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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, 1999
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
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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
(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, 1999 was approximately $1,077,000.
As of May 31, 1999, the registrant had 2,854,283 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, 1999) 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 Registrant................................9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................................11
Item 6. Selected Financial Data............................................12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......17
Item 8. Financial Statements and Supplementary Data........................18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................33
PART III
Item 10. Directors and Executive Officers of the Registrant................34
Item 11. Executive Compensation............................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management....34
Item 13. Certain Relationships and Related Transactions....................34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.35
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
ITEM 1. General
Xyvision, Inc. ("Xyvision" or the "Company"), through its majority-owned
subsidiary, Xyvision Enterprise Solutions, Inc. ("XyEnterprise"), develops,
markets, integrates and supports content management and publishing software.
These products help companies create, manage and distribute large amounts of
information and automate the compilation and delivery of this content into
paper, electronic and Web-based documents. The Company integrates its
internally developed products with selected third-party products into complete
publishing and document management solutions through its professional services
group and qualified third-party resellers and service partners. These solutions
are designed to increase productivity of content creation and editing, enhance
document and knowledge management functions, improve quality of final formatted
information, reduce information production and distribution costs.
Xyvision was founded in 1982 and accomplished the goal of introducing a
new generation of production publishing systems for commercial publishing and
technical documentation. In 1983, the Company introduced one of the first
integrated publishing systems targeted at the high-end commercial and technical
publishing marketplace. Xyvision Production Publisher (XPP), pioneered new
concepts for automating the production of high-volume, complex documents.
Xyvision built on the success of XPP by developing one of the first
compound document management systems, Parlance Document Manager (Parlance).
Introduced in 1989, Parlance is designed to manage large volumes of unique data
content that can be created, tracked, revised, and re-purposed in multiple
formats, media types and languages. Parlance is often linked to XPP or other
automated information distribution applications to provide an integrated
publishing workflow. In 1996, Xyvision introduced Webporter, a partner
technology to Parlance that dynamically assembles Web pages from approved
content stored and managed by the Parlance database.
The Company successfully completed several key changes to its business in
fiscal 1999. In September 1998, the Company sold the assets of its Contex
division to Barco, Inc., allowing the Company to focus its financial,
engineering and personnel resources on the publishing operation.
The second significant change was the signing of an Affinity Partner
Reseller Agreement with Open Text, the developer of Livelink, an intranet based
knowledge management system that enables enterprise wide collaboration. The
Livelink product expands Xyvision's target markets and provides a platform for
a wider range of consulting and integration services. The Company plans to
integrate Livelink with both the XPP and Parlance products enabling Web-based
enterprise access to its powerful publishing and document management
technologies.
Finally, the Company created XyEnterprise, a new company consisting of the
publishing, information management and professional services business formerly
operated by Xyvision. XyEnterprise was established in December 1998 with
Xyvision's contribution of technology and personnel and additional capital
contributed from a related party. Xyvision owns 100% of the outstanding common
stock of XyEnterprise. After giving effect to the conversion of outstanding
preferred stock and the exercise of outstanding stock options, Xyvision owns
87.5% of the outstanding common stock of XyEnterprise.
Xyvision is incorporated in Delaware and its executive offices are located
at 30 New Crossing Road, Reading, Massachusetts 01867 (781-756-4400). The
Company's home pages are located at http://www.xyvision.com. and
http://www.xyenterprise.com.
PRODUCTS AND SERVICES
Our content management and delivery solutions are successfully utilized by
customers such as product manufacturers, scientific and reference publishers,
government agencies and others to effectively manage their complex information
management and distribution needs. Several aircraft manufacturers (Boeing,
Sikorsky, Gulfstream, Bombardier and others) have used our document management
and publishing systems to develop and publish the complex maintenance
information used to repair and operate the aircraft you fly in. Other customers
such as Tweddle Litho and Maruboshi use our software to produce owners manuals
and maintenance manuals for truck and automotive manufacturers such as Ford,
General Motors, Daimler/Chrysler, Nissan, and others. When you pick up
prescription medication at the local drug store, the pharmacist may check a
computer database developed by our customer Facts & Comparisons to check for
conflicts between your medications.
