<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|q?[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
|q? 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.
(Exact name of registrant as specified in its charter)
Delaware 04-2751102
(State or other jurisdiction (I.R.S. Employer Identification
Number)
of incorporation or organization)
101 Edgewater Drive, Wakefield, MA 01880-1291
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (781) 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.
[x]Yes ----------------- No -----------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of
November 14, 1997.
Common Stock, $.03 par value 14,271,415
(Title of each class) (number of shares)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
Form 10-Q
Table of Contents
Page
Part I. Financial Information
Consolidated Balance Sheets
at September 30, 1997 and March 31, 1997 .............................. 2
Consolidated Statements of Operations
for the three and six months ended September 30, 1997 and 1996 ........ 3
Consolidated Statements of Cash Flows
for the six months ended September 30, 1997 and 1996 .................. 4
Notes to Consolidated Financial Statements ............................. 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 9
Part II. Other Information.................................................. 11
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. The important factors discussed below under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," including risks related to the Company's credit line availability
and debt restructuring efforts, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made
herein and presented elsewhere by management from time to time. Such
forward-looking statements represent management's current expectations and are
inherently uncertain. Investors are warned that actual results may differ from
management's expectations.
1
<PAGE>
<PAGE>
XYVISION, INC.
CONSOLIDATED BALANCE SHEETS
at September 30, 1997 and March 31, 1997
<TABLE>
<S> <C> <C>
(Unaudited)
September 30, March 31,
1997 1997
------------- ---------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 196 $ 261
Accounts receivable:
Trade, less allowance for doubtful accounts of $562 at September 30, 1997
and $649 at March 31, 1997 ............................................. 4,966 5,544
Inventories ............................................................... 275 311
Other current assets ...................................................... 793 728
------------- ---------
Total current assets ................................................ 6,230 6,844
Property and equipment, net ............................................. 734 733
Other assets, net, principally software development costs ............... 2,533 2,400
------------- ---------
Total assets ...................................................... $ 9,497 $ 9,977
============= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to a stockholder, less discount of $200 at September 30, 1997
and $350 at March 31, 1997................................................ $ 7,100 $ 4,550
Current portion of long-term debt ....................................... 1,952 2,031
Accounts payable and accrued expenses .................................... 2,875 2,969
Deferred service revenue ............................................. 1,081 1,243
Other current liabilities ................................................ 903 886
------------- ---------
Total current liabilities ............................................. 13,911 11,679
Long-term debt, less current portion ....................................... 224 165
------------- ---------
Total liabilities ................................................... 14,135 11,844
------------- ---------
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 and outstanding at September 30, 1997 and March 31, 1997
(aggregate liquidation preference of $3,057) ........................... 235 235
Common stock, $.03 par value; 50,000,000 shares authorized; 14,748,080 and
14,739,857 issued and outstanding at September 30, 1997 and March 31,
1997, respectively ................................................... 442 442
Additional paid-in capital ................................................ 49,602 49,575
Accumulated deficit ...................................................... (53,749) (50,951)
------------- ---------
(3,470) (699)
Less:
Treasury stock, at cost; 476,665 shares at September 30, 1997 and
March 31, 1997 ......................................................... 1,168 1,168
------------- ---------
Total stockholders' deficit .......................................... (4,638) (1,867)
------------- ---------
Total liabilities and stockholders' deficit ........................ $ 9,497 $ 9,977
============= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
<PAGE>
XYVISION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the three and six months ended September 30, 1997 and 1996
(In thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
----------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
Revenues:
Systems ...................................................... $ 2,052 $ 2,953 $ 4,594 $ 6,696
Services ................................................... 2,066 2,514 4,528 4,814
------------- ------------- ------------- -------------
Total revenues .......................................... 4,118 5,467 9,122 11,510
------------- ------------- ------------- -------------
Cost of sales:
Systems ...................................................... 898 1,057 1,889 2,429
Service ...................................................... 1,738 1,765 3,463 3,451
------------- ------------- ------------- -------------
Total cost of sales ....................................... 2,636 2,822 5,352 5,880
------------- ------------- ------------- -------------
Gross margin ................................................ 1,482 2,645 3,770 5,630
------------- ------------- ------------- -------------
Expenses:
Research and development .................................... 818 769 1,568 1,469
Marketing, general and administrative ........................ 2,324 1,723 4,491 3,733
