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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|q?[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
|q? TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
COMMISSION FILE NUMBER 000-14747
XYVISION, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2751102
(State or other jurisdiction (I.R.S. Employer Identification
Number)
of incorporation or organization)
30 New Crossing Road, Reading, MA 01867
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (781) 756-4400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes ---------- No ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of
August 14, 1998.
Common Stock, $.03 par value 14,271,415
(Title of each class) (number of shares)
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Form 10-Q
Table of Contents
Page
Part I. Financial Information
Consolidated Balance Sheets
at June 30, 1998 and March 31, 1998.................................. 2
Consolidated Statements of Operations
for the three months ended June 30, 1998 and 1997.................... 3
Consolidated Statements of Cash Flows
for the three months ended June 30, 1998 and 1997.................... 4
Notes to Consolidated Financial Statements............................ 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 10
Quantitative and Qualitative Disclosures About Market Risk........... 11
Part II. Other Information.................................................12
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. The important factors discussed below under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," including risks related to the Company's credit line availability
and debt restructuring efforts, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made
herein and presented elsewhere by management from time to time. Such
forward-looking statements represent management's current expectations and are
inherently uncertain. Investors are warned that actual results may differ from
management's expectations.
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XYVISION, INC.
CONSOLIDATED BALANCE SHEETS
at June 30, 1998 and March 31, 1998
<TABLE>
<S> <C> <C>
(Unaudited)
June 30, March 31,
1998 1998
---------- -------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 229 $ 356
Accounts receivable:
Trade, less allowance for doubtful accounts of $717 at June 30, 1998 and
$733 at March 31, 1998 .................................................... 2,820 3,630
Inventories .................................................................. 350 337
Other current assets ......................................................... 544 652
---------- -------
Total current assets ..................................................... 3,943 4,975
Property and equipment, net .................................................. 765 851
Other assets, net, principally software development costs .................... 1,105 1,090
---------- -------
Total assets ........................................................... $ 5,813 $ 6,916
========== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to a stockholder, less unamortized discount of $946 at June 30,
1998 and $1,032 at March 31, 1998 $ 10,554 $ 9,168
Current portion of long-term debt ............................................ 2,206 2,206
Accounts payable and accrued expenses ........................................ 1,713 2,277
Other current liabilities .................................................... 2,174 2,112
---------- -------
Total current liabilities ................................................ 16,647 15,763
---------- -------
Total liabilities ...................................................... 16,647 15,763
---------- -------
Commitments and contingencies .................................................. - -
Stockholders' deficit:
Capital stock:
Series preferred stock, $1.00 par value; 2,700,000 shares authorized;
no shares issued .......................................................... - -
Series B preferred stock, $1.00 par value; 300,000 shares authorized;
235,299 issued at June 30, 1998 and March 31, 1998 (aggregate liquidation
preference of $3,175 and $3,151, respectively) ............................ 235 235
Common stock, $.03 par value; 50,000,000 shares authorized; 14,748,080
issued at June 30, 1998 and March 31, 1998 ................................ 442 442
Additional paid-in capital ................................................... 50,602 50,602
Accumulated deficit .......................................................... (60,945) (58,958)
---------- -------
(9,666) (7,679)
Less:
Treasury stock, at cost; 476,665 shares at June 30, 1998 and
March 31, 1998 ............................................................ 1,168 1,168
---------- -------
Total stockholders' deficit ................................................. (10,834) (8,847)
---------- -------
Total liabilities and stockholders' deficit ............................ $ 5,813 $ 6,916
========== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
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XYVISION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended June 30, 1998 and 1997
(In thousands, except per share data)
<TABLE>
<S> <C> <C>
Three Months Ended
---------------------------
June 30, June 30,
1998 1997
------- ------
(Unaudited)
Revenues:
Systems ....................................... $ 984 $2,542
Service ....................................... 1,687 2,462