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Xyvision Production Publisher
Xyvision Production Publisher (XPP) is a server-based composition engine
designed to shorten production cycles and reduce publishing production costs by
automating composition and pagination of high-volume, typographically-demanding
documents. A powerful solution for corporate and commercial publishers, XPP
streamlines and automates document production and provides "pages per second"
performance unmatched by desktop systems.
Advanced features of XPP include batch composition, interactive WYSIWYG
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 such as HTML for the World Wide Web
and PDF for Adobe Acrobat.
XPP 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 1999, the Company released the
latest version of XPP (version 5.1) that provides enhanced support for SGML and
XML processing. This functionality positions XPP at the leading edge of
composition solutions that require support for standard data inputs such as XML
and SGML.
The growth of multiple media delivery, the need for customized and
localized publications and the growth in the need for timely technical and
reference information has increased the demand for powerful document production
engines. In fiscal 1999, XPP continued to be incorporated into solutions from
such companies as Atraxis, EDS, IBM, and Telcordia. 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 1999 include The
United States Navy, Allison Transmissions, Boeing Corporation, Thomson-Asia,
and the United States Air Force.
Parlance Document Manager
Parlance Document Manager ("Parlance") is a robust content and document
management system that facilitates data creation, re-use, and automated
information processes. Parlance is often used as a "single source" repository
for key information assets that need to be managed, revised, and distributed
from a secure system. Parlance contains integrated , standard links to numerous
editorial and distribution tools, and facilities that enable corporations to
re-purpose data. Parlance is an established information management system with
thousands of users installed at over 50 corporations worldwide.
Parlance stores and manages content components, including XML or SGML
objects, graphics, multimedia objects and collections of these objects. Because
this content is stored as individual information components, workgroups can
edit information once and then share and reuse the same information in more
than one document or format. This approach can significantly reduce the time
and cost associated with traditional information creation and delivery and
creates new opportunities for companies to resell information while improving
quality and accuracy.
Parlance stores data as objects inside relational database technology from
Oracle and Informix. This combination of object-oriented and relational
technologies provides a reliable, transportable storage environment that can
handle large volumes of complex data types while providing fast data access.
The use of proven, industry-standard technology makes Parlance compatible with
many existing corporate database environments.
XyEnterprise integrates several third-party products as application
interfaces to Parlance. These applications include SGML Conductor which
combines Adobe's FrameMaker+SGML and; SGML Publishing Director which combines
Parlance with XPP and ArborText's ADEPT Editor into a complete SGML/XML
publishing package.
New Parlance customers in fiscal 1999 include the United States Postal
Service, Boeing AWACS, British Airways, and Allison Transmissions.
Both Parlance and XPP currently operate on UNIX-based servers and
workstations from Sun Microsystems and IBM. We recently announced that we
expect to have Windows NT versions of Parlance and XPP available in 1999.
Parlance currently supports Windows client software running under Microsoft
Windows 95, 98, and NT.
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PROFESSIONAL SERVICES
The Company offers a comprehensive range of professional services that
includes systems integration, implementation planning, onsite and classroom
training, applications support, program management, process reengineering,
document analysis, and Web consulting. The Company's service professionals are
considered experts in analyzing and implementing large-scale document
management, publishing, and electronic delivery systems.
A significant number of the Company'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 and telephone
support.
Revenues from the Company's professional services including maintenance
were 67%, 52%, and 42% of total revenues in fiscal 1999, 1998 and 1997,
respectively.
MARKETS, APPLICATIONS AND CUSTOMERS
XyEnterprise targets three main application areas in the broad technology
market: content and document management; enterprise intranet computing; and
high-end publishing and information distribution. Within this broad market, the
Company's solutions are targeted at corporations and organizations that produce
documentation in support of manufactured products (technical documentation),
those that produce information as the primary product (commercial publishing),
and combinations of the two that use collaborative and remote connectivity to
facilitate greater efficiencies.
Within the technical documentation arena, the Company's solutions are used
by product manufacturers to support 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.
The Company's customers in the technical documentation segment include:
Allied Signal, Atraxis/Swiss Air, The Boeing Company, British Aerospace,
Cummins Engine, Allison Transmissions, IBM Corporation, Maruboshi, Pratt &
Whitney Canada, Raytheon Service Company and the Royal Australian Air Force.
Commercial publishing 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.