------------- ------------- ------------- -------------
Total operating expenses ................................. 3,142 2,492 6,059 5,202
------------- ------------- ------------- -------------
Income (loss) from operations ................................. (1,660) 153 (2,289) 428
------------- ------------- ------------- -------------
Other expense, net:
Interest income ............................................. 1 2 2 3
Interest expense - third party .............................. (31) (77) (65) (189)
Interest expense - stockholder .............................. (211) (145) (400) (275)
------------- ------------- ------------- -------------
Total other expense, net .................................... (241) (220) (463) (461)
------------- ------------- ------------- -------------
Income (loss) before income taxes and extraordinary item . (1,901) (67) (2,752) (33)
Provision for income taxes .................................... - - - -
------------- ------------- ------------- -------------
Net income (loss) before extraordinary item .................. (1,901) (67) (2,752) (33)
Extraordinary item:
Gain on the exchange of convertible subordinated
debentures ................................................ - 100 - 100
------------- ------------- ------------- -------------
Net income (loss) ............................................. (1,901) 33 (2,752 ) 67
Series B Preferred Stock dividends ........................... 24 24 48 46
------------- ------------- ------------- -------------
Net income (loss) allocable to common stockholders ............ $ (1,925) $ 9 $ (2,800) $ 21
============= ============= ============= =============
Earnings per share:
Income (loss) per share .................................... $ (0.13) $ - $ (0.20) $ -
============= ============= ============= =============
Weighted average common and common
equivalent shares outstanding .............................. 14,271 19,064 14,267 14,631
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
<PAGE>
XYVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended September 30, 1997 and 1996
(In thousands)
<TABLE>
<S> <C> <C>
Six Months Ended
---------------------------------
September 30, September 30,
1997 1996
------------- -------------
(Unaudited)
Operations:
Net income (loss) ......................................................... $ (2,752) $ 67
Adjustments to reconcile net income to net cash used for operating activities:
Gain on the exchange of convertible subordinated debentures .................. - (100)
Depreciation and amortization ................................................ 1,161 776
Provisions for losses on accounts receivable ................................. 200 -
Operating assets and liabilities:
Accounts receivable ...................................................... 378 (615)
Inventories ............................................................... 36 88
Accounts payable and accrued expenses .................................... (91) (655)
Other current liabilities ................................................ (141) (179)
Other assets ............................................................... (61) (19)
------------- -------------
Net cash used for operations ................................................ (1,270) (637)
Investments:
Additions to property and equipment .......................................... (239) (322)
Proceeds from sale of property and equipment ................................. - 3
Capitalized software ......................................................... (908) (752)
------------- -------------
Net cash used for investments ................................................ (1,147) (1,071)
Financing:
Proceeds from line of credit from a stockholder .............................. 2,600 1,900
Repayment of line of credit to a stockholder ................................. (200) (800)
Issuance of preferred stock ................................................ - 1
Exercise of warrants ......................................................... - 200
Dividends on preferred stock ................................................ (48) (47)
Principal loan payment from Employee Stock Ownership Plan .................. - 237
------------- -------------
Net cash provided from financing ............................................. 2,352 1,491
Net decrease in cash and cash equivalents .................................... (65) (217)
Cash and cash equivalents at the beginning of the period ..................... 261 332
------------- -------------
Cash and cash equivalents at the end of the period ........................... $ 196 $ 115
============= =============
Non-cash Financial Activities:
Conversion of 6% debentures to equity .................................... 20 2,000
Conversion of 4% notes to equity ............................................. - 4,568
Conversion of accrued interest on 6% debentures to equity ............... 7 649
Conversion of 6% debentures to 15% and 4% notes ........................ - 340
Conversion of 15% notes to 4% notes .................................... - 177
Conversion of accrued interest on 15% notes to Series B Preferred Stock - 75
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. 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, 1997 and the results of its consolidated operations and
consolidated cash flows for the interim periods ended September 30, 1997
and 1996. 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, 1997, as amended.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets, liabilities and accrued litigation at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and would impact future results of operations and cash
flows.
The results of consolidated operations for the interim period ended
September 30, 1997 are not necessarily indicative of the results of
consolidated operations that may be expected for the complete fiscal year.
2. 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.
3. Inventories are stated at the lower of cost, determined on a first-in,
first-out method, or market and consist primarily of finished goods.
