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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[][x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ------------- to-------------
Commission File No. 000-14747
XYVISION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2751102
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
30 NEW CROSSING ROAD, READING, MA 01867-3254
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 756-4400
101 EDGEWATER DRIVE, WAKEFIELD, MASSACHUSETTS 01880-1291
(FORMER ADDRESS)
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SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK $.03 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
(Title of class)
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 [][x] NO [] Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [][x]
The aggregate market value of Common Stock held by non-affiliates on May
31, 1998 was approximately $1,885,000.
As of May 31, 1998, the registrant had 14,739,857 shares of Xyvision, Inc.
Common Stock, $.03 par value, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year (March
31, 1998) are incorporated by reference in Part III.
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TABLE OF CONTENTS
ITEM PAGE
PART I
Item 1. Business............................................................3
Item 2. Properties .........................................................9
Item 3. Legal Proceedings...................................................9
Item 4. Submission of Matters to a Vote of Security Holders ...............9
Executive Officers of the Registrant9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ......................................................10
Item 6. Selected Financial Data ..........................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ............................................................12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk14
Item 8. Financial Statements and Supplementary Data........................15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................32
PART III
Item 10. Directors and Executive Officers of the Registrant ...............33
Item 11. Executive Compensation ..........................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management ...33
Item 13. Certain Relationships and Related Transactions ..................33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...34
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. For this purpose,
any statements contained herein that relate to events or circumstances that may
occur or exist in the future, including without limitation, the statements
under "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and located elsewhere herein
regarding industry prospects and the Company's results of operations or
financial position, 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 "Risk
Factors," 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.
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PART I
ITEM 1. Business
GENERAL
Xyvision, Inc. ("Xyvision" or the "Company") develops, markets, and
supports a family of software products that helps companies create, manage, and
distribute large amounts of information; automate the production of paper,
electronic, and World Wide Web ("Web") documents; and streamline prepress tasks
required for high-quality color printing. The Company combines its software
with selected third-party products and professional services to create complete
solutions designed to increase productivity, improve quality of final output,
and reduce publishing and prepress production costs.
Founded in 1982 with the goal of introducing a new generation of
production publishing systems for commercial publishing and technical
documentation, Xyvision in 1983 introduced one of the first integrated
publishing systems targeted at the high-end pagination marketplace. Later named
Xyvision Production Publisher, this early system pioneered new concepts for
automating the production of high-volume, complex documents. In 1989, Xyvision
introduced one of the first compound document management systems, Parlance[TM]
Document Manager ("Parlance"), that addresses the challenges of managing large
amounts of information across disparate workgroups. Parlance accelerates
information creation and revision, improves the accuracy and timeliness of
information, simplifies information distribution as both printed and digital
documents, and reduces costs associated with document production. In 1996,
Xyvision introduced Webporter[TM], a partner technology to Parlance, that
dynamically assembles Web pages from document components stored in the Parlance
database.
In 1988, the Company acquired Contex prepress systems. Contex operates as
a separate division of the Company, with its own line of products and
operations staff. Contex's color electronic design and prepress products
automate full-color design, stripping, and page assembly tasks used in the
preparation of color separations for high-quality color printing.
The Company was incorporated in Delaware in November 1982 and its
executive offices are located at 30 New Crossing Road, Reading, Massachussetts
01867 (781-756-4400). The Company's home pages are located at
http://www.xyvision.com and at http://www.contex.com.
PRODUCTS AND SERVICES
Xyvision Publishing Products
Xyvision publishing products are designed for commercial publishing or
inhouse corporate publishing groups that create, edit, publish, print, and/or
distribute information. Xyvision solutions help companies preserve knowledge
contained in business-critical documents, reduce costs associated with document
production and create opportunities for providing new revenue-generating
deliverables with little additional investment.
Xyvision Production Publisher (XPP) shortens production cycles and reduces
publishing production costs by automating composition and pagination of
high-volume, typographically-demanding documents. A powerful solution for
corporate and commercial publishers who want to streamline and automate
document production, XPP provides speed, power, and automated throughput
unmatched by desktop systems. Advanced features include batch composition,
interactive Display PostScript editor, automatic import and placement of
graphics, spot and process color separation, powerful tabular and math
composition, extensive footnoting capabilities, automatic looseleaf
composition, commercial-quality typographic controls, and output in multiple
formats including HTML for the World Wide Web and PDF-enabled PostScript for
Adobe Acrobat.
XPP can enable customers to significantly shorten production time and
reduce costs associated with the publishing process and is frequently used as a
publishing engine with a variety of document management systems that support
SGML (Standard Generalized Markup Language) or XML (Extensible Markup
Language). In fiscal 1998, XPP was also incorporated into third-party solutions
from such companies as IBM and Bellcore. Xyvision believes the speed, power,
and background processing capabilities of Xyvision Production Publisher make it
the most versatile and powerful batch composition system available today.
New Xyvision Production Publisher customers in fiscal 1998 include The
Boeing Company-Commercial Aerospace division,British Aerospace, Command
Financial, Editions du Juris-Classeur Eurodoc Marathon Multimedia, Maruboshi
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North America, Mitchell International, United Space Alliance, and Words &
Graphics.
Parlance Document Manager addresses the information needs of today's
corporate and commercial publishers: managing large amounts of information,
publishing information in both paper and electronic media, and leveraging the
value of information by enabling information reuse in multiple products.
Parlance is an established information management system that has been
installed at almost 50 corporations around the world. Parlance stores and
manages document components, which are typically smaller than a whole document
or computer file. Because these elements are stored as individual information
objects, workgroups can edit information once and then share and reuse the same
information in more than one document. Parlance supports information objects of
varying types and sizes, and manages a variety of text and graphics formats,
including SGML, XML and word processing data. In addition, Parlance provides
version control, built-in workflow, and dynamic document assembly of printed
and digital documents.
Parlance stores data as objects inside relational database technology from
two of the leading RDBMS (Relational Database Management System) providers,
Oracle and Informix. This combination of object-oriented and relational
technologies provides a reliable, transportable storage environment that can
handle large amounts of complex data types and provide fast data access. The
use of proven, industry-standard database technology makes Parlance compatible
with most existing corporate database environments.
Xyvision also packages Parlance with Xyvision and third-party products as
solution sets targeted to workgroups with specific publishing requirements.
SGML Conductor combines Adobe's popular FrameMaker+SGML with Parlance into a
complete solution for managing SGML data allowing users to create, update, and
manage SGML data from within a familiar FrameMaker environment. This solution
is designed for corporate publishers who recognize the value of using SGML or
XML to produce standard technical documentation, proposals, or other corporate
documents. SGML Publishing Director combines Parlance with Xyvision Production
Publisher and ArborText's ADEPT Editor into a complete SGML publishing package
designed for workgroups who want to manage and output SGML data as printed
documents with such demanding composition requirements as looseleaf update
insert pages, intricate tables, or complex footnotes.
WebPorter coordinates the information that is published on an internal or
external Web site with the Parlance database, enabling customers to
automatically synchronize the creation and update of Web information with other
corporate documents. This technology can dramatically reduce the time required
to maintain Web site data and ensure that the Web information is the most
current information available.
New Parlance customers in fiscal 1998 include Allied Signal, Society of
Petroleum Engineers, and Hearst MOTOR Publications. New SGML Conductor
customers include Atraxis SAir Group and Australian Government Publishing
Services. In fiscal 1998, WebPorter was installed at Underwriters Laboratories.
Significant upgrade orders for Parlance in fiscal 1998 include Boeing
Helicopter, Bureau of National Affairs, CTA and Hearst (additional Parlance
environment).
Xyvision publishing solutions currently operate on UNIX-based servers and
workstations from Sun Microsystems and IBM. Parlance supports Windows client
software running under Microsoft Windows 95 and Windows NT. Xyvision intends to
expand its platform support to provide customers with the best technologies
available to meet the demanding needs of information-intensive document
management and publishing.
Contex Prepress Products
The Contex family of color electronic design and prepress software
shortens the production cycle and reduces costs by automating full-color
design, stripping, and page assembly operations used to produce packaging,
inserts, advertisements, brochures, catalogs, and other high-quality color
printed materials.
ConSeps, a workstation product first commercially available in September
1997, is used in the production of process and spot color materials for
packaging, catalog, publication, and general commercial printing. ConSeps
includes support for the DCS 2.0 file format, automated step and repeat, and
easy page distortion for Flexo printing, as well as for automated imposition.
SmarTrap in ConSeps is the first raster-based trapping application that factors
ink opacity and ink rotation order as well as tint and density in calculating
traps. ConSeps will replace RIP 'n' Strip in the Contex product line.
New customers for ConSeps in fiscal 1998 include Graphics Express, Speed
Graphics, Motheral Printing, and Seva Graphic Technology. More than 20
customers of earlier Contex products have also converted to the new ConSeps
product line.
In March 1998, Contex introduced the SpeedTrap Server, which automates the
non-interactive functions of
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ConSeps. Users may configure and manage SpeedTrap from Macintosh computers,
allowing for a lower price entry point for Contex capabilities.
Contex Eclipse is powerful, productive, and versatile image editing
software for professional artists and retouchers, with features for image
editing, compositing, retouching, correction, image warping, filter effects,
and color separations. In 1996, Xyvision signed an exclusive licensing
agreement for Eclipse. More than 1,100 licenses for Eclipse are in use
worldwide today in graphic arts prepress, publishing, retouching companies, and
digital studios, whether designing for print, film, video, or other digital
media. In December 1997, Contex shipped the Eclipse 3.1 software upgrade.
Manufacturing companies using Eclipse include BMW, Renault, Chrysler,
General Motors, LLadro, The Franklin Mint, and Lever Bros. Co. Professional
photographic studios using Eclipse include Dan Lim, Fotostudio Iver Hansen,
Labtec Servicios Fotograficos, and Particle Studios. Graphic arts prepress
companies using Eclipse include Imaginex Inc., Ashai Offset, Bell Litho, and
the Mandel Company.
Contex RIP 'n' Strip is a software application that automates full-color
stripping and page assembly operations used primarily to produce four-color
packaging, inserts, advertisements, brochures, catalogs, and other high-quality
color printed materials. RIP 'n' Strip is in use at commercial printing
establishments, color prepress trade houses, and in corporate printing
establishments where high quality and high-volume production require more power
than is generally available from desktop systems. New customers in fiscal 1998
for RIP 'n' Strip include TV Guide, Mebane Packaging, and The Laird Group.
Professional Services
Xyvision provides customers with a comprehensive range of services that
includes systems integration, production analysis, implementation planning,
onsite and classroom training, applications support, program management, remote
diagnostics, process reengineering, document analysis, and Web consulting. With
over twelve years of corporate experience in integrating and delivering
solutions for a wide range of publishing environments, Xyvision service
professionals are experts in analyzing and implementing large-scale document
management, publishing, and electronic delivery systems.
Most of Xyvision's customers enter into maintenance and support contracts
and receive training. As part of a standard software support contract, the
Company provides software and documentation updates, as well as telephone
support. Each customer site is provided with remote diagnostics for the
identification, isolation, and resolution of problems.
Revenues from Xyvision professional services including maintenance were
42%, 42%, and 52% of overall revenues during fiscal 1996, 1997, and 1998,
respectively.
