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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, 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
December 31, 1996.
COMMON STOCK, $.03 PAR VALUE
(TITLE OF EACH CLASS)
14,253,992
(NUMBER OF SHARES)
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FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1996 AND MARCH 31, 1996
2 Consolidated Statements of Operations
for the three and nine months ended December 31, 1996 and 1995
3 Consolidated Statements of Cash Flows
for the nine months ended December 31, 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 ............................................13
2
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XYVISION, INC.
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 1996 AND MARCH 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
(Unaudited)
December 31, March 31,
1996 1996
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $227 $ 332
Accounts receivable: Trade, less allowance for doubtful accounts of
$578 at December 31, 1996 and $938 at March 31, 1996 6,851 5,889
Inventories 390 377
Other current assets 699 756
-------------
Total current assets 8,167 7,354
Property and equipment, net 718 724
Other assets, net, principally software development costs 2,344 2,203
Total assets $11,229 $ 10,281
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to a stockholder $4,900 $ 3,400
Current portion of long-term debt 2,027 4,064
Accounts payable and accrued expenses 2,930 3,588
Other current liabilities 2,280 3,053
Total current liabilities 12,137 14,105
Long-term debt, less current portion 177 5,420
Total liabilities 12,314 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 December 31, 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; 14,730,857
issued at December 31, 1996 and 9,300,037 at March 31, 1996 442 279
Additional paid-in capital 48,968 41,262
Accumulated deficit (49,561) (49,599)
84 (7,835)
Less: Treasury stock, at cost; 476,865 shares at December 31, 1996 and
477,865 shares at March 31, 1996 1,169 1,172
Receivable from Employee Stock Ownership Plan -- 237
Total stockholders' deficit (1,085) (9,244)
Total liabilities and stockholders' deficit $11,229 $ 10,281
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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XYVISION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(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,
1996 1995 1996 1995
(Unaudited) (Unaudited)
Revenues:
Systems $3,334 $ 2,788 $10,030 $ 9,776
Services 2,364 2,500 7,178 7,195
Total revenues 5,698 5,288 17,208 16,971
Cost of sales:
Systems 1,031 1,313 3,460 3,991
Service 1,909 1,709 5,360 4,808
Total cost of sales 2,940 3,022 8,820 8,799
Gross margin 2,758 2,266 8,388 8,172
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Expenses:
Research and development 797 879 2,266 2,416
Marketing, general and administrative 1,776 2,669 5,509 7,634
Restructuring charge -- 500 -- 500
Total operating expenses 2,573 4,048 7,775 10,550
Income (loss) from operations 185 (1,782) 613 (2,378)
Other expense, net: Interest income 1 1 4 5
Interest expense - third party (38) (112) (227) (298)
Interest expense - stockholder (108) (102) (383) (284)
Total other expense, net (145) (213) (606) (577)
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Income (loss) before income taxes and extraordinary item 40 (1,995) 7 (2,995)
Provision for income taxes -- -- -- --
Net income (loss) before extraordinary item 40 (1,995) 7 (2,955)
Extraordinary item: Gain on the exchange of convertible
subordinated debentures -- -- 100 --
Net income (loss) 40 (1,995) 107 (2,955)
Series B Preferred Stock dividends 24 22 70 63
Net income (loss) allocable to common stockholders $16 $ (2,017) $37 $ (3,018)
Earnings per share:
Income (loss) per share $.00 $ (0.23) $.00 $ (0.34)
============= ============= ============= =============
Weighted average common and common equivalent shares
outstanding 23,505 8,731 18,165 8,707
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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XYVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months Ended
December 31, December 31,
1996 1995
(Unaudited)
Operations:
Net income (loss) $107 $ (2,955)
Adjustments to reconcile net income to net cash used for operating
activities:
Gain on the exchange of Convertible Subordinated Debentures (100) --
Depreciation and amortization 1,194 1,535
Restructuring charge -- 500
Provisions for losses on accounts receivable 100 567
Loss on disposal of property and equipment 6 6
Operating assets and liabilities: Accounts receivable (1,062) (208)
Inventories (13) (162)
Accounts payable and accrued expenses (835) (762)
Other current liabilities (19) 129
Other assets 56 112
------------- -------------
Net cash provided from (used for) operations (566) (1,238)
Investments:
Additions to property and equipment (360) (205)
Proceeds from sale of property and equipment 6 --
Capitalized software (1,053) (1,039)
------------- -------------
Net cash used for investments (1,407) (1,244)
Financing: Proceeds from line of credit from a stockholder 3,100 3,300