4. On June 30, 1992, the Company obtained a $2,000,000 line of credit with
Tudor Trust ("Tudor Trust"), the largest stockholder of the Company. Mr.
Jeffrey Neuman, the grantor, sole trustee and sole current beneficiary of
Tudor Trust, also serves as Chairman of the Board of Directors of the
Company. The line, which is payable on demand, is collateralized 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 Tudor Trust 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 Tudor Trust four additional common stock
purchase warrants, each covering 100,000 shares of common stock. On
September 28, 1993, the Company and Tudor Trust 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 Tudor
Trust 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 Tudor Trust for no
additional consideration; and (iii) agreed to grant Tudor Trust 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 Tudor Trust 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 fair market value of the common stock on December 3, 1993
and (ii) agreed to grant Tudor Trust up to seven additional common stock
purchase warrants between December 31,
5
<PAGE>
<PAGE>
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).
On February 29, 1996, the Company and Tudor Trust 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 Tudor Trust 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 Tudor Trust, 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 at 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 with Tudor Trust, effective as of May 31,
1996, pursuant to which (a) Tudor Trust 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 to Tudor Trust under the line of credit
(which were issuable on a quarterly basis), and (b) in consideration
therefor, the Company issued to Tudor Trust warrants for 10,000,000 shares
of common stock of the Company at an exercise price of $.10 per share
(representing the parties' understanding as to the fair market value of
the common stock of the Company as of the date of warrant issuance). On
July 11, 1997, the Company received an independent third-party calculation
of the fair market value of the common stock of the Company as of the date
of warrant issuance of $.18 per share. On July 15, 1997, the Company and
Tudor Trust agreed to amend the warrants to increase the exercise price to
$.18 per share. In connection with this line of credit amendment, Tudor
Trust exercised previously granted warrants for the purchase of 2,092,500
shares of common stock of the Company, for an aggregate purchase price of
$200,000. On July 14, 1997, the Company received an independent
third-party calculation of the value of the common stock purchase warrants
as of the date of warrant issuance of $.06 per warrant. The value of the
warrants is being amortized on a straight-line basis over the two year
term of the credit line and charged to interest expense.
On November 22, 1996, the Company and Tudor Trust entered into an
additional amendment to the line of credit to increase the maximum loan
amount thereunder from $5,000,000 to $6,000,000. Such amendment provided
that Tudor Trust 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
Tudor Trust 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. In
addition, the Company is currently in negotiations with Tudor Trust to
further amend the line of credit. Such amendment, as currently proposed,
would (i) increase the maximum loan amount thereunder from $6,000,000 to
$8,300,000, (ii) decrease the interest rate on the line of credit from 8%
to 6%, (iii) eliminate the provision that Tudor Trust shall have the sole
discretion to decide whether or not to make any advances of funds
thereunder in excess of $5,000,000, (iv) provide for Tudor Trust to cause
the issuance of a letter of credit from a bank in the amount of $444,600
to the Company's proposed new landlord, (v) extend the term of the line of
credit to March 31, 2000, and (vi) provide for the issuance by the Company
to Tudor Trust of a common stock purchase warrant covering 10,000,000
shares of common stock at a purchase price of $.18 per share. There can be
no assurance, however, that such negotiations will be successful or that
increased borrowings will be available under the Company's line of credit.
As of September 30, 1997, the Company had an outstanding credit line
balance of $7,300,000. As of November 14, 1997, the Company had an
outstanding credit line balance of $8,100,000.
6
<PAGE>
<PAGE>
5. In May 1987, the Company issued $25,000,000 principal aggregate amount 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.
From March 10, 1992 to September 30, 1996, the Company consummated
restructuring transactions with the holders of a total of $19,035,000
principal aggregate amount of Debentures. Substantially all of these
transactions involved the exchange of outstanding Debentures for (i) an
unsecured, unsubordinated promissory note of the Company 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 the Company per $1,000,000 principal
amount of Debentures. The Company has issued 15% Promissory Notes in an
aggregate principal amount of $5,815,000 in connection with such Debenture
exchange transactions with aggregate interest of $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.
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,
1996 or 1997. 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 14, 1997, no
such acceleration had occurred or been threatened.