MARKETS, APPLICATIONS AND CUSTOMERS
Within the broad market for computer-based electronic publishing,
information management, and printing technologies, the Company has targeted its
marketing efforts primarily at three key application segments: technical
documentation, commercial publishing, and color electronic design and prepress.
Technical Documentation is produced by corporations and product
manufacturers in support of a product or service. Market segments that produce
technical documentation include aerospace, automotive, discrete manufacturing,
computers, electronics, telecommunications, and transportation companies who
publish such documents as maintenance manuals, tariff directories, and end-user
documentation. These publications often have a long shelf life, need frequent
revisions, and require output in a variety of formats including Interactive
Electronic Technical Manuals (IETMs), World Wide Web pages, Portable Document
Format (PDF), and printed pages.
Companies that produce technical documentation often produce manuals in
looseleaf format and distribute updates as looseleaf change pages. XPP's unique
Automatic Looseleaf option enables companies to automatically create update
pages when new information is added to previously released documents, enabling
users to distribute only changed pages instead of reprints of the entire
document. This can dramatically reduce printing and warehousing costs, and
allows more timely updates of technical information.
Xyvision customers in the technical documentation segment include: Allied
Signal, The Boeing Company, British Aerospace, Consolidated Freightways,
Cummins Engine, Embraer, Gulfstream Aerospace, IBM Corporation, Maruboshi,
Pratt & Whitney Canada, Raytheon Service Company, Royal Australian Air Force,
Sikorsky Aircraft, and the United Space Alliance.
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Commercial Publishing target customers include commercial printers and
trade service bureaus; book, journal, and financial publishers; professional
associations; financial services and insurance companies; government agencies;
and wholesale distributors. In order to remain competitive, commercial
printers, publishers, and service providers must be able to efficiently produce
high-quality, cost-effective printed and electronic documents.
Information providers, such as legal publishers and professional
associations, are increasingly faced with the need to better manage information
content, versions, and workflow. Parlance Document Manager provides these
companies with a complete information management solution that reduces costs,
shortens turnaround time, and enables customers to generate new revenue by
repackaging existing information into new publications or media.
Xyvision customers in the commercial publishing sector include AAA, ASTM,
American Institute of Physics, American Chemical Society, American Medical
Association, British Medical Association, Bureau of National Affairs, Cadmus
Journal Services, Capital Printing Systems, Daniels Printing, Grafikon, Idea
Institute, Merck & Co., Reed Elsevier, Telia, TVSM, Tweddle Litho, Underwriters
Laboratories, ValueLine Inc., and Wolters Kluwer.
Color Electronic Design and Prepress target customers include commercial
trade shops, printers, packaging convertors, prepress service companies, and
consumer goods companies that specialize in packaging, advertising, catalogs,
brochures, promotional displays and similar printed material that involves
complex layout of color elements.
For commercial trade shops, printers, and prepress service companies, the
production of catalogs, brochures, posters or ads involves assembling job
elements and page geometries into a high-quality, finished, printed piece.
Typically, these organizations receive data from their clients in a variety of
formats during various stages of the production cycle.
Design firms, packaging manufacturers and consumer goods companies are
responsible for creating packages, free-standing newspaper inserts, in-store
promotions, and other collateral for consumer product marketing. For these
companies, the challenge is taking an initial design concept through to
completion.
For each of these groups, success depends significantly on their ability
to make the path from design through production completely electronic. They
need to be able to create an open-systems environment that allows them to
accept data in any format, at any time and to manage projects and people for
efficient use of available resources. Contex products automate the production
process, improve the quality of the finished piece and reduce production time
and cost.
Xyvision's customers in the color electronic design and prepress
application segment include: Akerlund & Rausing, Banta/Color Response, Field
Packaging, DAR Projects, Kimberly Clark, HEL Productions, Novacel, Lincoln
Graphics, Prestige Graphics, Schawkgraphics, Scandicolor, Schmalbach-Lubeca,
Southern Graphics, and Litho Plus.
STRATEGY
The Company's objective is to be the leading worldwide supplier of
compound document management and publishing solutions that solve the demanding
requirements of corporate and commercial publishers. To achieve this objective,
the Company plans to refocus development and marketing efforts on core
competencies, expand technology relationships, enhance existing technology, and
widen its distribution channels.
Refocus Marketing and Development Efforts on Core Competencies. The
Company intends to concentrate its efforts on promising business lines while
exiting those areas that are not performing up to expectations.
Expand Technology Relationships. The Company intends to expand the scope
of its market from a departmental solution to a broader enterprise-wide
solution by tightly integrating its technology with selected third-party
enterprise solution vendors. In addition, the Company will continue to embed
selected third-party software into its solutions from companies such as Adobe,
Verity, Oracle, and Omnimark.
Enhance Existing Technology. The Company intends to continue to add
functionality to its existing product line to keep pace with technological
change and to support additional document types and platforms. Major
development efforts will concentrate on improving interoperability between
Xyvision products and third-party solutions as well as enhancing SGML and XML
capabilities in Xyvision publishing products. In addition, the Company plans to
continue to market one or more of its products as an embedded technology in
high-end solutions offered by other companies.
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Widen Distribution Channels. The Company plans to continue to expand its
distribution channels to reach a broader customer base. The Company sells its
products, third-party products, and services through its direct sales force as
well as through indirect channels, primarily consisting of system integrators,
value-added resellers, and distributors. Xyvision intends to continue to expand
its indirect sales channel to include additional resellers and distributors on
a worldwide basis.
SALES AND DISTRIBUTION
Xyvision Publishing Systems. In North America, Xyvision markets its
products and related services primarily through its direct sales force. In
fiscal 1998, the Company increased its marketing efforts with systems
integrators by adding additional resellers and integrators to its Partners
Program. In fiscal 1998, the Company expanded its Partners Program in North
America to include Grafnetix, Information Architects, TelTek Systems, and
Uniscan.
The Company maintains a European sales and support headquarters in
England. In fiscal 1998, Xyvision opened an additional office in Paris, France
and signed reseller agreements with Antea (France) and Atraxis (Switzerland).
The Company also resells its products through selected distributors in Europe,
Africa, and Asia. In fiscal 1998, InFrame Solutions in Australia joined
Xyvision's partners program.
Contex Prepress Systems. Xyvision markets its Contex software and
associated services primarily through a worldwide network of value added
resellers with appropriate applications support and systems integration skills
called Contex Prepress Partners.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapid
technological change that requires the continuing enhancement of existing
products and the development of new products. During the past three fiscal
years, the Company's investments in product development and engineering, before
the capitalization of software costs, have ranged from 19% to 29% of the
Company's total revenues.
In the future, the Company's product development efforts will focus on
continuing to enhance its open-architecture systems, increasing the
price/performance of its products and developing software for specific
application needs. The Company believes it will have to continue to invest a
significant portion of its revenues in development to remain competitive in its
markets.
COMPETITION
The markets for Xyvision products are characterized by intense
competition, rapid technology developments, and frequent new product
introductions. Xyvision's future success will depend on its ability to enhance
its existing products on a timely basis, meet changing customer needs, and
respond to emerging standards and other technological changes.
Competition is usually based on price/performance, functionality
differences, quality and extent of service and support, and the financial
strength of the vendor.
For sales of Xyvision Production Publisher, competitors include Advent
3B2, Miles 33, and Datalogics. For sales of Parlance Document Manager, Xyvision
principally competes with Documentum, Texcel, and Chrystal (a Xerox New
Enterprise Company). For Contex prepress products, the Company competes
primarily with Barco/Disc, Dainippon Screen, Linotype-Hell, Dalim, Scitex,
Rampage, and a variety of desktop products.
MANUFACTURING AND SUPPLIERS
The Company's document management and publishing product lines work with
operating systems and hardware platforms from Sun Microsystems and IBM. The
Parlance product is packaged with a variety of third-party technology including
RDBMS from Oracle or Informix and the Verity search engine. XPP relies on
Adobe's PostScript output language and Display PostScript viewing technology.
Xyvision's Contex family of prepress systems is based on workstations and
operating systems from Silicon Graphics, Inc. A significant interruption in
supply from these vendors to either the Company or the Company's customers
would have a material adverse effect on the Company.
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BACKLOG
The Company believes that it is able to anticipate near-term demand for
its products and ship products shortly after receipt of the order. Accordingly,
the Company's backlog at any particular time is generally neither significant
nor indicative of future sales levels.
PATENTS, LICENSES, AND TRADEMARKS
The Company relies on copyright, patent, and trade secret laws to protect
its technology. Management believes that because of rapid technological changes
in professional publishing and color electronic design and prepress
technologies, patent, trade secret, and copyright protection is not as
significant to the Company's business as the technical and creative skills of
its employees.
Xyvision, PackageMaker, RIP'n'Strip, SmarTrap, and RoboRIP are registered
trademarks of the Company. The Company also uses the following trademarks;
Parlance, WebPorter, SGML Conductor, Contex, Contex ConSeps, Contex
Professional, Contex Prepress Partners, Contex SpeedTrap, and DotBox. All other
trademarks and trade names referred to in this Annual Report are the property
of their respective owners.
The Company has acquired non-exclusive licenses for certain software from
several companies. These licenses permit the Company to grant sublicenses to
its customers. Loss of the Company's rights to grant sublicenses to its
customers on some of these software products could have a material adverse
effect on the Company.
EMPLOYEES
As of March 31, 1998, the Company employed 138 persons, which included 37
in research and development, 33 in sales and marketing, 48 in customer support,
and 20 in finance and administration.
Xyvision's products are primarily proprietary software and services.
Software and services companies are commonly referred to as "intellectual
property companies." As an intellectual property company, management believes
that the future success of the Company will depend in large part on its ability
to attract and retain qualified employees. Due to the competitive market for
skilled software engineers and other employees in the greater Boston area, the
Company from time to time experiences difficulty in hiring and retaining
personnel. The Company's employees are not represented by a labor union, and
the Company has never suffered an interruption of business as a result of a
labor dispute. The Company believes its employee relations are good.
RISK FACTORS
In addition to other information contained in this report, prospective
investors should carefully consider the following factors when evaluating the
Company and its business.
Future operating results of the Company will depend upon many factors
including the demand for the Company's products, the level of product and price
competition, the length of the Company's sales cycle, the timing of individual
license transactions, the delay or deferral of customer implementations, the
Company's success in expanding its direct sales force and indirect distribution
channels, the timing of new product introductions and product enhancements by
the Company and its competitors, the mix of products and services sold,
activities of and acquisitions by competitors, the timing of new hires, changes
in foreign currency exchange rates, the ability of the Company to develop and
market new products and control costs, and general domestic and international
economic political conditions. The Company's sales generally reflect a
relatively high amount of revenues per order. The loss or delay of individual
orders, therefore, could have a significant impact on the revenues and
quarterly results of the Company. In addition, the timing of license revenue is
difficult to predict because of the length of the Company's sales cycle, which
is typically six to twelve months from the initial contact. Because the
Company's operating expenses are based on anticipated revenue trends and
because a high percentage of the Company's expenses are relatively fixed, a
delay in the recognition of revenue from a limited number of license
transactions could cause significant variations in operating results from
quarter to quarter and could result in losses. In addition, the Company has
experienced financial difficulties in recent years and it is dependent upon a
credit line from its principal stockholder to meet its working capital needs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." As a result of these factors, operating results for any quarter
are subject to significant variation, and there can be no assurance as to the
Company's future financial success.