------- ------
Total revenues ................................ 2,671 5,004
------- ------
Cost of sales:
Systems ....................................... 219 991
Service ....................................... 1,277 1,725
------- ------
Total cost of sales ........................... 1,496 2,716
------- ------
Gross margin ......................... 1,175 2,288
------- ------
Expenses:
Research and development ...................... 941 750
Marketing, general and administrative ......... 1,922 2,167
------- ------
Total operating expenses ...................... 2,863 2,917
------- ------
Loss from operations ................. (1,688) (629)
------- ------
Other expense, net:
Interest income ............................... 4 1
Interest expense - third party ................ (31) (34)
Interest expense - stockholder ................ (248) (189)
------- ------
Total other expense, net ............. (275) (222)
------- ------
Loss before income taxes ............. (1,963) (851)
Provision for income taxes ........... - -
------- ------
Net loss ............................. (1,963) (851)
Series B Preferred Stock dividends ... 24 24
------- ------
Net loss allocable to common stockholders$(1,987) $ (875)
======= ======
Basic and diluted earnings per share:
Loss allocable to common stockholders (0.14) (.06)
------- ------
Net loss per share ................... (0.14) (.06)
======= ======
Weighted average common and common
equivalent shares outstanding ................. 14,271 14,263
======= ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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XYVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended June 30, 1998 and 1997
(In thousands)
<TABLE>
<S> <C> <C>
Three Months Ended
----------------------------
June 30, June 30,
1998 1997
------- -----
(Unaudited)
Operations:
Net loss ..................................................................... $(1,963) $(851)
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization ................................................ 330 575
Provisions for losses on accounts receivable ................................. 153 75
Operating assets and liabilities:
Accounts receivable ......................................................... 657 (276)
Inventories ................................................................. (13) (66)
Accounts payable and accrued expenses ....................................... (564) (235)
Other current liabilities ................................................... 62 81
Other assets ................................................................ 110 35
------- -----
Net cash used for operations ................................................. (1,228) (662)
Investments:
Additions to property and equipment .......................................... (33) (80)
Capitalized software ......................................................... (143) (427)
------- -----
Net cash used for investments ................................................ (176) (507)
Financing:
Proceeds from line of credit from a stockholder .............................. 1,300 1,300
Repayment of line of credit to a stockholder ................................. - (200)
Dividends on preferred stock ................................................. (24) (24)
------- -----
Net cash provided from financing ............................................. 1,276 1,076
Net decrease in cash and cash equivalents .................................... (128) (93)
Cash and cash equivalents at the beginning of the period ..................... 357 261
------- -----
Cash and cash equivalents at the end of the period ........................... $ 229 $ 168
======= =====
Supplemental Information:
Conversion of 6% debentures to equity ....................................... - 20
Conversion of accrued interest on 6% debentures to equity ................... - 72
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying financial statements reflect
all adjustments (including normal recurring adjustments) necessary to
present fairly the Company's consolidated financial position as of June
30, 1998 and the results of its consolidated operations and consolidated
cash flows for the interim periods ended June 30, 1998 and 1997. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements
should be read in conjunction with the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets, liabilities and accrued litigation at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and would impact future results of operations and cash
flows.
The results of consolidated operations for the interim period ended June
30, 1998 are not necessarily indicative of the results of consolidated
operations that may be expected for the complete fiscal year.
2. Trade receivables do not contain any material amounts collectible over a
period in excess of one year.
The Company sells its products to a wide variety of customers in a variety
of industries. The Company performs ongoing credit evaluations of its
customers but does not require collateral or other security to support
customer receivables. The Company maintains reserves for credit losses and
such losses have been within management's expectations.
3. Inventories are stated at the lower of cost, determined on a first-in,
first-out method, or market and consist primarily of finished goods.
4. On June 30, 1992, the Company obtained a $2,000,000 line of credit with
Tudor Trust ("Tudor Trust"), the largest stockholder of the Company. Mr.