In order to relieve itself of the payment obligations on the 15%
Promissory Notes, in fiscal 1995 the Company began a program to
restructure the 15% Promissory Notes. As of September 30, 1997, 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, 1997, 15% Promissory Notes in an aggregate principal amount of $60,000
and accrued interest of $48,000 were overdue. The Company may seek to
restructure the remaining 15% Promissory Notes but there can be no
assurance that it will do so.
As of September 30, 1997, the Company has completed transactions with
holders of an aggregate of $4,974,000 principal amount of the outstanding
4% Promissory Notes. Under the terms of the exchange agreements, 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). The Company has accounted for the conversions as a contribution
of capital by significant stockholders. As of September 30, 1997, 4%
Promissory Notes in an aggregate principal amount of $500,000 were
overdue. The Company may seek to restructure the remaining 4% Promissory
Notes but there can be no assurance that it will do so.
Between September 30, 1996 and September 30, 1997, the Company completed
transactions with investors holding an additional aggregate amount of
$2,020,000 principal amount of the Debentures. Under the terms of the
exchange agreements, holders of 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
7
<PAGE>
<PAGE>
the accrued interest thereon, divided by $3.33. As of September 30, 1997,
a total of $1,355,000 principal amount of Debentures remained outstanding.
Of such Debentures, the Company has identified the holders of $315,000
principal amount, leaving the holders of $1,040,000 principal amount of
Debentures unidentified. The Company has accounted for the conversions as
a contribution of capital by significant stockholders.
The Company continues to negotiate, in good faith, restructuring
transactions with as many of the remaining holders of Debentures, 15%
Promissory Notes and 4% Promissory Notes as possible. However, despite the
progress that has been made, the Company can still give no assurance about
the outcome of these restructuring efforts and does not expect the matters
to be resolved in the near future. If the Company is unable to enter into
exchange transactions with the remaining holders, and such holders 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 1998 will be satisfied mainly from its credit line, as proposed to
be amended, or otherwise from Tudor Trust, assuming the continued
forbearance by the holders of the Debentures, 15% Promissory Notes and 4%
Promissory Notes and the availability of increased borrowings under the
credit line or otherwise. In addition, the Company's current outstanding
credit line balance is in excess of the current terms of the credit line,
and for the remainder of fiscal 1998, the Company expects to require cash
in excess of the terms of the credit line as proposed to be amended. There
can be no assurance that the forbearance by the debtholders will continue
or that the Company will successfully negotiate an amendment to the credit
line as proposed, or otherwise, or that Tudor Trust will continue to
advance any required funds under or above the credit line. 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.
6. The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. Management has assigned a valuation allowance to fully
offset the future tax benefits of these deferred tax assets. There has
been no change to the valuation allowance during the three months ended
June 30, 1997.
7. Net loss per share was computed on the basis of weighted average common
shares outstanding. Net income per share was computed on the basis of
weighted average common shares and dilutive common equivalent shares
outstanding. Full diluted weighted average shares outstanding used in the
per share calculation include common stock purchase warrants, stock
options, and the conversion of certain debts and other equities into
common stock. In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Standards No. 128, "Earnings per Share",
which is effective for fiscal years ending after December 15, 1997. This
statement replaces the presentation of primary earnings per share ("EPS")
with a presentation of basic EPS, which excludes dilutive securities. It
also requires a reconciliation of the basic EPS to diluted EPS and dual
presentation on the face of the income statement.
The impact of the new standard on earnings per common share as reported
would be immaterial.
8
<PAGE>
<PAGE>
XYVISION, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
For the six months ended September 30, 1997 and 1996
Results of Operations
Revenues for the second quarter of fiscal 1998 were $4,118,000, a decrease
of $1,349,000, or 25%, from the same quarter of fiscal 1997. Revenues for the
first six months of fiscal 1998 were $9,122,000, a decrease of $2,388,000, or
21%, from the same period of the previous year. In the second quarter of fiscal
1998, systems revenues decreased $901,000, or 31%, from the same quarter of
fiscal 1997. The decrease was attributable to decreased worldwide Contex
division sales partially offset by increased Publishing European sales. For the
first six months of fiscal 1998, systems revenues decreased $2,102,000, or 31%,
for the comparable period of the previous fiscal year. These decreases in
revenues are primarily attributable to decreases in sales in the Contex
division, while the Publishing division's revenues remained constant. For the
three and six month periods ended September 30, 1997, service revenues
decreased $448,000, or 18%, and $286,000, or 6%, from the comparable periods of
fiscal 1997, respectively. These decreases are primarily due to decreases in
the Publishing domestic service and maintenance revenues.