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ITEM 2. Properties
The Company's executive, administrative, research and development, and
home office sales support facilities, which consist of approximately 31,200
square feet of office space, are located in Reading, Massachusetts. The Company
occupies this facility under a lease which expires in January, 2002. The lease
requires annual payments of $593,800.00.
The Company also leases smaller sales and service facilities at other
locations in the United States and abroad.
ITEM 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company or any of
its subsidiaries is a party or which any of its properties is subject. In the
opinion of management, the Company is not a party to any litigation which it
believes could have a material adverse effect on the Company or its business.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the last quarter of the fiscal year ended March 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
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NAME AGE POSITION
___________________ _____ ________________________________________
Kevin J. Duffy ......... 43 President and Chief Operating Officer
Eugene P. Seneta ......... 53 Vice President, Chief Financial Officer,
Treasurer and Secretary
Mark G. LeBlanc ......... 37 Vice President of Engineering
Carol S. Bumbaca ......... 36 Vice President of Customer Support
Michael S. Borin ......... 56 Vice President of Human Resources
Gerald T. Ulbricht ...... 50 Vice President of North American Sales
</TABLE>
Mr. Duffy joined Xyvision in June 1983 and was elected President and Chief
Operating Officer in August 1996. In December 1995 he was promoted to Senior
Vice President and General Manager, Xyvision Publishing Group. From April 1991
to December 1995 he served as Vice President, North American Sales. Immediately
prior to this position, Mr. Duffy served as Director, Eastern Region Sales, a
position he assumed in January 1990. Previously, he held a variety of sales,
support, and marketing positions for the Company, including commercial sales
manager, customer support manager, and pre-sales support manager.
Mr. Seneta joined Xyvision in June 1990 as Manager of Contract
Administration and was elected Treasurer and Secretary in February 1994. In
December 1995 he was promoted to Vice President and Chief Financial Officer.
From May 1991 to February 1994, he served as Corporate Controller.
Mr. LeBlanc joined Xyvision in March, 1998 as Vice President of
Engineering. Previously he served as Vice President of Research and Development
at Filemark, a developer of high-volume document management, COLD and Imaging
storage and retrieval software. Prior to joining Filemark, Mr. LeBlanc was Vice
President of Engineering at Hager Telecommunications and held various
consulting positions in the telecommunications industry. LeBlanc has over 16
years of development experience including design work.
Ms. Bumbaca joined Xyvision in January, 1984 and became Vice President of
Customer Support in April, 1998. Previously, Ms. Bumbaca held various positions
in customer support including director, technical service manager, telephone
support manager, new product manager and technical writer.
Mr. Borin joined the Company in May 1989 as Manager, Human Resources. In
January 1992 he was promoted to Director, Human Resources. In September 1995 he
became Vice President of Human Resources.
Mr. Ulbricht has been with Xyvision since May, 1991, and became Vice
President of North American Sales in 1996. With over 26 years of experience in
the electronic publishing industry, Mr. Ulbricht has held senior sales
management with Automix Keyboards, Inc., Penta System, International, Texet
Corporation, and Omnipage, Inc. Prior to his current position, Mr. Ulbricht was
the Sales Manager for Commercial Publishing.
Each officer serves at the discretion of the Company's Board of Directors.
There are no family relationships among any of the directors and executive
officers of the Company.
9
<PAGE>
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is currently traded on the Nasdaq system under
the symbol "XYVI". The price per share of the Company's Common Stock is
reported on the OTC Bulletin Board over a level 2 or level 3 Nasdaq workstation
and through the National Quotation Bureau Pink Sheets.
The following table sets forth the reported high and low bid prices for
the Company's Common Stock for the periods indicated.
<TABLE>
<S> <C> <C>
HIGH LOW
FISCAL YEAR ENDED MARCH 31, 1997
April 1 - June 30 ............ $ .33 $.31
July 1 - September 30 ......... .44 .32
October 1 - December 31 ...... .75 .37
January 1 - March 31 ......... .69 .50
FISCAL YEAR ENDED MARCH 31, 1998
April 1 - June 30 ............ $ .50 $.28
July 1 - September 30 ......... .38 .25
October 1 - December 31 ...... .32 .25
January 1 - March 31 ......... .26 .25
</TABLE>
As of May 31, 1998, there were approximately 633 stockholders of record.
No cash dividends have been declared on the Common Stock since Xyvision's
formation. The Company does not expect to declare cash dividends on the Common
Stock in the foreseeable future.
On May 21, 1997, the Company consummated an exchange transaction with a
holder of certain of the Company's outstanding 6% Convertible Subordinated
Debentures, pursuant to which the Company issued 8,223 shares of Common Stock
in exchange for $20,000 aggregate amount of Debentures in reliance upon the
exemption from registration set forth in Section 3(a)(9) of the Securities Act
as exempted securities exchanged by the issuer with existing security holders.
No underwriters were engaged in connection with such issuance.
On November 10, 1997, pursuant to, and in consideration for, an amendment
to the Company's line of credit with Tudor Trust, the Company issued to Tudor
Trust warrants for the purchase of 10,000,000 shares of Common Stock at an
exercise price of $.16 per share in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act as a sale by the
Company not involving a public offering. No underwriters were engaged in
connection with such issuance. See Note 7 to Notes to Consolidated Financial
Statements.
10
<PAGE>
<PAGE>
ITEM 6. Selected Financial Data
The following table summarizes certain selected financial data and should
be read in conjunction with the financial statements and related notes
appearing elsewhere in this report.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED
______________________________________________________________
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1994 1995 1996 1997 1998
_________ _________ _________ _________ _________
(in thousands, except per share data)
INCOME STATEMENT DATA
Revenues .................................... $ 23,865 $ 24,559 $ 22,414 $ 22,234 $ 16,501
Gross margin .............................. 11,907 12,045 10,170 10,406 5,675
Operating expenses ........................ 11,815 11,205 15,077 10,765 12,574
Income (loss) from operations ............... 92 840 (4,907) (359) (6,899)
Income (loss) before income taxes
and extraordinary item(1) .................. (479) 321 (5,707) (1,359) (7,913)
Net income (loss) allocable to common
stockholders (1) ........................... 301 286 (5,793) (1,353) (8,007)
Basic earnings per share (1) ............... $ .04 $ .03 $ (.66) $ (.11) $ (.56)
Diluted earnings per share .................. .04 .03 (.66) (.11) (.56)
Weighted average common and common
equivalent shares outstanding, basic ...... 7,961 8,390 8,726 12,097 14,269
Diluted .................................... 8,224 10,033 8,726 12,097 14,269
Financial Position
Cash and cash equivalents .................. $ 312 $ 174 $ 332 $ 261 $ 357
Working capital deficit ..................... (8,961) (3,200) (6,751) (4,834) (10,788)
Total assets .............................. 12,505 13,137 10,281 9,977 6,916
Long-term debt .............................. 1,706 4,655 5,421 165 -
Stockholders' deficit ..................... $ (6,674) $ (4,116) $ (9,244) $ (1,867) $ (8,847)
OTHER INFORMATION
Research and development expenditures,
including capitalized software costs ...... $ 4,586 $ 4,410 $ 4,512 $ 4,381 $ 4,743
</TABLE>
- --------------------------------------------------------------------------------
(1)Fiscal 1994 results include an extraordinary item for a gain of $780,
or $.10 per share, from the exchange of Debentures for unsecured,
unsubordinated promissory notes, and shares of common stock (also, see Note 8
of the Notes to Consolidated Financial Statements).
Fiscal 1997 results include an extraordinary item for a gain of $100, or
$.01 per share, from the exchange of Debentures for unsecured, unsubordinated
promissory notes, and shares of common stock (also, see Note 8 of the Notes to
Consolidated Financial Statements).
11
<PAGE>
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Revenues decreased less than 1% from $22,414,000 in fiscal 1996 to
$22,234,000 in fiscal 1997 and decreased 26% from $22,234,000 in fiscal 1997 to
$16,501,000 in fiscal 1998. In fiscal 1997 system revenues decreased 2% as a
result of decreased Publishing Pacific Rim and Contex Prepress Systems European
sales. In fiscal 1998, system revenues decreased 38% primarily as a result of
decreased Contex International sales and reductions in Publishing and Contex
domestic revenues. In fiscal 1997 service revenue increased less than 1%. This
increase was primarily due to increased Contex European maintenance, training
and integration service revenues partially offset by reduced maintenance
revenues in the Contex domestic and Publishing domestic and European business
groups. In fiscal 1998, service revenues decreased 9% primarily due to
decreases in the Publishing division and Contex division domestic maintenance
revenues.
Gross margins increased from 45% of revenues in fiscal 1996 to 47% of
revenues in fiscal 1997 and decreased to 34% of revenues in fiscal 1998. System
margins increased from 55% of system revenues in fiscal 1996 to 63% of system
revenues in fiscal 1997 and decreased to 47% of system revenues in fiscal 1998.
The increase in fiscal 1997 was primarily the result of the increase in the
proportion of domestic commercial software sales. The decrease in fiscal 1998
system margins is attributable to decreased revenues, primarily in Contex,
combined with higher than normal cost of sales partially attributable to the
$798,000 writedown to net realizeable value of Contex capitalized software
development costs. Service margins decreased from 32% of service revenues in
fiscal 1996 to 24% of service revenues in fiscal 1997 and decreased to 23% of
service revenues in fiscal 1998. The decreases in service margins in fiscal
1997 and 1998 were the result of the decrease in Publishing division revenues
and a relatively higher level of costs due to an increased proportion of third
party training and consulting expenses, which have a lower gross margin than
the Company's internal services.
Research and development expenses, including capitalized software
development costs, were $4,512,000, $4,381,000 and $4,743,000 for fiscal 1996,
1997 and 1998, respectively. These amounts represented 20%, 19% and 29% of
revenues, respectively. Capitalized software costs were $1,087,000, $1,477,000
and $981,000 in fiscal 1996, 1997 and 1998, respectively. The decrease in
research and development expenditures from fiscal 1996 to fiscal 1997 was
primarily due to decreased headcount and other cost control efforts in the
Publishing division. The increase in research and development expenditures from
fiscal 1997 to fiscal 1998 was primarily the result of headcount increases and
maintenance of a competitive salary structure. Research and development
expenses, excluding capitalized software development costs, were 15%, 13% and
23% of revenues during fiscal 1996, 1997 and 1998, respectively. The increase
in the percentage of revenue of net research and development expenses from
fiscal 1997 to fiscal 1998 is due to a significant decrease in revenue.
Marketing, general and administrative expenses decreased from $11,152,000
(or 50% of revenues) in fiscal 1996 to $7,861,000 (or 35% of revenues) in
fiscal 1997. Fiscal 1998 expenses increased to $8,812,000 (or 53% of revenues).
The decrease from fiscal 1996 to fiscal 1997 was primarily due to cost
awareness and containment. The increase from fiscal 1997 to fiscal 1998 was
primarily due to increased domestic and international marketing expenditures
and the opening of European sales offices for the Publishing division.
During fiscal 1996 the Company incurred restructuring charges of $500,000.
Included in the charges were approximately $385,000 of severance and employee
benefits for the December 1995 workforce reduction, a $70,000 write-off of
equipment associated with the staff reduction and a writedown of $45,000 for
capital assets not expected to contribute to future operations.