Repayment of line of credit to a stockholder (1,600) (1,000)
Issuance of common stock -- 3
Issuance of preferred stock 1 --
Exercise of warrants 200 --
Dividends on preferred stock (70) (63)
Principal loan payment from Employee Stock Ownership Plan 237 257
-------------
Net cash provided from (used for) financing 1,868 2,497
Net decrease in cash and cash equivalents (105) 15
Cash and cash equivalents at the beginning of the period 332 174
------------- -------------
Cash and cash equivalents at the end of the period $227 $ 189
============= =============
Supplemental Information: Interest paid $427 $ 203
Conversion of 6% debentures to equity 2,000 --
Conversion of 4% notes to equity 4,956 --
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 December 31, 1996
and the results of its consolidated operations and consolidated cash flows
for the interim periods ended December 31, 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 December
31, 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, (the "investor"), the largest stockholder of the Company. Mr. Jeffrey
L. Neuman, trustee of the investor, also serves as Chairman of the Board of
Directors of the Company. The line, which is payable on demand, is secured by
substantially all of the assets of the Company and has been used for working
capital and general business purposes. Interest on the line of credit is
payable monthly. The Company issued 400,000 shares of common stock and a
common stock purchase warrant for 100,000 shares of common stock at an
exercise price of $.50 per share to the investor for no additional
consideration upon signing of the line of credit. In addition, as required by
the line of credit, from September 30, 1992 through June 30, 1993, the
Company granted the investor four additional common stock purchase warrants,
each covering 100,000 shares of common stock. On September 28, 1993, the
Company and the investor amended the line of credit. Under the terms of this
amendment: (i) the amount available under the line of credit was increased
from $2,000,000 to $2,500,000; (ii) the annual interest rate was reduced from
13% to 10%; and (iii) the term of the line of credit was extended from June
30, 1994 to June 30, 1995. In consideration of such changes, the Company: (i)
reduced the exercise price of 200,000 and 100,000 common stock purchase
warrants exercisable by the investor from $.50 and $.25 per share,
respectively, to $.09 per share (the fair market value of the common stock on
September 28, 1993); (ii) issued 200,000 shares of common stock and a warrant
to purchase 300,000 shares of common stock at an exercise price of $.09 per
share to the investor for no additional consideration; and (iii) agreed to
grant the investor up to eight additional warrants, each covering 125,000
shares of common stock at an exercise price at the lesser of the fair market
value of the common stock on the date of issue or $1.00 per share.
On December 3, 1993, the Company and the investor entered into an additional
amendment to the line of credit. Under the terms of this amendment, the
amount available under the line of credit was increased to $3,000,000. In
consideration of this change, the Company: (i) issued 100,000 shares of
common stock and a warrant to purchase 500,000 shares of common stock at the
fair market value of the common stock on December 3, 1993 and (ii) agreed to
grant the investor up to seven additional common stock purchase warrants
between December 31, 1993 and June 30, 1995, each covering 200,000 shares of
common stock at an exercise price at the lesser of the fair market value of
the common stock on the date of grant or $1.00 per share (these warrants are
in lieu of the last seven of the warrants referred to in clause (iii) of the
preceding paragraph).
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On February 29, 1996, the Company and the investor entered into an additional
amendment to the line of credit. Under the terms on this amendment, the
amount available under the line of credit was increased to $4,000,000 and the
term of the line of credit was extended to December 31, 1997. In
consideration of these changes, the Company granted the investor a common
stock purchase warrant for 200,000 shares of common stock at an exercise
price of $.10 per share (the fair market value of the common stock on the
date of issuance of such warrant) and agreed to continue to grant the
investor, for each fiscal quarter for which amounts are outstanding under the
credit line, a common stock purchase warrant for 200,000 shares of common
stock, provided that the number of shares subject to the warrant shall be
325,000 (rather than 200,000 shares) in the event that the maximum amount of
outstanding credit line advances on one or more dates during the quarter
ending on the issue date of such warrant exceeds $3,000,000. The exercise
price of the first five warrants (beginning with the warrant for the quarter
ended September 30, 1995) will be the lesser of the fair market value of the
common stock on the date of the grant or $1.00 per share while the exercise
price of the final five warrants will be the fair market value of the common
stock on the date of the grant.
