 31, 1995
(aggregate liquidation preference of 2,786,788) 223 190
Common stock, $.03 par value; 20,000,000 shares authorized; 9,296,824
issued at December 31, 1995 and 9,218,962 at March 31, 1995 279 276
Additional paid-in capital 41,493 41,177
Accumulated deficit (46,824) (43,806)
(4,829) (2,163)
Less: Treasury stock, at cost; 565,265 shares at December 31, 1995 and
573,325 shares at March 31, 1995 1,434 1,458
Receivable from Employee Stock Ownership Plan 237 494
Total stockholders' deficit (6,500) (4,115)
Total liabilities and stockholders' deficit $ 12,586 $ 13,137
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
XYVISION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
1995 1994 1995 1994
(Unaudited) (Unaudited)
Revenues:
Systems $2,788 $ 4,111 $9,776 $ 11,541
Services 2,500 2,201 7,195 6,832
Total revenues 5,288 6,312 16,971 18,373
Cost of sales:
Systems 1,313 1,592 3,991 4,680
Service 1,709 1,530 4,808 4,452
Total cost of sales 3,022 3,122 8,799 9,132
Gross margin 2,266 3,190 8,172 9,241
------------- -------------
Expenses:
Research and development 879 767 2,416 2,243
Marketing, general and administrative 2,669 2,066 7,634 6,182
Restructuring charge 500 -- 500 --
Total operating expenses 4,048 2,833 10,550 8,425
Income (loss) from operations (1,782) 357 (2,378) 816
Other expense, net: Interest income 1 1 5 5
Interest expense - third party (112) (90) (298) (184)
Interest expense - shareholder (102) (64) (284) (180)
Total other expense, net (213) (153) (577) (359)
-------------
Income (loss) before income taxes and extraordinary item (1,995) 204 (2,955) 457
Provision for income taxes -- -- -- --
Income (loss) before extraordinary item (1,995) 204 (2,955) 457
Extraordinary item: Gain on exchange of convertible
subordinated debentures -- -- -- --
Net income (loss) (1,995) 204 (2,955) 457
Series B Preferred Stock dividends 22 16 63 16
Net income (loss) allocable to common stockholders $(2,017) $ 188 $(3,018) $ 441
Earnings per share:
Income (loss) per share $(0.23) $ .02 $(0.34) $ .05
============= ============= ============= =============
Weighted average common and common equivalent shares
outstanding 8,731 9,900 8,707 9,307
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
XYVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months Ended
December 31 December 31,
1995 1994
(Unaudited)
Operations:
Net income (loss) $(2,955) $ 457
Adjustments to reconcile net income to net cash used for operating
activities:
Depreciation and amortization 1,535 1,661
Restructuring charge 500 --
Provisions for losses on accounts receivable 567 550
Loss on disposal of property and equipment 6 --
Operating assets and liabilities: Accounts receivable (208) (814)
Retainage -- 382
Inventories (162) (12)
Accounts payable and accrued expenses (762) 165
Other current liabilities 129 (798)
Other assets 112 (296)
------------ -------------
Net cash provided from (used for) operations (1,238) 1,295
Investments:
Additions to property and equipment (205) (288)
Proceeds from sale of property and equipment -- --
Additions to customer support spares -- (1)
Capitalized software (1,039) (942)
------------ -------------
Net cash used for investments (1,244) (1,231)
Financing: Proceeds from line of credit from a shareholder 3,300 1,100
Repayment of line of credit to a shareholder (1,000) (1,500)
Issuance of common stock 3 --
Payment on 15% Promissory Notes -- (63)
Dividends on preferred stock (63)
Principal loan payment from Employee Stock Ownership Plan 257 257
------------
Net cash provided (used for) from financing 2,497 (206)
Net decrease in cash and cash equivalents 15 (142)
Cash and cash equivalents at the beginning of the period 174 312
------------ -------------
Cash and cash equivalents at the end of the period $189 $ 170
============ =============
Supplemental Information: Interest paid $203 $ 107
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
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 December 31, 1995
and the results of its consolidated operations and consolidated cash flows
for the interim periods ended December 31, 1995 and 1994. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these financial statements be read
in conjunction with the Company's Annual Report on Form 10-K for the year
March 31, 1995.