Jeffrey Neuman, the grantor, sole trustee and sole current beneficiary of
Tudor Trust, also serves as Chairman of the Board of Directors of the
Company. The line, which is payable on demand, is collateralized by
substantially all of the assets of the Company and has been used for
working capital and general business purposes. Interest on the line of
credit is payable monthly. The Company issued 400,000 shares of common
stock and a common stock purchase warrant for 100,000 shares of common
stock at an exercise price of $.50 per share to Tudor Trust for no
additional consideration upon signing of the line of credit. In addition,
as required by the line of credit, from September 30, 1992 through June
30, 1993, the Company granted Tudor Trust four additional common stock
purchase warrants, each covering 100,000 shares of common stock. On
September 28, 1993, the Company and Tudor Trust amended the line of
credit. Under the terms of this amendment: (i) the amount available under
the line of credit was increased from $2,000,000 to $2,500,000; (ii) the
annual interest rate was reduced from 13% to 10%; and (iii) the term of
the line of credit was extended from June 30, 1994 to June 30, 1995. In
consideration of such changes, the Company: (i) reduced the exercise price
of 200,000 and 100,000 common stock purchase warrants exercisable by Tudor
Trust from $.50 and $.25 per share, respectively, to $.09 per share (the
fair market value of the common stock on September 28, 1993); (ii) issued
200,000 shares of common stock and a warrant to purchase 300,000 shares of
common stock at an exercise price of $.09 per share to Tudor Trust for no
additional consideration; and (iii) agreed to grant Tudor Trust up to
eight additional warrants, each covering 125,000 shares of common stock at
an exercise price at the lesser of the fair market value of the common
stock on the date of issue or $1.00 per share.
On December 3, 1993, the Company and Tudor Trust entered into an
additional amendment to the line of credit. Under the terms of this
amendment, the amount available under the line of credit was increased to
$3,000,000. In consideration of this change, the Company: (i) issued
100,000 shares of common stock and a warrant to purchase 500,000 shares of
common stock at fair market value of the common stock on December 3, 1993
and (ii) agreed to grant Tudor Trust up to seven additional common stock
purchase warrants between December 31,
5
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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 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 has received an appraisal from an independent third-party of
the value of the common stock purchase warrants as of the date of warrant
issuance of $.11 per warrant. 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.
On July 1, 1998, the Company and Tudor Trust entered into an additional
amendment to the line of credit that, among other things, (i) increases
the maximum loan amount thereunder from $8,300,000 to $13,500,000, (ii)
provides that
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Tudor Trust shall have the sole discretion to decide whether or not to
make advances of funds thereunder, (iii) provides 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, (iv)
provides 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) increases the interest rate on the line of
credit from 6% to 8%. As of June 30, 1998, the Company had an outstanding
credit line balance of $11,500,000. As of August 14, 1998, the Company had
an outstanding credit line balance of $12,150,000.
5. In May 1987, the Company issued $25,000,000 principal aggregate amount of
6% Convertible Subordinated Debentures due 2002 (the "Debentures")
convertible into common stock at a conversion price of $22.50 per share.
Interest on the Debentures is payable annually (on May 5th) and the
Debentures may be called by the Company under certain conditions. At the
beginning of fiscal 1992, the Company had outstanding $22,410,000 of these
Debentures. This was a significant amount of debt for the Company and
represented an annual cash interest payment obligation of $1,344,600.
During fiscal 1992, the Company began a program to restructure its
financial position, specifically, the Debentures. There can be no
assurance, however, that increased borrowings will be available under the
Company's line of credit.
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 August 14,
1998, no such acceleration had occurred or been threatened.
Between September 30, 1996 and June 30, 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
June 30, 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 June 30, 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 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
7
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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 June 30, 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 June 30, 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 June 30, 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.
The Company anticipates that its cash requirements for the remainder of
fiscal 1999 will be satisfied mainly from its credit line, as 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. 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.
6. The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. Management has assigned a valuation allowance to fully
offset the future tax benefits of these deferred tax assets. There has
been no change to the valuation allowance during the three months ended
June 30, 1998.
8
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7.