Late in fiscal 1996, management of the Company concluded that, due
principally to the significant losses from operations in the third and fourth
quarters of fiscal 1996 (which amounted to approximately $1.8 million and
$2.5 million, respectively), the Company's $4,000,000 credit line would be
insufficient to finance the Company's cash needs during the first quarter of
fiscal 1997. Accordingly, after investigating a number of alternative sources
of financing, the Company entered into an amendment to its line of credit
agreement, effective as of May 31, 1996, pursuant to which (a) the investor
agreed to (i) increase the maximum loan amount to $5,000,000, (ii) reduce the
interest rate on the line of credit from 10% to 8% per annum, (iii) eliminate
any borrowing covenants or conditions that would prevent the Company from
accessing the full $5,000,000 of available credit, and (iv) eliminate the
requirement for the issuance of additional warrants under the line of credit
(which were issuable on a quarterly basis), and (b) in consideration
therefor, the Company issued to the investor warrants for 10,000,000 shares
of common stock of the Company at an exercise price of $.10 per share
(representing the fair market value of the common stock of the Company as of
the date of warrant issuance). The Company concludes that no interest charge
is necessary regarding this transaction because the exercise price of the
warrants is approximately equal to the fair market value of the Common Stock
at the time the commitment to issue the warrants arose. In connection with
this line of credit amendment, the investor exercised warrants for the
purchase of 2,092,500 shares of common stock of the Company, for an aggregate
purchase price of $200,000.
As of December 31, 1996, the Company had $4,900,000 outstanding under the
amended line of credit. As of February 13, 1997, 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 February 1997, 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 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.
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 February 13, 1997, 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 December 31, 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, but there can be
no assurance that it will do so.
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 February 13, 1997, the Company
entered into agreements with holders of an additional $387,000 principal
amount of the outstanding 4% Promissory Notes on substantially the same terms
as described above. Accordingly, as of February 13, 1997, the Company had
consummated transactions with holders of an aggregate of $4,956,000 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 February 13, 1997, 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 the holders of $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
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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 nine months ended December 31,
1996.
9
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XYVISION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
RESULTS OF OPERATIONS
Revenues for the third quarter of fiscal 1997 were $5,698,000, an increase
of $410,000, or 8%, from the same quarter of fiscal 1996. Revenues for the
first nine months of fiscal 1997 were $17,208,000, an increase of $237,000,
or 1%, from the same period of the previous year. In the third quarter of
fiscal 1997, systems revenues increased $546,000, or 20%, from the same
quarter of fiscal 1996. For the first nine months of fiscal 1997, systems
revenues increased $254,000, or 3%, from the comparable period of fiscal
1996. These increases in revenues are primarily attributable to the
continuing strategy of growing a network of domestic and international
resellers. For the three and nine month periods ending December 31, 1996,
service revenues decreased $136,000, or 5%, and $17,000, or less than 1%,
from the comparable periods of the previous year. These decreases are
primarily due to decreases in the Publishing division domestic service
revenues caused by expiring maintenance contracts.
For the third quarter of fiscal 1997, gross margins increased to 48% of
revenues from 43% in the comparable period of fiscal 1996. For the first nine
months of fiscal 1997, gross margins increased to 49% of revenues from 48% of
revenues for the comparable period of fiscal 1996. Systems margins for the
third quarter of fiscal 1997 increased to 69% of revenues from 53% for the
same quarter of fiscal 1996. For the first nine months of fiscal 1997 systems
margins increased to 66% of revenues from 59% of revenues for the comparable
period of fiscal 1996. This increase in margins is primarily attributable to
an increase in the proportion of commercial software sales in the domestic
publishing division. For the third quarter of fiscal 1997, service margins
decreased to 19% of revenues from 32% for the same quarter of fiscal 1996.
For the first nine months of fiscal 1997, service margins decreased to 25% of
revenues from 33% for the same period of the previous fiscal year. These
decreases in service margins were primarily the result of decreased
Publishing division revenues and a higher level of fixed costs, primarily in
Contex's European division.