For the second quarter of fiscal 1998, gross margins decreased to 36% of
revenues from 48% in the comparable quarter of fiscal 1997. For the first six
months of fiscal 1998, gross margins decreased to 41% of revenues from 49% for
the comparable period of fiscal 1997. Systems margins for the second quarter of
fiscal 1998 decreased to 56% of revenues from 64% for the same quarter of
fiscal 1997. For the first six months of fiscal 1998, systems margins decreased
to 59% of revenues from 64% for the same period of fiscal 1997. The second
quarter and six month decreases were primarily a result of increased Contex
division research and development amortization and decreased Contex software
sales. For the second quarter of fiscal 1998, service margins decreased to 16%
of revenues from 30% for the same quarter of fiscal 1997. For the first six
months of fiscal 1998, service margins decreased to 24% of revenues from 28%
for the same period of the previous fiscal year. These decreases in service
margins were primarily a result of decreased Publishing domestic service
revenues and constant level of service costs.
Research and development expenses, net of capitalized software development
costs, were $818,000 and $1,568,000 for the three and six month periods ended
September 30, 1997, respectively. These amounts represent increases of 6% and
7%, respectively, from the comparable periods of fiscal 1997. Capitalized
software development costs were $481,000 and $908,000 for the second quarter
and first six months of fiscal 1998, respectively, as compared to $355,000 and
$752,000 for the same time periods of fiscal 1997. Research and development
expenses (excluding software development costs) for the second quarter and
first six months of fiscal 1998 were 20% and 17% of revenues, respectively, as
compared to 14% and 13% for the same periods of fiscal 1997, respectively. The
increase in research and development costs were primarily a result of increased
headcount and related expenses in both the Publishing and Contex divisions.
Marketing, general and administrative expenses were $2,324,000 and
$4,491,000, or 56% and 49% of revenues, respectively, for the second quarter
and first six months of fiscal 1998. These are increases from $1,723,000 and
$3,733,000 which represented 32% of revenues for the comparable periods of
fiscal 1997. The increases were primarily the result of increased sales and
marketing spending in Publishing's domestic and European markets.
Total other expense, net was $241,000 and $463,000 for the second quarter
and first six months of fiscal 1998, an increase of $22,000, or 9% and $2,000,
or less than one percent, respectively, from the comparable periods of fiscal
1997, respectively. The increases in interest expense were primarily due to a
higher average balance in the credit line and increased amortization expense
related to the third-party calculation of the value of the common stock
purchase warrants described in Note 4 to the consolidated financial statements,
being partially offset by the impact of the program to exchange the Debentures
and 4% Promissory Notes for equity securities described in Note 5 to the
consolidated financial statements.
The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. The Company has a valuation allowance to fully offset
future tax benefits of these deferred tax assets. There has been no change in
the valuation allowance for the second quarter and first six months of fiscal
1998.
The Company accrued dividends of $24,000 and $48,000 on the Series B
Preferred Stock for the second quarter and first six months of fiscal 1998,
respectively, compared to $24,000 and $46,000 on the Series B Preferred Stock,
in the second quarter and first six months of fiscal 1997, respectively. The
dividends were a result of the 15% Promissory Note exchange program described
in Note 5 to the consolidated financial statements.
The Company recorded a net loss allocable to common stockholders of
$1,925,000 for the second quarter of fiscal 1998, compared to net income
allocable to common stockholders of $9,000 for the second quarter of fiscal
9
<PAGE>
<PAGE>
1997. For the first six months of fiscal 1998, the Company recorded a net loss
allocable to common stockholders of $2,800,000 compared to net income allocable
to common stockholders of $21,000 for the first six months of fiscal 1997.
The Company believes that inflation has not had a material effect on its
results of operations to date.
Liquidity and Capital Resources
At September 30, 1997, the Company had cash of $196,000, a decrease of
$65,000 from March 31, 1997. During the first six months of fiscal 1998, the
Company's operating and investment activities used $2,417,000 of cash.