Interest income was $7,000, $7,000 and $9,000 in fiscal 1996, 1997 and
1998, respectively. The low amount of interest income in each of the fiscal
years was due to the Company's low level of cash available for investing.
Interest expense from third parties was $424,000, $263,000 and $160,000 in
fiscal 1996, 1997 and 1998, respectively. Interest expense paid to third
parties includes the interest obligation on the Company's 6% Convertible
Subordinated Debentures (the "Debentures") and the quarterly interest payments
on the Company's 4% Promissory Notes. Interest expense from third parties
decreased in fiscal 1998 and 1997 as a result of the program to exchange the
Debentures and 4% Promissory Notes for equity securities (also please see note
8 of the Notes to Consolidated Financial Statements). Interest expense paid to
Tudor Trust, the largest stockholder of the Company, was $384,000, $744,000 and
$864,000 in fiscal 1996, 1997 and 1998 (also, please see Note 7 of the Notes to
Consolidated Financial Statements).
12
<PAGE>
<PAGE>
During fiscal 1997, the Company entered into exchange transactions with
certain investors holding Debentures in the aggregate principal amount of
$370,000. These Debenture holders exchanged their Debentures for (i) an
unsecured, unsubordinated promissory note of the Company, in the principal
amount equal to 30% of the principal amount of the Debentures delivered for
exchange, which bears interest at 4% per year (payable quarterly) and matures
30 months from issuance, and (ii) 137,000 shares of common stock of the Company
per $1,000,000 principal amount of Debentures exchanged, and (iii) 13,000
shares of Series B Preferred Stock per $1,000,000 principal amount of
Debentures exchanged. As a result of such exchanges, the Company realized an
extraordinary gain of $100,000, or $.01 per share.
As a result of the 15% Promissory Note exchange programs described in Note
8 to the Consolidated Financial Statements, the Company accrued dividends of
$86,000, $94,000 and $94,000 on the Series B Preferred Stock during fiscal
1996, 1997 and 1998, respectively.
The Company recorded net losses allocable to common stockholders of
$5,793,000, $1,353,000 and $8,007,000 for fiscal 1996, 1997 and 1998,
respectively.
The Company believes inflation has not had a material effect on its
results of operations to date.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents of $357,000,
which is an increase of $95,000 from the previous fiscal year end.
Approximately $3,631,000 of cash was used by operations and approximately
$1,574,000 of cash was used in investing activities in fiscal 1998. The Company
plans to continue its aggressive efforts of managing working capital.
In fiscal 1998, the Company invested $1,574,000 in capital assets,
including $981,000 of capitalized software costs, reflecting the Company's
continuing commitment to its product development programs. The Company
anticipates it will continue to invest in capital assets as required to support
its product development efforts and general business needs in future periods.
The Company has a $8,300,000 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 6% per year. As of March 31, 1998, the
Company had an outstanding line of credit balance of $10,200,000. As of June
11, 1998, the Company had an outstanding credit line balance of $11,250,000. In
June 1998, the Company and Tudor Trust agreed in principle on an amendment to
the line of credit that would increase the maximum loan amout thereunder to
$13,500.00. There can be no assurance, however, that increased borrowings will
be available under the Company's line of credit, as proposed to be amended. See
Note 7 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 8 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 matters 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.
13
<PAGE>
<PAGE>
The Company anticipates that its cash requirements for fiscal 1999 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 from Tudor Trust. 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 1999, the
Company expects to require cash in excess of the current terms of the credit
line. There can be no assurance that the forbearance by the debtholders will
continue 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.
YEAR 2000
The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by various so-called "Year 2000"
systems and software failures which can arise in certain time sensitive
functions. All of the Company's products are currently Year 2000 compliant, and
therefore the Company does not expect to undertake additional research and
development efforts in this regard. In addition, the Company is in the process
of identifying anticipated costs, problems and uncertainties associated with
making its internal use operating systems Year 2000 compliant. The Company
expects to resolve the Year 2000 issue with respect to its computer systems and
software applications through upgrade, conversion, modification or replacement
of non-compliant systems and applications. There can be no assurance, however,
that the systems of other parties upon which the Company's business also relies
will be Year 2000 compliant. The costs of becoming Year 2000 compliant, or
failure thereof by the Company or other parties, could have a material adverse
effect on the Company's business, financial condition or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
14
<PAGE>
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Xyvision, Inc.:
We have audited the accompanying consolidated balance sheets of Xyvision,
Inc. as of March 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' deficit and cash flows for each of the
three fiscal years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to report on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our report.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred a loss from
operations in fiscal 1998 and has a working capital deficit and a stockholders'
deficit at March 31, 1998 and 1997. On May 5, 1998, 1997, 1996, 1995, 1994,
1993, and 1992, the Company elected not to make the interest payment that was
due on its 6% Convertible Subordinated Debentures. 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 June 11, 1998,
no such acceleration had occurred. The Company's attainment of profitable
operations and sufficient additional financing, as well as the continued
forbearance of its Debentureholders, cannot be determined at this time. These
uncertainties raise substantial doubt about the Company's ability to continue
as a going concern. Management's actions in regard to these matters are
described in Notes 7 and 8. 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.
Because of the significance of the uncertainties referred to in the
preceding paragraph, we are unable to express, and we do not express, an
opinion on the consolidated financial statements referred to above.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 11, 1998
15
<PAGE>
<PAGE>
XYVISION, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<S> <C> <C>
ASSETS 1998 1997
_____________ _____________
Current assets:
Cash and cash equivalents .......................................... $ 356,526 $ 261,032
Accounts receivable:
Trade, less allowance for doubtful accounts of
$732,738 and $648,518 at March 31, 1998 and 1997,
respectively ...................................................... 3,630,365 5,544,264
Inventories ......................................................... 337,045 311,402
Other current assets ................................................ 650,664 727,788
_____________ _____________
Total current assets ................................................ 4,974,600 6,844,486
Property and equipment, net .......................................... 850,583 732,325
Other assets, net, principally capitalized software costs ............ 1,090,453 2,399,907
_____________ _____________
Total assets ......................................................... $ 6,915,636 $ 9,976,718
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to stockholder, less unamortized discount of $1,031,710
at March 31, 1998 and $350,000 at March 31, 1997 .................. $ 9,168,290 $ 4,550,000
Current portion of long-term debt .................................... 2,206,110 2,031,364
Accounts payable and accrued expenses .............................. 2,277,339 2,968,658
Deferred service revenues .......................................... 1,164,482 1,242,825
Other current liabilities .......................................... 946,720 885,986
_____________ _____________
Total current liabilities .......................................... 15,762,941 11,678,833
Long-term debt, less current portion ................................. - 165,000
_____________ _____________
Total liabilities ................................................... 15,762,941 11,843,833
_____________ _____________
Commitments and contingencies
Stockholders' deficit:
Capital stock:
Series preferred stock, $1.00 par value; 2,700,000 shares
authorized; no shares issued and outstanding ..................... - -
Series B Preferred Stock, $1.00 par value: 300,000 shares
authorized; 235,299 issued and outstanding at March 31, 1998
and 1997 (aggregate liquidation preference of $3,151,447
and $3,057,327, respectively) ................................. 235,299 235,299
Common stock, $.03 par value; 50,000,000 shares authorized;
14,748,080 and 14,739,857 issued and outstanding at March 31,
1998 and 1997, respectively, including treasury stock ............ 442,442 442,195
Additional paid-in capital .......................................... 50,602,356 49,575,463
Accumulated deficit ................................................ (58,958,865) (50,951,535)
_____________ _____________
(7,678,768) (698,578)
Less:
Treasury stock, at cost; 476,665 at March 31, 1998 and 1997
respectively ......................................................... 1,168,537 1,168,537
Total stockholders' deficit .......................................... (8,847,305) (1,867,115)
_____________ _____________
Total liabilities and stockholders' deficit ........................ $ 6,915,636 $ 9,976,718
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
<PAGE>
XYVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1998
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
____________ ____________ ____________
Revenues:
Systems ................................................ $ 7,914,014 $ 12,792,836 $ 13,026,610
Service ................................................ 8,586,803 9,441,164 9,386,903
____________ ____________ ____________
Total revenues ....................................... 16,500,817 22,234,000 22,413,513
____________ ____________ ____________
Cost of sales:
Systems ................................................ 4,213,480 4,679,212 5,852,984
Service ................................................ 6,612,198 7,148,693 6,390,728
____________ ____________ ____________
Total cost of sales ................................. 10,825,678 11,827,905 12,243,712
____________ ____________ ____________
Gross margin ............................................. 5,675,139 10,406,095 10,169,801
____________ ____________ ____________
Expenses:
Research and development .............................. 3,761,973 2,904,137 3,424,797
Marketing, general, and administrative .................. 8,812,483 7,861,312 11,152,172
Restructuring charge .................................... - - 499,725
____________ ____________ ____________
Total operating expenses .............................. 12,574,456 10,765,449 15,076,694
____________ ____________ ____________
Net loss from operations ................................. (6,899,317) (359,354) (4,906,893)
____________ ____________ ____________
Other income (expense), net:
Interest income ....................................... 9,134 7,486 7,312
Interest expense - third party ........................ (159,515) (262,555) (423,657)
Interest expense - stockholder ........................ (863,512) (744,308) (383,752)
____________ ____________ ____________
Total other expense, net .............................. (1,013,893) (999,377) (800,097)
____________ ____________ ____________
Loss before income taxes and
extraordinary item .................................... (7,913,210) (1,358,731) (5,706,990)
Provision for income taxes .............................. - - -
____________ ____________ ____________
Loss before extraordinary item ........................... (7,913,210) (1,358,731) (5,706,990)
Extraordinary item:
Gain on exchange of convertible subordinated
debentures ............................................. - 100,000 -
____________ ____________ ____________
Net loss ................................................ (7,913,210) (1,258,731) (5,706,990)
Series B preferred stock dividends ..................... 94,120 93,795 85,916
____________ ____________ ____________
Net loss allocable to common stockholders ............... $ (8,007,330) $ (1,352,526) $ (5,792,906)
============ ============ ============
Basic and diluted earnings per share:
Loss allocable to common stockholders before extraordinary
item ................................................... (0.56) (0.12) (0.66)
Extraordinary item ....................................... - 0.01 -
____________ ____________ ____________
Net loss per share ....................................... (0.56) (0.11) (0.66)
============ ============ ============
Weighted average common and common
equivalent shares outstanding ........................... 14,269,404 12,096,914 8,725,829
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
<PAGE>
XYVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997, AND 1996
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
____________ ____________ ____________
Operations:
Net loss ......................................................... $ (7,913,210) $ (1,258,731) $ (5,706,990)
Adjustments to reconcile net loss to net cash used by
operations:
Gain on exchange of convertible subordinated debentures ............ - (100,000) -
Depreciation and amortization .................................... 1,960,900 1,689,477 2,205,499
Interest expense related to warrants .............................. 318,290 250,000 -
Writedown of capitalized software to net realizeable value ......... 798,000 - -
Restructuring charge ............................................. - - 499,725
Provision for losses on accounts receivable ........................ 868,921 483,636 2,015,768
Loss on disposal of property and equipment ........................ - 5,159 6,310
Operating assets and liabilities:
Accounts receivable ............................................. 1,044,978 (139,051) (43,842)
Inventories ...................................................... (25,643) 65,300 (188,451)
Other current assets ............................................. 83,050 28,719 426,737
Accounts payable and accrued expenses ........................... (691,319) (796,492) (595,387)
Other current liabilities ....................................... (74,597) (262,909) 400,130
____________ ____________ ____________
Net cash used by operations ....................................... (3,630,630) (34,892) (980,501)
____________ ____________ ____________
Investments:
Additions to property and equipment .............................. (592,577) (503,216) (280,098)
Proceeds from sales of property and equipment ..................... - 6,621 3,353
Additions to customer support spares .............................. - - (3,864)
Capitalized software costs ....................................... (981,299) (1,477,154) (1,086,960)
____________ ____________ ____________
Net cash used by investments ....................................... (1,573,876) (1,973,749) (1,367,569)
____________ ____________ ____________
Financing:
Proceeds from line of credit and warrants from a stockholder ...... 5,500,000 4,000,000 3,900,000
Repayment of line of credit to a stockholder ..................... (200,000) (2,500,000) (1,600,000)
Proceeds from issuance of common stock from treasury ............... - 510 33,350
Exercise of warrants ............................................. - 200,000 -
Dividends on preferred stock ....................................... - - (82,557)
Payment on 15% promissory notes .................................... - - (2,134)
Loan payment from Employee Stock Ownership Plan .................. - 237,142 257,143
____________ ____________ ____________
Net cash provided from financing ................................. 5,300,000 1,937,652 2,505,802
____________ ____________ ____________
Net increase (decrease) in cash and cash equivalents ............... 95,494 (70,989) 157,732
Cash and cash equivalents at the beginning of the year ............ 261,032 332,021 174,289
____________ ____________ ____________
Cash and cash equivalents at the end of the year .................. $ 356,526 $ 261,032 $ 332,021
============ ============ ============
Supplemental cash flow information:
Conversion of 6% debentures to equity .............................. $ 20,000 $ 2,000,000 -
Conversion of 4% notes to equity ................................. - 4,973,500 -
Conversion of accrued interest on 6% debentures to equity ......... 7,140 648,658 -
Conversion of 6% debentures to 15% and 4% notes .................. - 340,000 $ 25,000
Conversion of 15% notes to 4% notes .............................. - 177,000 784,000
Conversion of accrued interest on 15% notes to Series B
Preferred Stock ................................................... - 75,460 330,680
Issuance of common stock purchase warrants to stockholder ......... 1,000,000 600,000 -
Interest payments ................................................ 406,000 409,000 277,000
</TABLE>
18
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<PAGE>
XYVISION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
<TABLE>
<S> <C> <C> <C>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL
___________ ________ ___________
Balance, March 31, 1995 ..................... $ 189,875 $276,569 $41,176,900
Issuance of common stock with the
exchange of $25,000 of Convertible
Subordinated Debentures, 2,675 shares ...... 80 1,254
Issuance of common stock with the
exchange of $784,000 of Promissory
Notes, 78,400 shares ..................... 2,352 39,268
Issuance of Series B stock with the
exchange of $784,000 of Promissory
Notes, 33,068 shares ..................... 33,068 297,612
Issuance of stock from treasury for
employee stock options, 94,660 shares ... (250,974)
Issuance of stock from treasury for
employment service awards, 800 shares ... (2,056)
Payments on receivable from Employee
Stock Ownership Plan .....................