<TABLE>
<S> <C> <C>
Three Months Ended
---------------------------
June 30, June 30,
1998 1997
------ ------
(Unaudited)
Basic and diluted EPS Computation:
Loss ............................................... (1,963) (851)
Series B Preferred Stock Dividends ................. 24 24
------ ------
Loss allocable to common stockholders .............. (1,987) (875)
------ ------
Weighted average common shares outstanding ......... 14,271 14,263
====== ======
Basic and diluted EPS:
Loss allocable to common stockholders .............. (0.14) (0.06)
------ ------
Net loss per share ................................. (0.14) (0.06)
====== ======
</TABLE>
During the first quarter of fiscal 1999, options to purchase 1,699,000
shares of common stock at prices ranging from $.28 to $5.00 with expiration
dates ranging up to December 22, 2007 were outstanding but were not
included in the computation of diluted EPS because the option exercise
prices were greater than the average market price of the common stock.
These options were still outstanding at the end of the first quarter of
fiscal 1999. Additionally, warrants to purchase 1,405,000 shares of common
stock at prices ranging from $.33 to $.53 with expiration dates ranging up
to December 31, 2000 were outstanding but were not included in the
computation of diluted EPS because the warrant exercise prices were greater
than the average market price of the common stock. These warrants were
still outstanding at the end of the first quarter of fiscal 1999. Also, the
following 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 5,000 shares of common stock, (ii) warrants to purchase 12,513,000
shares of common stock, (iii) 471,000 shares of Series B Preferred Stock,
and (iv) 582,000 common equivalents as a result of certain debt to equity
transactions.
During the first quarter of fiscal 1998, options to purchase 1,361,655
shares of common stock at prices ranging from $.95 to $5.00 with expiration
dates ranging up to October 25, 2006 were outstanding but were not included
in the computation of diluted EPS because the option exercise prices were
greater than the average market price of the common stock. These options
were still outstanding at the end of the first quarter of fiscal 1998.
Also, the following common stock equivalents were not included in the
diluted EPS calculation as a result of their antidilutive effect (i)
options to purchase 335,000 shares of common stock, (ii) warrants to
purchase 3,309,762 shares of common stock, (iii) 471,000 shares of Series B
Preferred Stock, and (iv) 557,000 common equivalents as a result of certain
debt to equity transactions.
9
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XYVISION, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
For the three months ended June 30, 1998 and 1997
Results of Operations
Revenues for the first quarter of fiscal 1999 were $2,671,000, a decrease
of $2,333,000, or 47%, from the first quarter of fiscal 1998. Systems revenues
fell $1,558,000, or 61% from the same quarter of fiscal 1998. Systems revenues
decreased in both the Publishing and Contex business segments in North America
and Europe. Service revenues fell 31% to $1,687,000 from $2,462,000 in the
first quarter of fiscal 1998. The decrease in service revenues was a result
primarily of lower systems sales and, consequentially, a lower level of related
customer service and maintenance requirements. The most significant decrease in
service revenues occurred in the North American Publishing group.
In the first quarter of the current fiscal year, gross margins decreased
to 44% of revenues from 46% of revenues in the comparable quarter of fiscal
1998. System margins increased to 78% of system revenues in the current fiscal
quarter from 61% of system revenues in the first quarter of the previous fiscal
year. The increase in the percentage of system margins in the first quarter of
fiscal 1999 is a result of a higher proportion of software revenues from which
the Company realizes higher margins as compared to the same quarter of the
previous fiscal year. Service margins in the first quarter of fiscal 1999
decreased to 24% of service revenues from 30% of service revenues in the first
quarter of the previous fiscal year. The decrease in service margine is
primarily attributable to the lower level of custom service revenues resulting
from the lower level of system sales which was experienced during the first
quarter of the current fiscal year.
In the first quarter of fiscal 1999, research and development expenses,
net of capitalized software development costs, were $941,000, an increase of
$191,000, or 25%, from the first quarter of fiscal 1998. The increase is
primarily due to a lower level of capitalization of development costs in the
Contex division partially offset to some extent by reduced development
headcount and payroll in the same business group. First quarter capitalized
software costs were $143,000 and $427,000 in fiscal 1999 and 1998,
respectively.