The results of consolidated operations for the interim period ended December
31, 1995 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.
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 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, 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).
The Company and the investor have agreed in principle on an amendment to
extend the line of credit. The Company expects to complete documentation of
this amendment in February 1996, but there can be no assurance that it will
do so. As of December 31, 1995 the Company had an outstanding line of credit
balance of $3,400,000. As of February 13, 1996, the Company had an
outstanding line of credit balance of $3,800,000.
5
<PAGE>
In May 1987, the Company issued $25,000,000 of 6% Convertible Subordinated
Debentures (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 $18,700,000 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 February 13, 1996, a total of $3,710,000
principal amount of Debentures remained outstanding. Of such Debentures, the
Company has identified the holders of $1,935,000 principal amount, leaving
$1,775,000 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 or 1995. 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
February 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, 1995 the Company had issued promissory notes in
an aggregate principal amount of $5,715,000 in connection with the Debenture
exchange transactions described above, the interest on which accrues at a
rate of 15% per year and is $2,344,000 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 February 28,
1997. 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, 1995, the Company closed exchange
transactions with 15% Promissory Note holders of an aggregate principal
amount of $4,647,000 and accrued interest of $1,903,000, 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 as defined in the Series B Preferred Stock Agreement.
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 Series B Preferred are convertible. The
exchange transaction was completed assuming a fair value of $10 per share of
Series B Preferred Stock. An independent valuation of the Series B Preferred
Stock was completed which supported a fair value of $10.00 per share.
Subsequent to June 30, 1995 and prior to February 13, 1996, the Company
closed exchange transactions with holders of 15% Promissory Notes in an
additional aggregate principal amount of $774,000 with accrued interest of
$326,000 on substantially the same terms as those described above. Currently,
15% Promissory Notes in an aggregate principle amount of $162,000 and accrued
interest of $68,000 are overdue.The Company will seek to restructure the
remaining 15% Promissory Notes.
6
<PAGE>
The Company anticipates that its cash requirements for the remainder of
fiscal 1996 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 completion of the amendment to the line of
credit. The Company can give no assurance on the outcome of the Debenture
restructuring efforts and does not expect the matter to be resolved in the
immediate future. Moreover, no assurance can be given as to the ability of
the Company to satisfy or otherwise discharge its payment obligations under
the remaining 15% Promissory Notes issued in connection with the Debenture
restructuring. 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 ongoing attempts to negotiate an extension
to its credit line and restructure the remaining outstanding Debentures and
the ability of the Company to obtain financing to repay or otherwise
restructure the remaining 15% Promissory Notes.
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 nine months ended December 31,
1995.
During the first nine months of fiscal 1996, the Company supplemented its
revenue recognition policy to reflect its current business strategy. This
strategy includes growing a network of domestic and international resellers
to market its software and services, particularly in its Contex division.
7
<PAGE>
XYVISION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994
RESULTS OF OPERATIONS
Revenues for the third quarter of fiscal 1996 were $5,288,000, a decrease
of $1,024,000 or 16%, from the same quarter of fiscal 1995. Revenues for the
first nine months of fiscal 1996 were $16,971,000, a decrease of $1,402,000,
or 8%, from the same period of the previous year. In the third quarter of
fiscal 1996, systems revenues decreased $1,323,000, or 32% from the same
quarter of the previous fiscal year. This decrease is primarily due to delays
in completion of contract negotiations with several customers. Diversion and
cutbacks of government funding resulted in additional delayed or cancelled
orders. For the first nine months of fiscal 1996, systems revenues decreased
$1,765,000, or 15% for the comparable period of fiscal 1995. For the three
and nine month periods ended December 31, 1995, service revenues increased
$299,000 or 14% and $363,000 or 5% from the comparable periods of fiscal 1995
respectively. These increases are primarily due to increased international
maintenance, training and integration service revenues in both the Contex and
Publishing business groups.