Dividends on Series B Preferred Stock ......
Net loss ....................................
Balance, March 31, 1996 ..................... 222,943 279,001 41,262,004
___________ ________ ___________
Reduction of common stock with the reversal
of $30,000 of 15% notes payable to
Convertible Subordinated Debentures,
3,213 shares .............................. (96) (607)
Issuance of common stock with the
exchange of $370,000 of Convertible
Subordinated Debentures into 4% notes
payable, 50,690 shares ..................... 1,521 14,330
Issuance of Series B Preferred stock with the
exchange of $370,000 Convertible
Subordinated Debentures into 4% notes
payable, 4,810 shares ..................... 4,810 43,290
Issuance of common stock with the exchange
of $177,000 15% notes payable into 4%
notes payable, 17,700 shares ............ 531 4,956
Issuance of Series B preferred stock with the
exchange of $177,000 15% notes payable
into 4% notes payable, 7,546 shares ...... 7,546 67,914
Issuance of common stock with the exchange
of $2,000,000 Convertible Subordinated
Debentures into equity, 795,393 shares ... 23,862 2,596,607
Issuance of common stock with the exchange
of $4,973,500 4% notes payable into
equity 2,486,750 shares .................. 74,601 4,852,834
Issuance of stock for exercise of warrants,
2,092,500 shares ........................... 62,775 137,225
Issuance of stock from treasury for
employment service awards, 1,200
shares .................................... (3,090)
Issuance of common stock purchase
warrants to stockholder .................. 600,000
Payments on receivable from Employee
Stock Ownership Plan .....................
Dividends on Series B Preferred Stock ......
Net loss ....................................
Balance, March 31, 1997 ..................... 235,299 442,195 49,575,463
___________ ________ ___________
Issuance of common stock with the
exchange of $20,000 of Convertible
Subordinated Debentures into equity,
8,223 shares .............................. 247 26,893
Issuance of common stock purchase
warrants to stockholder .................. 1,000,000
Dividends on Series B Preferred Stock ......
Net loss ....................................
Balance, March 31, 1998 ..................... $ 235,299 $442,442 $50,602,356
=========== ======== ===========
<S> <C> <C> <C> <C>
RECEIVABLE
FROM
EMPLOYEE
STOCK TOTAL
ACCUMULATED TREASURY OWNERSHIP STOCKHOLDERS'
DEFICIT STOCK PLAN DEFICIT
_____________ ____________ ____________ ______________
Balance, March 31, 1995 ..................... $ (43,806,103) $ (1,458,517) $ (494,285) $ (4,115,561)
Issuance of common stock with the
exchange of $25,000 of Convertible
Subordinated Debentures, 2,675 shares ...... 1,334
Issuance of common stock with the
exchange of $784,000 of Promissory
Notes, 78,400 shares ..................... 41,620
Issuance of Series B stock with the
exchange of $784,000 of Promissory
Notes, 33,068 shares ..................... 330,680
Issuance of stock from treasury for
employee stock options, 94,660 shares ... 283,980 33,006
Issuance of stock from treasury for
employment service awards, 800 shares ... 2,400 344
Payments on receivable from Employee
Stock Ownership Plan ..................... 257,143 257,143
Dividends on Series B Preferred Stock ...... (85,916) (85,916)
Net loss .................................... (5,706,990) (5,706,990)
_____________ ______________
Balance, March 31, 1996 ..................... (49,599,009) (1,172,137) (237,142) (9,244,340)
_____________ ____________ ____________ ______________
Reduction of common stock with the reversal
of $30,000 of 15% notes payable to
Convertible Subordinated Debentures,
3,213 shares .............................. (703)
Issuance of common stock with the
exchange of $370,000 of Convertible
Subordinated Debentures into 4% notes
payable, 50,690 shares ..................... 15,851
Issuance of Series B Preferred stock with the
exchange of $370,000 Convertible
Subordinated Debentures into 4% notes
payable, 4,810 shares ..................... 48,100
Issuance of common stock with the exchange
of $177,000 15% notes payable into 4%
notes payable, 17,700 shares ............ 5,487
Issuance of Series B preferred stock with the
exchange of $177,000 15% notes payable
into 4% notes payable, 7,546 shares ...... 75,460
Issuance of common stock with the exchange
of $2,000,000 Convertible Subordinated
Debentures into equity, 795,393 shares ... 2,620,469
Issuance of common stock with the exchange
of $4,973,500 4% notes payable into
equity 2,486,750 shares .................. 4,927,435
Issuance of stock for exercise of warrants,
2,092,500 shares ........................... 200,000
Issuance of stock from treasury for
employment service awards, 1,200
shares .................................... 3,600 510
Issuance of common stock purchase
warrants to stockholder .................. 600,000
Payments on receivable from Employee
Stock Ownership Plan ..................... 237,142 237,142
Dividends on Series B Preferred Stock ...... (93,795) (93,795)
Net loss .................................... (1,258,731) (1,258,731)
_____________ ______________
Balance, March 31, 1997 ..................... (50,951,535) (1,168,537) - (1,867,115)
_____________ ____________ ____________ ______________
Issuance of common stock with the
exchange of $20,000 of Convertible
Subordinated Debentures into equity,
8,223 shares .............................. 27,140
Issuance of common stock purchase
warrants to stockholder .................. 1,000,000
Dividends on Series B Preferred Stock ...... (94,120) (94,120)
Net loss .................................... (7,913,210) (7,913,210)
_____________ ______________
Balance, March 31, 1998 ..................... $ (58,958,865) $ (1,168,537) $ - $ (8,847,305)
============= ============ ============ ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies
a. NATURE OF BUSINESS: Xyvision, Inc. (the "Company"), which operates in a
single industry segment, designs and markets software for publishing,
document management, color design, and prepress applications.
b. BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Xyvision, Inc. and all its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
c. CASH: The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
The Company anticipates that its cash requirements for fiscal 1999 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 from Tudor Trust. 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 1999, the Company expects to require cash
in excess of the current terms of the credit line. There can be no
assurance that the forbearance by the debtholders will continue 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.
d. INVENTORIES: Inventories are stated at the lower of cost, determined
under the first-in, first-out method, or market.
e. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Major
renewals and improvements are capitalized while repair and maintenance
charges are expensed when incurred. Depreciation and amortization are
computed on a straight-line basis over the useful lives of the assets,
except for leasehold improvements that are amortized over the lesser of
the term of the lease or the estimated useful life of the related asset.
When assets are sold or retired, their cost and related accumulated
depreciation are removed from the accounts. Any gain or loss is included
in income.
The following lives are used to provide for depreciation and amortization:
<TABLE>
<S> <C>
LIVES IN YEARS
_______________
Design, test, and manufacturing equipment ...... 2-5
Office furniture and fixtures .................. 7
Leasehold improvements ........................ 2-4
Purchased software .............................. 5
Delivery and service vehicles .................. 3
</TABLE>
f. REVENUE RECOGNITION: Revenues from equipment, software, and supplies are
recognized upon shipment. Maintenance revenues are recognized over the
contractual periods and noncontractual maintenance services are recognized
as the services are provided.
g. SOFTWARE DEVELOPMENT COSTS: Costs for research, design, and development
of software for sale to others incurred prior to the achievement of
"technological feasibility" are charged to expense. The Company
capitalizes certain software costs in accordance with Statement of
Financial Accounting Standard ("SFAS")
20
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
No. 86, "Accounting for costs of computer software to be sold, leased or
otherwise marketed." The Company's policy is to amortize capitalized
software costs by the greater of (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross
revenues for that product or (b) the straight-line method over the
remaining estimated life of the product including the period being
reported on. It is reasonably possible that those estimates of anticipate
future gross revenues, the remaining estimated economic life of the
product, or both will be reduced significantly in the near term. As a
result, the carrying amount of the capitalized software costs may be
reduced materially in the near term.
h. Income Taxes: The Company follows the provisions of SFAS No. 109,
"Accounting for Income Taxes." Income tax expense is based on reported
earnings before income taxes. Deferred income taxes reflect the impact of
temporary differences between the amount of assets and liabilities
recognized for financial statement purposes and such amounts recognized
for tax purposes. These deferred taxes are measured by applying currently
enacted tax rates. Applicable tax credits are recognized as a reduction in
the provision for income taxes in the year in which they are available.
i. Warranty Costs: The Company warrants the majority of its products for 90
days from the date of customer acceptance. Estimated warranty costs are
provided at the time of sale. Warranty costs incurred by the Company have
not been significant.
j. Earnings Per Common Share: The Company has adopted Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per
share," which requires the presentation of basic and diluted earnings per
share. Basic earnings per share excludes the dilutive effect of common
equivalent securities and is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if stock options were exercised that
resulted in the issuance of common stock that then shared in the earnings
of the entity. In accordance with SFAS 128, as of March 31, 1998, the
Company has restated all prior period earnings per share data presented.
k. Concentration of Credit Risk: Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally
of trade receivables.