Marketing, general and administrative expenses were $1,922,000 for the
first quarter of fiscal 1999, a decrease of $245,000, or 11%, from the first
quarter of fiscal 1998. These expenses were 72% and 43% of revenues in the
first quarter of fiscal 1999 and 1998, respectively. The decrease in spending
occurred as a result of lower headcount primarily in Contex sales and support
worldwide and Publishing sales and marketing in North America. Corporate
administrative expenses were lower due to savings associated with the
relocation of corporate headquarters.
Total other expense, net was $275,000 for the first quarter of fiscal
1999, an increase of $53,000, or 24% from the first quarter of 1998. The
increase in interest expense for the first quarter of fiscal 1999 was primarily
due to a higher average balance of the Company's credit line.
The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. The Company has a valuation allowance to fully offset
future tax benefits of these deferred assets. There has been no change in the
valuation allowance for the first quarter of fiscal 1999.
The Company accrued dividends of $24,000 on the Series B Preferred Stock
in each of the first quarters of fiscal 1999 and 1998. The dividends were a
result of the 15% Promissory Note exchange program as described below and in
Note 5 to the consolidated financial statements.
The Company recorded a net loss allocable to common stockholders of
$1,987,000 for the first quarter of fiscal 1999, compared to a net loss
allocable to common stockholders of $875,000 for the first quarter of fiscal
1998.
The Company believes that inflation has not had a material effect on its
results of operations to date.
10
<PAGE>
<PAGE>
Liquidity and Capital Resources
At June 30, 1998, the Company had cash of $229,000, a decrease of $128,000
from March 31, 1998. During the first quarter of fiscal 1999, the Company's
operating and investment activities used $1,404,000 of cash primarily for
operations.
As of June 30, 1998, the Company had 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. As of June 30, 1998, the Company had an outstanding line of credit
balance of $11,500,000. As of August 13, 1998, the Company had an outstanding
credit line balance of $12,150,000. In July, 1998, the Company and Tudor Trust
completed an amendment to the line of credit that increased the maximum loan
amount thereunder to $13,500,000. See Note 4 to the consolidated financial
statements for a further description of the Company's line of credit, as
amended.
See Note 5 to the Consolidated Financial Statements for a description of
the Company's efforts to restructure the outstanding Debentures, 15% Promissory
Notes and 4% Promissory Notes. Despite the progress that has been made, the
Company can give no assurance about the outcome of these restructuring efforts
and does not expect the 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.
The Company anticipates that its cash requirements for fiscal 1999 will be
satisfied mainly from its credit line, as 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. 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.
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.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
11
<PAGE>
<PAGE>
PART II: OTHER INFORMATION
Item 5. Other Events:
Stockholder Proposals for 1999 Annual Meeting
As set forth in the Company's Proxy Statement for its 1998 Annual Meeting
of Stockholders, stockholder proposals submitted pursuant to Rule 14a-8
under the Exchange Act for inclusion in the Company's proxy materials for
its 1999 Annual Meeting of Stockholders must be received by the Secretary
of the Company at its offices, 30 New Crossing Road, Reading,
Massachusetts 01867-3254 no later than April 9, 1999.
In addition, in accordance with recent amendments to Rules 14a-4, 14a-5
and 14a-8 under the Exchange Act, written notice of stockholder proposals
submitted outside the processes of Rule 14a-8 for consideration at the
1999 Annual Meeting of Stockholders must be received by the Company on or
before June 23, 1999 in order to be considered timely for purposes of
Rule 14a-4. The persons designated in the Company's proxy statement and
proxy card will be granted discretionary authority with respect to any
stockholder proposal with respect to which the Company does not receive
timely notice.
Item 6. Exhibits and Reports on Form 8-K:
<TABLE>
<S> <C> <C>
(a) Exhibit Number Description
---------------- ------------------------
27 Financial Data Schedule
(b) the Company filed no reports on Form 8-K during
the quarter for which this report is filed.
</TABLE>
12
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XYVISION, INC.
------------------------------
(Registrant)
August 14, 1998
/s/ Eugene P. Seneta
------------------------------
Eugene P. Seneta
Vice President, Chief
Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
13
<PAGE>
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
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