For the third quarter of fiscal 1996, gross margins decreased to 43% of
revenues from 51% of revenues for the comparable period of fiscal 1995. For
the first nine months of fiscal 1996, gross margins decreased to 48% of
revenues from 50% of revenues for the comparable period of fiscal 1995.
Systems margins for the third quarter of fiscal 1996 decreased to 53% of
revenues from 61% for the same quarter of fiscal 1995. For the first nine
months of fiscal 1996, systems margins remained the same, 59% of revenues, as
in the same period of the previous fiscal year. These decreases were due in
part to decreased revenues and decreased operational efficiencies resulting
from the need for senior management to focus on the restructuring effort.
Additionally, the third quarter system margin percentage decrease was a
result of a higher content of hardware sales in the European markets for the
Contex division. For the third quarter of fiscal 1996, service margins
increased to 32% of revenues from 30% for the same quarter of fiscal 1995.
This increase in service margins was the result of higher maintenance and
training revenues in the European markets. For the first nine months of
fiscal 1996, service margins decreased to 33% of revenues from 35% for the
same period of the previous fiscal year. This decrease in service margins was
the result of a higher level of fixed costs.
Research and development expenses, net of capitalized software development
costs, were $879,000 and $2,416,000 for the three and nine month period ended
December 31, 1995. These amounts represent increases of 15% and 8%,
respectively, from the comparable periods of fiscal 1995. Capitalized
software development costs were $302,000 and $1,039,000 for third quarter and
first nine months of fiscal 1996, respectively, as compared to $365,000 and
$942,000 for the same time periods of fiscal 1995. Research and development
expenses (excluding software development costs) for the second quarter
increased to 17% of revenues from 12% for the same quarter of fiscal 1995.
For the first nine months of fiscal 1996, research and development expenses
(excluding software development costs) increased to 14% of revenues from 12%
for the same time period of fiscal 1995. The expense increases were mainly
the result of increased headcount and its associated costs.
Marketing, general and administrative expenses were $2,669,000, and
$7,634,000, or 50% and 45% of revenues, for the third quarter and the first
nine months of fiscal 1996 respectively. These are increases from $2,066,000
and $6,182,000 for the comparable periods of fiscal 1995, which represented
33% and 34% of revenues, respectively. Significant increases for the three
and nine month periods ending December 31, 1995, occurred in payroll, travel
and trade show expenses, primarily in Europe, reflecting the Company's
strategy to grow its international markets. Additionally, during the quarter
ending December 31, 1995, increases to the bad debt reserves were required,
primarily for the Contex business group.
In the third quarter of fiscal 1996, the Company incurred restructuring
charges of $500,000. Included in the charge were approximately $385,000 of
severance and employee benefits for the December 1995 work force reduction, a
$70,000 write-off of equipment associated with the staff reduction and a
write-down of $45,000 for capital assets not expected to contribute to future
operations. It is anticipated that the restructuring will decrease operating
expenses in the next several quarters.
The increase in interest expense for the third quarter and first nine
months of fiscal 1996 were the result of; (i) 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
(ii) 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.
8
<PAGE>
The Company's deferred tax assets consist primarily 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 nine months of fiscal 1996.
In the third quarter and first nine months of fiscal 1996, as a result of
the 15% Promissory Note exchange program described below and in Note 5 to the
consolidated financial statements, the Company declared dividends of $22,000
and $63,000, respectively, on the Series B Preferred Stock.
The Company recorded a net loss allocable to common stockholders of
$2,017,000, in the third quarter of fiscal 1996 compared to net income of
$188,000, for the third quarter of fiscal 1995. For the first nine months of
fiscal 1996, the Company recorded a net loss allocable to common stockholders
of $3,018,000, compared to net income of $441,000, 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.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had cash and cash equivalents of
$189,000, which is an increase of $15,000 from March 31,1995. During the
first nine months of fiscal 1996, the Company's operating and investment
activities used $2,482,000 of cash.