Concentrations of credit risk with respect to trade receivables are due to
the number of customers operating primarily in the electronic publishing
industry, which includes commercial publishers, printers, and trade shops.
l. Use of Estimates: 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 and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates
included in the financial statements are accounts receivable and sales
allowances, as well as the amount of capitalized software costs. Actual
results could differ from those estimates.
m. New Accounting Pronouncements:In June 1997, the Financial Accounting
Standards Board ("FASB"), issued SFAS No. 130 "Reporting Comprehensive
Income." The statement, which must be adopted for periods beginning after
December 15, 1997, establishes standards for reporting and displaying
comprehensive income and its components in consolidated financial
statements. The effect of adopting SFAS 130 is not expected to impact the
Company's financial position.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related information", which must be adopted for periods
beginning after December 15, 1997. Under the new standard, companies will
be required to report certain information about operating segments in
consolidated financial statements. Operating segments will be determined
based on the method by which management organizes its business for making
operating decisions and assessing performance. The standard also requires
that companies report certain information about their products and
services, the geographic areas in which they operate, and their major
customers. The Company is currently evaluating the effect, if any, of
implementing SFAS No. 131.
21
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company will adopt Statement of Position (SOP) 97-2 "Software Revenue
Recognition" in fiscal year 1999. This Statement supersedes SOP 91-1 on
software revenue recognition. This statement establishes revenue
recognition criteria for arrangements to deliver software that do not
require significant production, modification or customization of the
software. This Statement also establishes requirements for recognizing
revenue when multiple elements exist in a software arrangement. The
Company is currently evaluating the effect, if any, of implementing SOP
97-2.
2. Accounts Receivable
Trade receivables do not contain any material amounts collectible over a
period in excess of one year.
3. Inventories
Inventory consists primarily of finished goods from third party vendors.
4. Property and Equipment
Property and equipment consists of:
<TABLE>
<S> <C> <C>
MARCH 31, 1998 MARCH 31, 1997
______________ ______________
Design, test, and manufacturing equipment ...... $ 2,332,982 $ 2,419,587
Office furniture and fixtures .................. 335,128 577,509
Leasehold improvements ........................ 422,289 1,260,503
Purchased software .............................. 270,181 278,573
Delivery and service vehicles .................. 9,333 9,333
______________ ______________
3,369,913 4,545,505
Accumulated depreciation and amortization ...... (2,519,330) (3,813,180)
______________ ______________
$ 850,583 $ 732,325
============== ==============
</TABLE>
Depreciation and amortization expense for property and equipment for
fiscal 1998, 1997 and 1996 was $471,000, $483,000 and $777,000, respectively.
5. Other Assets
Other assets consists of the following, which are presented net of any
accumulated amortization
<TABLE>
<S> <C> <C>
MARCH 31, 1998 MARCH 31, 1997
________________ ________________
Capitalized software costs ...... $ 975,307 $ 2,269,449
Debenture issuance costs ......... 10,622 14,242
Other ........................... 104,524 116,216
_______________ _______________
$ 1,090,453 $ 2,399,907
=============== ===============
</TABLE>
Capitalized software costs amortized and charged to expense, including
adjustments to net realizeable value of $798,000 in fiscal 1998, were
$2,275,000, $1,152,000, and $1,357,000 in fiscal 1998, 1997, and 1996,
respectively. Capitalized software costs are presented net of accumulated
amortization of $2,653,000 and $4,447,000 at March 31, 1998 and 1997,
respectively.
Debenture issuance costs amortized and charged to expense were $4,000,
$6,000, and $10,000, in fiscal 1998, 1997, and 1996, respectively. In addition,
as a result of the exchange of Debentures in fiscal 1997 related Debenture
issuance costs of $27,000 were written off as a reduction to the extraordinary
gain recognized in fiscal year 1997. The accumulated amortization of the
Debenture issuance costs was $774,000 and $770,000 at March 31, 1998 and 1997,
respectively. (See Note 8.)
22
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Other Current Liabilities
Other current liabilities consists of:
<TABLE>
<S> <C> <C>
MARCH 31, 1998 MARCH 31, 1997
________________ ________________
Interest payable on debentures ..................... 561,303 487,089
Dividends payable on Series B Preferred Stock ...... 210,209 116,089
Other ............................................. 175,208 282,808
_______________ _______________
$ 946,720 $ 885,986
=============== ===============
</TABLE>
7. Note Payable to Stockholder
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, 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 of 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
23
<PAGE>
<PAGE>
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.
The Company entered into an additional 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.
On November 10, 1997, the Company and Tudor Trust entered into an
additional amendment to the line of credit to increase the maximum loan amount
thereunder from $6,000,000 to $8,300,000. Such amendment also (i) reduced the
interest rate on the line of credit from 8% to 6%, (ii) eliminated 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, (iii)
provided 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 new landlord, and (iv) extended
the term of the line of credit from December 31, 1997 to March 31, 2001. In
consideration for such amendment to the line of credit, the Company issued to
Tudor Trust a warrant for the purchase of 10,000,000 shares of Common Stock of
the Company at an exercise price of $.16, the fair market value of the Common
Stock on the date of warrant issuance.
The Company received a preliminary appraisal from an independent
third-party of the value of the common stock purchase warrants as of the date
of warrant issuance of $.10 per warrant. Such appraisal is subject to
finalization. The value of the warrants is being amortized on a straight-line
basis over the remaining term of the credit line and charged to interest
expense.
In June 1998, the Company and Tudor Trust agreed in principle on an
amendment to the line of credit that would, among other things, (i) increase
the maximum loan amount thereunder from $8,300,000 to $13,500,000, (ii) provide
that Tudor Trust shall have the sole discretion to decide whether or not to
make advances of funds thereunder, (iii) provide Tudor Trust with the option of
receiving the interest payable thereunder in cash or in shares of Common Stock
based on the fair market value of the Common Stock, and (iv) provide for the
issuance by the Company to Tudor Trust of a common stock purchase warrant
covering 3,000,000 shares of Common Stock of the Company at a purchase price
equal to the fair market value of the Common Stock on the date of issuance, and
(v) increase the interest rate on the line of credit from 6% to 8%. There can
be no assurance, however, that increased borrowings will be available under the
Company's line of credit, as proposed to be amended.
As of March 31, 1998, the Company had an outstanding credit line balance
of $10,200,000. As of June 11, 1998, the Company had an outstanding credit line
balance of $11,250,000.
24
<PAGE>
<PAGE>
8. Long-Term Debt
Long-term debt consists of:
<TABLE>
<S> <C> <C>
MARCH 31, MARCH 31,
1998 1997
___________ ___________
6% Convertible Subordinated Debentures ............ $1,355,000 $1,375,000
15% promissory notes, due fiscal 1996 ............ 116,110 86,364
4% promissory notes, due fiscal 1998 and 1999 ...... 735,000 735,000
___________ ___________
2,206,110 2,196,364
Less: Current portion of long-term debt ............ 2,206,110 2,031,364
___________ ___________
$ - $ 165,000
=========== ===========
</TABLE>
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, the 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 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, 1997 or 1998. 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 June 23, 1998, no such acceleration had occurred or
been threatened.
Between September 30, 1996 and March 31, 1998, 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 the accrued interest thereon, divided
by $3.33. The Company has accounted for the exchanges as a contribution of
capital by significant stockholders. As of March 31, 1998, 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.
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 March 31, 1998, 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
25
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
$10.00 per share of Series B Preferred Stock. As of March 31, 1998, 15%
Promissory Notes in an aggregate principal amount of $60,000 and accrued
interest of $56,000 were overdue. The Company may seek to restructure the
remaining 15% Promissory Notes, but there can be no assurance that it will do
so.
The Company intends to continue to convert its debt to equity,
specifically the 4% Promissory Notes. As of March 31, 1998, 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 March 31, 1998, 4% Promissory Notes
in an aggregate principal amount of $512,000 were overdue. The Company may seek
to restructure the remaining 4% Promissory Notes, but there can be no assurance
that it will do so.
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.
Interest expense amounted to $1,023,000, $1,007,000, and $807,000, in
fiscal 1998, 1997, and 1996, respectively.
9. Income Taxes
For fiscal years 1998, 1997, and 1996 the Company was not required to
provide for income taxes and had no effective income tax rate due to the
utilization of net operating loss carryforwards. The Company was not required
to make an alternative minimum tax payments in fiscal 1996, 1997 or 1998.
As of March 31, 1998, the Company had net operating loss carryforwards of
$52,905,000 expiring at various dates from fiscal 1999 to fiscal 2013,
investment tax credits of $150,000 expiring at various dates from fiscal 1999
to fiscal 2002, and research and development credits of $1,439,000 expiring at
various dates from fiscal 1999 to fiscal 2009. These items are available to
reduce future income taxes payable.
Additionally, the Company has approximately $2,500,000 of net operating
loss carryforwards for regular federal income tax and alternative minimum tax
purposes from the acquisition of Contex Graphics Systems, Inc. These acquired
net operating loss carryforwards, expiring at various dates from fiscal 1999 to
fiscal 2001, have limitations on their use pursuant to the United States
Internal Revenue Code and are available only to offset income from that
subsidiary.
As of March 31, 1998, 1997, and 1996 the Company's deferred tax assets of
approximately $21,693,000, $20,157,000 and $20,214,000, respectively, consisted
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.
Under Federal tax laws, certain changes in ownership of the Company, which
may not be within the Company's control, may restrict future utilization of
these carryforwards.
26
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Stock Option Plans
The Company's 1982 Stock Option Plan expired on May 5, 1992. No options
were granted under the 1982 Stock Option Plan after March 31, 1992. Under the
1982 Stock Option Plan, incentive stock options were granted at a price greater
than or equal to fair market value at the date of grant. Currently, all options
outstanding are vested. Options expire ten years subsequent to award. terms of
such plan. There were options to purchase 99,264 shares of common stock
outstanding under the 1982 Stock Option Plan at March 31, 1998.
During fiscal 1992 the Board adopted the 1992 Stock Option Plan for which
1,000,000 shares of common stock were reserved. The 1992 Stock Option Plan was
approved by the Company's stockholders at the Company's 1992 Annual Meeting of
Stockholders. Under the 1992 Stock Option Plan, incentive stock options are
granted at a price greater than or equal to fair market value at the date of
grant. Generally, options become exercisable at a rate of 25% over a four year
period. Options expire ten years subsequent to award. At the date of
termination, an employee's unvested options are canceled and any vested options
are canceled after 90 days.