Research and development expenses, net of capitalized software development
costs, were $797,000 and $2,266,000 for the three and nine month periods
ended December 31, 1996. These amounts represent decreases of 9% and 6%,
respectively, from the comparable periods of fiscal 1996. Capitalized
software development costs were $300,000 and $1,053,000 for the third quarter
and first nine months of fiscal 1997, respectively, as compared to $302,000
and $1,039,000 for the same time periods of fiscal 1996. Research and
development expenses (excluding software development costs) for the third
quarter decreased to 14% of revenues from 17% for the same quarter of fiscal
1996. For the first nine months of fiscal 1997, research and development
expenses (excluding software development costs) decreased to 13% of revenues
from 14% for the same time period of fiscal 1996. The expense decreases were
mainly a result of decreased headcount and its associated costs related to
the restructuring charge described below.
Marketing, general and administrative expenses were $1,776,000 and
$5,509,000, or 31% and 32% of revenues for the third quarter and the first
nine months of fiscal 1997, respectively. These are decreases from $2,669,000
and $7,634,000 for the comparable periods of fiscal 1996, which represented
50% and 45% of revenues, respectively. The decrease was primarily the result
of decreased Contex division bad debt expense in the domestic and European
markets.
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.
The decrease in interest expense for the third quarter of fiscal 1997 was
primarily the result of the conversion of Debentures and 4% Promissory Notes
into common stock of the Company described in Note 5 to the consolidated
financial statements. The increase in interest expense for the first nine
months of fiscal 1997 was primarily a result of the higher average balance in
the credit line described below and in Note 4 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 third quarter 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 on the Series B Preferred Stock. These amounts were $24,000 and
$70,000 for the three and nine month periods ending December 31, 1996,
respectively, and $22,000 and $63,000 for the comparable periods of the
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previous fiscal year.
10
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The Company recorded net income allocable to common stockholders of
$16,000 in the third quarter of fiscal 1997 compared to a net loss of
$2,017,000 in the third quarter of fiscal 1996. For the first nine months of
fiscal 1997, the Company recorded net income allocable to common stockholders
of $37,000 compared to a net loss of $3,018,000 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.
11
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash of $227,000, which is a
decrease of $105,000 from March 31, 1996. During the first nine months of
fiscal 1997, the Company's operating and investment activities used
$1,973,000 of cash.
The Company has a $5,000,000 amended line of credit with Tudor Trust, the
largest stockholder of the Company. Mr. Jeffrey L. Neuman, trustee 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 December 31, 1996 the Company had an
outstanding line of credit balance of $4,900,000. As of February 13, 1997 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 February 1997, 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 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.
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 February 13, 1997, 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 December 31, 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 but there can be
no assurance that it will do so.
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
12
<PAGE>
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
12
<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 February 13, 1997, the
Company entered into agreements with holders of an additional $387,000
principal amount of the outstanding 4% Promissory Notes on substantially the
same terms as described above. Accordingly, as of February 13, 1997, the
Company had consummated transactions with holders of an aggregate of
$4,956,000 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 February 13, 1997, 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 the holders of $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.
13
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS: NOT APPLICABLE.
Item 2. Changes in Securities: Not applicable.
Item 3. Defaults upon Senior Securities: Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders: Not
applicable.
ITEM 5. OTHER INFORMATION: NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
<TABLE>
<CAPTION>
<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>
14
<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, 1997
/s/ Eugene P. Seneta
- -----------------------------------------------------------------------------
Eugene P. Seneta
Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 227 227
<SECURITIES> 0 0
<RECEIVABLES> 7,429 7,429
<ALLOWANCES> (578) (578)
<INVENTORY> 390 390
<CURRENT-ASSETS> 699 699
<PP&E> 14,638 14,638
<DEPRECIATION> (11,576) (11,576)
<TOTAL-ASSETS> 11,229 11,229
<CURRENT-LIABILITIES> 12,137 12,137
<BONDS> 177 177
0 0
235 235
<COMMON> (151) (151)
<OTHER-SE> (1,169) (1,169)
<TOTAL-LIABILITY-AND-EQUITY> 11,229 11,229
<SALES> 17,208 5,698
<TOTAL-REVENUES> 17,208 5,698
<CGS> 8,820 2,940
<TOTAL-COSTS> 8,820 2,940
<OTHER-EXPENSES> 7,775 2,573
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 606 145
<INCOME-PRETAX> 7 40
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 100 0
<CHANGES> 0 0
<NET-INCOME> 107 40
<EPS-PRIMARY> 0.00 0.00
<EPS-DILUTED> 0.00 0.00
</TABLE>