The Company has a $3,000,000 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 10% per year, payable monthly. This line of credit
expired on June 30, 1995. However, the Company and the investor are currently
negotiating an amendment to extend the line of credit. The Company expects to
complete documentation of this amendment in February 1996, but there can be
no assurance that it will do so. As of December 31, 1995 the Company had an
outstanding line of credit balance of $3,400,000. As of February 13, 1996,
the Company had an outstanding line of credit balance of $3,800,000.
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 $18,700,000 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 February 13, 1996, a total of $3,710,000
principal amount of Debentures remained outstanding. Of such Debentures, the
Company has identified the holders of $1,935,000 principal amount, leaving
$1,775,000 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 or 1995.
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 February 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, 1995 the Company had issued promissory notes
in an aggregate principal amount of $5,715,000 in connection with the
Debenture exchange transactions described above, the interest on which
accrues at a rate of 15% per year and is $2,344,000 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 February 28,
1997. 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, 1995, the Company closed exchange
transactions with 15% Promissory Note holders of an aggregate principal
amount of $4,647,000 and accrued interest of $1,903,000, 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 reference 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 as defined in the Series B Preferred Stock Agreement.
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 Series B Preferred are convertible. The
exchange transaction was completed assuming a fair value of $10 per share of
Series B Preferred Stock. An independent valuation of the Series B Preferred
10
<PAGE>
Stock was completed which supported a fair value of $10.00 per share.
10
<PAGE>
Subsequent to June 30, 1995 and prior to February 13, 1996, the Company
closed exchange transactions with 15% Promissory Note holders of an
additional aggregate principal amount of $774,000 and accrued interest of
$326,000 on substantially the same terms as those described above. Currently,
15% Promissory Notes in an aggregate principle amount of $162,000 and accrued
interest of $68,000 are overdue. The Company will seek to restructure the
remaining 15% Promissory Notes.
The Company anticipates that its cash requirements for the remainder of
fiscal 1996 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 completion of the amendment to the line of
credit. The Company can give no assurance on the outcome of the Debenture
restructuring efforts and does not expect the matter to be resolved in the
immediate future. Moreover, no assurance can be given as to the ability of
the Company to satisfy or otherwise discharge its payment obligations under
the remaining 15% promissory notes issued in connection with the Debenture
restructuring. 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 ongoing attempts to negotiate an extension
to its credit line and to restructure the remaining outstanding Debentures
and the ability of the Company to obtain financing to repay or otherwise
restructure the remaining 15% Promissory Notes.
11
<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: SIGNIFICANT MANAGEMENT CHANGES:
THOMAS H. CONWAY RESUMED DIRECT RESPONSIBILITY FOR OPERATIONS OF XYVISION IN
DECEMBER, 1995 WHEN THE COMPANY'S BOARD OF DIRECTORS REQUESTED THAT HE AGAIN
SERVE AS PRESIDENT IN ADDITION TO CONTINUING AS CHAIRMAN AND CHIEF EXECUTIVE
OFFICER. THE COMPANY'S PRESIDENCY BECAME VACANT FOLLOWING THE RESIGNATION OF
DANIEL M. CLARKE WHO HAD SERVED IN THAT POSITION SINCE FEBRUARY, 1994. MR.
CLARKE HAD PREVIOUSLY BEEN THE COMPANY'S CHIEF FINANCIAL OFFICER.
EFFECTIVE JANUARY 18, 1996, KEVIN DUFFY BECAME SENIOR VICE PRESIDENT AND
GENERAL MANAGER OF THE XYVISION PUBLISHING DIVISION. MR. DUFFY HAD PREVIOUSLY
SERVED AS VICE PRESIDENT OF NORTH AMERICAN SALES FOR XYVISION.
ALSO EFFECTIVE JANUARY 18, 1996, PAUL WOODS BECAME SENIOR VICE PRESIDENT AND
GENERAL MANAGER OF THE CONTEX PREPRESS DIVISION. MR. WOODS PREVIOUSLY SERVED
AS A VICE PRESIDENT FOR CONTEX.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
NONE.
12
<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)
February 13, 1996
/s/ Eugene P. Seneta
- -----------------------------------------------------------------------------
Eugene P. Seneta
Treasurer and Secretary
(Prinicipal Financial Officer)
13
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