At the 1994 Annual Meeting of Stockholders, the stockholders of the
Company approved an amendment to the Company's 1992 Stock Option Plan
increasing the authorized number of options that may be granted from 1,000,000
to 2,000,000. Options issued under the 1992 Stock Option Plan remain under the
terms of such plan. There were options to purchase 1,604,634 shares of Common
Stock outstanding under the 1992 Stock Option Plan at March 31, 1998. During
fiscal 1998, the Board adopted the 1997 Stock Incentive Plan for which
2,000,000 shares of common stock are reserved. No options had been granted
under the 1997 Stock Incentive Plan at March 31, 1998.
The following sets forth certain information relating to the 1982 Stock
Option Plan and the 1992 Stock Option Plan for the years ended March 31,1996,
1997 and 1998:
<TABLE>
<S> <C> <C>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
_________ _________________
Options outstanding at March 31, 1995 ...... 1,225,617 $ 0.35
Granted ................................. 277,293 0.93
Cancelled .............................. (237,895) 0.48
Exercised .............................. (94,660) 0.35
_________
Options outstanding at March 31, 1996 ...... 1,170,355 0.49
Granted ................................. 1,393,000 0.50
Cancelled .............................. (460,550) 0.40
Exercised .............................. - -
_________
Options outstanding at March 31, 1997 ...... 2,102,805 $ 0.52
Granted ................................. 54,000 0.46
Cancelled .............................. (452,907) 0.49
Exercised .............................. - -
_________
Options outstanding at March 31, 1998 ...... 1,703,898 $ 0.52
=========
</TABLE>
Under the 1982 Stock Option Plan and the 1992 Stock Option Plan, options
were exercisable for 683,308, 427,094 and 675,039 shares of Common Stock at
March 31, 1996, 1997 and 1998, respectively. At March 31, 1996, 1997 and
1998, options for the purchase of 979,906, 31,096 and 2,367,386 shares of
Common Stock, respectively, were available for future grants under the 1997
and 1992 Stock Incentive Plan.
27
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
________________________________________________________________________ _________________________________
Weighted-Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
__________________ ___________ _________________ _______________ ___________ _______________
$0.19 to $.29 100,000 6.49 $ .27 55,000 $ .27
0.30 to .49 234,743 4.28 .34 234,743 .34
0.50 to .69 1,178,250 8.56 .50 300,875 .50
0.70 to 0.89 7,500 3.46 .81 7,500 .81
0.90 to 1.09 180,085 7.38 .95 73,601 .95
1.10 to 5.00 3,320 0.63 4.77 3,320 4.77
___________ ___________
$0.19 to $5.00 1,703,898 7.69 $ 0.52 675,039 $ 0.50
=========== ===========
</TABLE>
On October 21, 1992, the 1992 Director Stock Option Plan was approved by
stockholders of the Company. Under this Plan, options to purchase up to a
total of 150,000 shares of Common Stock may be granted to outside directors
of the Company. Each outside director who is initially elected to the Board
of Directors is granted an option for 20,000 shares of Common Stock, at an
exercise price equal to the fair market value of the Common Stock on the
date of grant. Each option becomes exercisable in five equal annual
installments beginning on the date of grant, provided that all outstanding
options will become exercisable in full in the event of a "change in
control" of the Company (as defined in the Plan) which is not approved by
the Board of Directors. In general, an optionholder may exercise his
option, to the extent vested, only while he is a director of the Company
and for up to three months thereafter. In connection with the adoption of
the 1992 Director Stock Option Plan, the Company terminated the 1989
Director Stock Option Plan. Under the 1992 Director Stock Option Plan,
options to purchase an aggregate of 60,000 shares of Common Stock were
outstanding at March 31, 1996, 1997 and 1998, respectively. At March 31,
1996, 1997 and 1998, options for the purchase of 48,000, 52,000 and 56,000
shares of Common Stock, respectively, were exercisable. At March 31, 1996,
1997 and 1998, options for the purchase of 90,000 shares of Common Stock
were available for future grant under the Plan.
The Company has adopted the disclosure provisions of SFAS 123 "Accounting
for Stock-Based Compensation" and has applied APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized for its stock option plans. The fair value of each
option granted during fiscal 1996, 1997 and 1998 is estimated on the date
of the grant using the Black-Scholes pricing model with the following
assumptions:
<TABLE>
<S> <C> <C> <C>
FISCAL FISCAL FISCAL
1998 1997 1996
______ _______ ______
Dividend yield ............... 0 0 0
Expected volatility ......... 80.0% 80.0% 80.0%
Risk-free interest rate ...... 6.5% 6.3% 6.8%
Expected life (years) ......... 10.0 10.0 10.0
Weighted average fair value of options granted at or
above fair value during:
Fiscal 1998 .................. $ 0.24
Fiscal 1997 .................. $ 0.43
Fiscal 1996 .................. $ 0.79
</TABLE>
28
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had compensation cost for the Company's fiscal 1996, 1997 and 1998 stock
option grants been determined consistent with SFAS No. 123, the Company's
net loss allocable to common stockholders and net loss per share would
approximate the pro forma amounts below:
<TABLE>
<S> <C> <C>
NET LOSS BASIC/DILUTED
ALLOCABLE TO COMMON NET LOSS
STOCKHOLDERS PER SHARE
___________________ _____________
As reported:
Fiscal 1998 ...... $ (8,007,330) (0.56)
Fiscal 1997 ...... $ (1,352,526) (0.11)
Fiscal 1996 ...... $ (5,792,906) (0.66)
Pro Forma:
Fiscal 1998 ...... $ (8,147,356) (0.57)
Fiscal 1997 ...... $ (1,453,344) (0.12)
Fiscal 1996 ...... $ (5,820,318) (0.67)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards made
prior to fiscal year 1996. Additional awards in future years are
anticipated.
11. Rights Agreement
In October 1988, the Company entered into a Rights Agreement and declared
a dividend distribution of one Right for each share of the Common Stock of the
Company outstanding on October 26, 1988. Each Right entitles the holder to
purchase from the Company 1/100 of a share of $1.00 par value Series A Junior
Participating Preferred Stock at an exercise price of $35.00 per Right, subject
to adjustment. The Rights will not be exercisable or separable from the Common
Stock until ten business days after a party acquires beneficial ownership of
20% or more of the Company's Common Stock or announces a tender offer for at
least 30% of its Common Stock outstanding. Except for Saltzman Partners' and
Tudor Trust's historical acquisitions of the Company's Common Stock, which have
been exempted by the Board of Directors from the Rights Agreement, the Company
is not aware of the occurrence of any such events. The issuance of the Rights
does not dilute ownership or affect reported earnings per share.
12. Profit-Sharing and Savings Plans
a. Employee Stock Ownership Plan
In fiscal 1990, the Company created the Xyvision, Inc. Employee Stock
Ownership Plan and Trust (the "Trust") and entered into a Term Loan
Agreement with the Trust whereby the Trust borrowed $1,800,000 from the
Company and paid the proceeds to the Company to purchase 400,000 shares of
the Company's Common Stock at $4.50 per share. The loan was fully repaid
during fiscal 1997. The Plan covers substantially all employees and, as
principal payments are made on the term loan, shares held by the Trust are
allocated to eligible employees. Payments of approximately $237,000 for
fiscal 1997 and $257,000 in fiscal 1996, were made to the Trust, which the
Trust applied against its loan to the Company. These payments caused an
allocation to the eligible employees of 52,698 shares of the Company's
Common Stock for fiscal 1997, and 57,143 shares of the Company's Common
Stock for fiscal 1996. No payment was required or made during fiscal 1998.
The Company charged $87,000 in fiscal 1997 and $257,000 in fiscal 1996 to
operations for contributions to the Trust. The Company incurred no charges
to operations for contributions to the Trust in fiscal 1998.
29
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
b. Savings Plan
The Company has a 401(k) Savings Plan under which employees may voluntarily
defer a portion of their compensation and the Company matches a portion of
the employee deferral. All employees employed within the United States with
at least three months of continuous service are eligible for the Plan.
Company contributions vest 100% immediately. The Company's contributions to
this Plan and charges to expense amounted to $72,000, $67,000, and $65,000
in fiscal 1998, 1997 and 1996, respectively.
13. Commitments and Contingencies
a. Leases
At March 31, 1998, the Company was committed under operating leases,
principally for building and office space. Certain leases require the
payment of expenses under escalation clauses. The major facilities lease is
for a four-year term, ending January 31, 2002.
Future minimum lease payments under all noncancelable leases as of March
31, 1998 are as follows:
<TABLE>
<S> <C>
FISCAL YEAR
_________________
1999 ............ 769,000
2000 ............ 754,000
2001 ............ 760,000
2002 ............ 657,000
2003 ............ 107,000
Thereafter ...... 151,000
___________
Total $3,198,000
===========
</TABLE>
Rental expense under all operating leases was approximately $767,000,
$742,000 and $1,200,000, in fiscal 1998, 1997 and 1996, respectively.
b. Employment Agreements
The Company has instituted a severance benefit plan which covers
substantially all employees. The Plan stipulates, in general, that in the
event of a change in control of the Company (as defined), any employee
terminated within twelve months of such event, without cause, would be
entitled to receive a cash payment equal to his annual base compensation.
The Board of Directors may declare by resolution that an event otherwise
constituting a change in control per this Plan will not be considered a
change in control. Therefore, it cannot be reasonably estimated what the
potential liability to the Company would be under this Plan.
c. Contingencies
The Company is party to several pending legal proceedings and claims.
Although the outcome of such proceedings and claims cannot be determined
with certainty, the Company's management is of the opinion that the final
outcome should not have a material adverse effect on the Company's
operations or financial position.
d. Year 2000
The Company recognizes that it must ensure that its products and operations
will not be adversely impacted by various so-called "Year 2000" systems and
software failures which can arise in certain time sensitive functions. All
of the Company's products are currently Year 2000 compliant, and therefore
the Company does not expect to undertake additional research and
development efforts in this regard. In addition, the Company is in the
process of identifying anticipated costs, problems and uncertainties
associated with making its internal use operating systems Year 2000
compliant. The Company expects to resolve the Year 2000 issue with respect
to its computer systems and software applications through upgrade,
conversion, modification or replacement of non-compliant systems and
applications. There can be no assurance, however, that the systems of other
parties upon which the Company's business also relies will be Year 2000
compliant. The costs of becoming Year 2000 compliant, or failure thereof by
the Company or other parties, could have a material adverse effect on the
Company's business, financial condition or results of operations.
30
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
d(e). Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
14. Major Customers and Geographic Revenues
No single customer accounted for more than 10% of revenues in fiscal 1998,
1997, or 1996.
Sales to unrelated customers by geographic region for fiscal 1998, 1997
and 1996 were as follows:
<TABLE>
<S> <C> <C> <C>
FISCAL 1998 FISCAL 1997 FISCAL 1996
______________ ______________ ______________
North America ...... $ 12,439,198 $ 15,537,000 $ 15,578,000
Western Europe ...... 3,320,069 5,312,000 5,339,000
Asia ............... 741,550 1,385,000 1,337,000
Australia ............ - - 160,000
============= _____________ _____________
Total ............... $ 16,500,817 $ 22,234,000 $ 22,414,000
============= ============= =============
</TABLE>
15. Related Parties
The Company has a line of credit with 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. As a result of the outstanding line of credit balance, the
Company paid Tudor Trust $277,000, $409,000 and $406,000 in fiscal 1996, 1997
and 1998, respectively and as a result of the 15% Promissory Note Exchange
programs (described in Note 8 to the consolidated financial statements), the
Company paid an additional $37,000 of interest to Tudor Trust in fiscal 1997.
16. Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings per Share" in the fiscal
year ended March 31, 1998 and all historical net income per share data
presented has been restated to conform to the provisions of this statement.
SFAS No. 128 establishes a different method of computing net income per share
than is currently required under the provisions of Accounting Principles Board
Opinion No. 15. The following table reconciles the numerator and the
denominators of the basic and diluted earnings per share (EPS) computations as
shown on the Consolidated Statement of Income included in this report on Form
10-K.
<TABLE>
<S> <C> <C> <C>
Fiscal Fiscal Fiscal
1998 1997 1996
___________ ___________ ___________
Basic and diluted EPS Computation:
Loss before extraordinary item .................. (7,913,210) (1,358,731) (5.706,990)
Less; Series B Preferred Stock Dividends ......... 94,120 93,795 85,916
___________ ___________ ___________
Loss allocable to common stockholders before
extraordinary item .............................. (8,007,330) (1.452,526) (5,792,906)
Extraordinary item .............................. - 100,000 -
Loss allocable to common stockholders ............ (8,007,330) (1,352,526) (5,792,906)
=========== =========== ===========
Weighted average common shares outstanding ...... 14,269,404 12,096,914 8,725,829
=========== =========== ===========
Basic and diluted EPS:
Loss allocable to common stockholders before
extraordinary item .............................. (0.56) (0.12) (0.66)
Extraordinary item .............................. - 0.01 -
___________ ___________ ___________
Net loss per share .............................. (0.56) (0.11) (0.66)
=========== =========== ===========
</TABLE>
31
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At March 31, 1998, the following antidilutive common stock equivalents
were not included in the diluted EPS calculation as a result of the net loss
for the period: (i) options to purchase 1,763,898 shares of common stock, (ii)
common stock warrants to purchase 22,162,500 shares of common stock, (iii)
470,598 shares of Series B Preferred Stock and (iv) 497,388 common equivalents
as a result of certain debt to equity transactions.
At March 31, 1997, the following antidilutive common stock equivalents
were not included in the diluted EPS calculation as a result of the net loss
for the period (i) options to purchase 2,162,805 shares of common stock, (ii)
common stock warrants to purchase 12,162,500 shares of common stock (iii)
470,598 shares of Series B Preferred Stock, and (iv) 480,430 common equivalents
as a result of certain debt to equity transactions.
At March 31, 1996, the following antidilutive common stock equivalents
were not included in the diluted EPS calculation as a result of the net loss
for the period (i) options to purchase 1,230,355 shares of common stock, (ii)
common stock warrants to purchase 2,925,000 shares of common stock (iii)
445,886 shares of Series B Preferred Stock and (iv) 3,087,297 common
equivalents as a result of certain debt to equity transactions.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
32
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information required by this item (i) will be included under the headings
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders (the "1998 Proxy Statement"), which information is
incorporated herein by reference, and (ii) is included in Part I of this Annual
Report on Form 10-K under the heading "Executive Officers of the Registrant,"
which information is incorporated herein by reference.
ITEM 11. Executive Compensation
Information required by this item will be included under the headings
"Director Compensation," "Executive Compensation," and "Agreements with Senior
Executives" in the 1998 Proxy Statement, which information is incorporated
herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item will be included under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the 1998
Proxy Statement, which information is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information required by this item will be included under the heading
"Certain Transactions" in the 1998 Proxy Statement, which information is
incorporated herein by reference.
33
<PAGE>
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. (1) Financial Statements
The following financial statements of Xyvision are included in Part II,
Item 8.
PAGE(S) IN
FORM 10-K
Report of Independent Accountants ....................................15
Consolidated Balance Sheets-March 31, 1998 and 1997 ..................16
Consolidated Statements of Operations
for the years ended March 31, 1998, 1997 and 1996 ..................17
Consolidated Statements of Cash Flows
for the years ended March 31, 1998, 1997 and 1996 .....................18
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended March 31, 1998, 1997 and 1996 ..................19
Notes to Consolidated Financial Statements ........................20-32
a. (2) Financial Statement Schedules
Financial statement schedules have been omitted because they are either not
required, not applicable or because the required information has been
included elsewhere in the financial statements or notes thereto.
a. (3) Exhibits
The Exhibits listed in the Exhibit Index immediately preceding such
exhibits are filed as part of this Annual Report on Form 10-K.
b. Reports on Forms 8-K
No reports on Form 8-K were filed in the last quarter of the Company's
fiscal year ended March 31, 1998.
34
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date:
June 26, 1998
/s/ Kevin J. Duffy
------------------------------------------------
Kevin J. Duffy
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the date indicated.
<TABLE>
<S> <C> <C>
Signature Title Date
/s/ Jeffrey L. Neuman Chairman of the Board of Directors
- ------------------------------
Jeffrey L. Neuman
/s/ Kevin J. Duffy President, June 26, 1998
- ------------------------------
Chief Operating Officer and Director
Kevin J. Duffy (Principal Executive Officer)
Vice President,
/s/ Eugene P. Seneta Chief Financial Officer,
- ------------------------------ Treasurer and Secretary
Eugene P. Seneta (Principal Financial
Accounting Officer)
/s/ Leland S. Kollmorgen Director
- ------------------------------
Leland S. Kollmorgen
/s/ James L. McKenney Director
- ------------------------------
James L. McKenney
/s/ James S. Saltzman Director
- ------------------------------
James S. Saltzman
</TABLE>
35
<PAGE>
<PAGE>
XYVISION, INC.
COMMISSION FILE NUMBER 000-14747
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Exhibit
Number Description
- --------------------------------------------------------------------------------
*3.1 - Restated Certificate of Incorporation of the Company
+++3.2 - Certificate of Amendment No. 6 to Certificate of Incorporation of the Company
A 3.3 - Certificate of Amendment to Certificate of Incorporation
A 3.4 - Certificate of Designation to Certificate of Incorporation of the Company designating Se-
ries B Preferred Stock
******3.5 - Amended and Restated By-laws of the Company as amended
B 3.6 - Certificate of Amendment of Amended & Restated Certificate of Incorporation
***4.1 - Indenture dated as of May 5, 1987 between the Company and Bankers Trust Company, as
Trustee, regarding the Company's $25,000,000 principal amount of 6% Convertible Sub-
ordinated Debentures Due 2002
****4.2 - Rights Agreement, dated as of October 19, 1988, between Xyvision, Inc. and the Con-
necticut Bank and Trust Company, N.A.
++4.3 - Amendment No. 1, dated January 8, 1992, to Rights Agreement between Xyvision, Inc.
and Mellon Bank, N.A. (formerly Connecticut Bank and Trust Company, N.A.)
A 4.4 - Amendment No. 2, dated September 16, 1992, to Rights Agreement between Xyvision,
Inc. and Mellon Bank, N.A. (formerly Connecticut Bank and Trust Company, N.A.)
A 4.5 - Amendment No. 3, dated January 2, 1996, to Rights Agreement between Xyvision, Inc.
and Mellon Bank, N.A. (formerly Connecticut Bank and Trust Company, N.A.)
**4.6 - Amendment, dated November 17, 1997, to Rights Agreement between Xyvision, Inc. and
Mellon Bank, N.A. (formerly Connecticut Bank and Trust, N.A.)
0++10.1 - 1992 Stock Option Plan
OC 10.2 - 1997 Stock Incentive Plan
**10.3 - Sublease Agreement, dated as of September 18, 1997, by and between the Company and
TASC, Inc.
X 10.4 - Secured Advance Facility Loan Agreement between the Company and Tudor Trust dated
July 2, 1992, as amended to date
A 10.5 - Second Amendment dated February 29, 1996, to the Amended Secured Advance Facility
Loan Agreement between the Company and Tudor Trust
A 10.6 - Third Amendment dated May 31, 1996, to the Amended Secured Advance Facility Loan
Agreement between the Company and Tudor Trust
**10.7 - Fourth Amendment, dated November 22, 1996, to the Amended Secured Advance Facility
Loan Agreement between the Company and Tudor Trust
**10.8 - Fifth Amendment, dated November 10, 1997, to the Amended Secured Advance Facility
Loan Agreement between the Company and Tudor Trust
0****** 10.9 - Severence Program for Executive Committee Corporate Officers
0****** 10.10 - Employee Severence Benefit Program
0******10.11 - Employee Stock Ownership Plan and Trust
0*****10.12 - 1992 Director Stock Option Plan
XX 10.13 - Form of Exchange Agreement for 15% Promissory Notes
B 10.14 - Form of Exchange Agreement for 4% Promissory Notes
B 10.15 - Form of Exchange Agreement for 6% Convertible Subordinated Debentures due 2002
+ 21.1 - List of Subsidiaries
23.1 - Consent of Independent Accountants
27 - Financial Data Schedule
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1988.
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
*** Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1987.
**** Incorporated by reference to the Company's Current Report on Form 8-K dated October 19, 1988.
***** Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 33-54018).
****** Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1990.
A Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996.
B Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
C Incorporated by reference to Annex A to the Company's Preliminary Schedule 14A filed August 4, 1997.
</TABLE>
36
<PAGE>
<PAGE>
XYVISION, INC.
COMMISSION FILE NUMBER 000-14747
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
INDEX TO EXHIBITS (CONT'D)
<TABLE>
<S> <C>
Exhibit
Number Description
- --------------------------------------------------------------------------------
+ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March
31, 1991.
++ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March
31, 1992.
+++ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March
31, 1993.
X Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March
31, 1994.
XX Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended
September 30, 1994.
0 Management contract or compensatory plan or arrangement filed as an exhibit to this Form
pursuant to
Items 14(a) and 14(c) of Form 10-K.
</TABLE>
37
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 357
<SECURITIES> 0
<RECEIVABLES> 4,363
<ALLOWANCES> (733)
<INVENTORY> 337
<CURRENT-ASSETS> 651
<PP&E> 11,712,298
<DEPRECIATION> 9,771,262
<TOTAL-ASSETS> 6,916
<CURRENT-LIABILITIES> 15,763
<BONDS> 0
0
235
<COMMON> (7,914)
<OTHER-SE> (1,169)
<TOTAL-LIABILITY-AND-EQUITY> 6,916
<SALES> 16,501
<TOTAL-REVENUES> 16,501
<CGS> 10,826
<TOTAL-COSTS> 10,826
<OTHER-EXPENSES> 12,574
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,014
<INCOME-PRETAX> (7,913)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,913)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Xyvision, Inc. on Form S-8 (File Nos. 333-56277, 33-10405, 33-15473, 33-29845,
33-29486, 33-36243, 33-41846, 33-54014, 33-54018 and 333-19529) of our report
dated June 11, 1998, which report disclaims an opinion on consolidated
financial statements of Xyvision, Inc. as of March 31, 1998 and 1997 and for
each of the three fiscal years in the period ended March 31, 1998 due to
uncertainties as to the Company's ability to continue as a going concern.
/s/ Coopers & Lybrand L.L.P
Coopers & Lybrand L.L.P.
Boston, Massachusetts
June 26, 1998
1
<PAGE>