The Company has a $6,000,000 amended line of credit with Tudor Trust, the
largest stockholder of the Company. Mr. Jeffrey L. Neuman, the grantor, sole
trustee and sole current beneficiary of Tudor Trust, also serves as Chairman of
the Board of Directors 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, 1997, the Company had an outstanding line of credit balance of
$7,300,000. As of November 14, 1997, the Company had an outstanding credit line
balance of $8,100,000. The Company is currently in negotiations with Tudor
Trust to further amend the line of credit to, among other things, permit
increased borrowing. There can be no assurance, however, that such negotiations
will be successful or that increased borrowings will be available under the
Company's line of credit. See Note 4 to the consolidated financial statements
for a further description of the Company's line of credit, as amended, and the
proposed amendment thereto.
See Note 5 to the consolidated financial statements for a description of
the Company's efforts to restructure the outstanding Debentures, 15% Promissory
Notes and 4% Promissory Notes. Despite the progress that has been made, the
Company can give no assurance about the outcome of these 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 debt
holders, and such holders 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 1998 will be satisfied mainly from its credit line, as proposed to be
amended, or otherwise from Tudor Trust, assuming the continued forbearance by
the holders of the Debentures, 15% Promissory Notes and 4% Promissory Notes and
the availability of increased borrowings under the credit line or otherwise. In
addition, the Company's current outstanding credit line balance is in excess of
the current terms of the credit line, and for the remainder of fiscal 1998, the
Company expects to require cash in excess of the terms of the credit line as
proposed to be amended. There can be no assurance that the forbearance by the
debtholders will continue or that the Company will successfully negotiate an
amendment to the credit line as proposed, or otherwise, or that Tudor Trust
will continue to advance any required funds under or above the credit line. 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.
10
<PAGE>
<PAGE>
PART II: OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1997 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") held on September 25, 1997, the following matters were acted
upon by the stockholders of the Company:
1. The election of Kevin J. Duffy and Jeffrey L. Neuman as Class II
Directors for the ensuing three years;
2. The approval of the Company's 1997 Stock Incentive Plan (the "1997
Plan"); and
3. Ratification of the appointment of Coopers & Lybrand L.L.P. as
independent public accountants of the Company for the current year.
The other directors of the Company, whose terms of office as directors
continued after the Annual Meeting, are Leland S. Kollmorgen, James L.
McKenney and James S. Saltzman. The results of the voting on each of the
matters presented to stockholders at the Annual Meeting are set forth
below:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Votes For Votes Withheld Votes Against Abstentions Broker Non-votes
----------- --------------- -------------- ----------- -----------------
1. Election of Class II
Directors
Kevin J. Duffy 12,806,742 33,195 N/A N/A N/A
Jeffrey Neuman 12,806,942 32,995 N/A N/A N/A
2. 1997 Plan Approval 10,319,394 N/A 368,547 39,795 2,112,201
3. Ratification of
Independent Public
Accountants 12,726,506 N/A 80,486 32,945 N/A
</TABLE>
Item 6. Exhibits and Reports on Form 8-K:
<TABLE>
<S> <C> <C>
(a) Exhibit Number Description
--------------- -----------------------
27 Financial Data Schedule
(b) the Company filed no reports on Form 8-K
during the quarter for which this report is filed.
</TABLE>
11
<PAGE>
<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 14, 1997
/s/ Eugene P. Seneta
------------------------------
Eugene P. Seneta
Vice President, Chief
Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 196 196
<SECURITIES> 0 0
<RECEIVABLES> 5,528 5,528
<ALLOWANCES> (562) (562)
<INVENTORY> 275 275
<CURRENT-ASSETS> 793 793
<PP&E> 14,872 14,872
<DEPRECIATION> (11,605) (11,605)
<TOTAL-ASSETS> 9,497 9,497
<CURRENT-LIABILITIES> 13,911 13,911
<BONDS> 224 224
0 0
235 235
<COMMON> (3,705) (3,705)
<OTHER-SE> (1,168) (1,168)
<TOTAL-LIABILITY-AND-EQUITY> 9,497 9,497
<SALES> 4,118 9,122
<TOTAL-REVENUES> 4,118 9,122
<CGS> 2,636 5,352
<TOTAL-COSTS> 2,636 5,352
<OTHER-EXPENSES> 3,142 6,059
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 241 463
<INCOME-PRETAX> (1,901) (2,752)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,901) (2,752)
<EPS-PRIMARY> (0.13) (0.20)
<EPS-DILUTED> (0.13) (0.20)
</TABLE>