The Company's commercial publishing customers include AAA, American
Institute of Physics, American Chemical Society, American Medical Association,
British Medical Association, Bureau of National Affairs, Cadmus Journal
Services, Merck & Co., Reed Elsevier, Telia, Underwriters Laboratories,
ValueLine Inc., and Wolters Kluwer.
STRATEGY
The Company's objective is to be a leading international provider of
departmental and enterprise content and document management systems and
information distribution solutions. To achieve this objective, the Company has
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focused its development efforts on offering our products on new platforms,
integrating our software with a wider variety of third-party applications,
enhancing our relationships with third-party channels and integrators, and
continuing to expand our professional services business. We plan to continue
these efforts in the manner detailed below:
New Platforms
On March 2, 1999, the Company announced and demonstrated its Parlance
Document Management and Xyvision Production Publishing software on the NT
platform. Shipments are expected to begin in August of this year, adding a
significant competitive advantage by offering its products on both UNIX and NT
operating systems.
New Application Programming Interfaces (API's)
The Company is completely recreating the Application Programming Interface
(API) of the Parlance Document Manager product, moving to open architectures
endorsed by Microsoft and the WWW consortium. In the UNIX environment, the API
will also be enhanced to improve support for Java based applets and servlets.
This redesign is critical to attracting major third-party integrators and other
vendors who may consider including Parlance technology as part of their broader
integration efforts. The API enhancements will also enable our professional
services group to expand the range of standard and custom interfaces to
customer systems and other software products.
Partnership with Open Text and its Livelink Products
XyEnterprise has a relationship with Open Text, a supplier of enterprise
knowledge management technology.The Company completed its first sale of Open
Text Livelink in March 1999. The Livelink product expands Xyvision's target
markets and provides a platform for a wider range of consulting and integration
services. The Company plans to integrate Livelink with both the XPP and
Parlance products enabling Web-based enterprise access to its powerful
publishing and document management technologies. The Open Text partnership adds
to the Company's current product partner list that includes Oracle, Informix,
Sun, Adobe, Verity, Arbortext and others. In order to facilitate the success of
this strategy, the Company has committed resources to the training of key
personnel on the Livelink product, hired new sales staff to represent this
application, and developed several prototypes of the integration of XPP and
Parlance with Livelink.
Professional Services
The Company is expanding its current comprehensive range of services which
include implementation planning, process reengineering, project management,
training, custom development, consulting, Web development services, maintenance
and on-going support services. We expect to expand our offerings by developing
new integration tools centered on Java and XML for Internet applications and
VB, C++, and COM for Microsoft application enhancements and extensions.
SALES AND DISTRIBUTION
In North America, the Company markets its products and related services
primarily through its direct sales force. In fiscal 1999, the Company increased
its sales efforts by adding dedicated Enterprise Sales Consultants, focused
primarily on the sales of the Livelink product for enterprise solutions. The
Company also continued its strategic relationships with companies such as
Atraxis, Telcordia and IBM. With the advent of the new API and platform
offerings, the Company expects to be able to further expand its Partners
Program in fiscal 2000.
The Company maintains a European sales and support headquarters in England
and an additional office in Paris, France and Munich, Germany. The Company also
resells its products through selected distributors in Europe, Africa, and Asia.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapid
technological change that requires continuous 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 20% to 37% of the Company's
total revenues.
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In the future, the Company's product development efforts will focus on
enhancing its open-architecture systems, increasing the price/performance of
its products and developing software for specific application needs. The
Company believes it will continue to invest a significant portion of its
revenues in development to remain competitive in its markets.
COMPETITION
The markets for the Company's products are characterized by intense
competition, rapid technology developments, and frequent new product
introductions. The Company'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 XPP, competitors include Advent 3B2, Miles 33, and
Datalogics. For sales of Parlance, the Company principally competes with
Documentum, Interleaf, and Chrystal (a Xerox New Enterprise Company).
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
PostScript output language and Display PostScript viewing technology A
significant interruption in supply from these vendors to either the Company or
the Company's customers could have a material adverse effect on the Company.
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 content management 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 and
Xyvision Enterprise Solutions are registered trademarks of the Company. The
Company also uses the following trademarks: Parlance, WebPorter, SGML
Conductor, and XyEnterprise. 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, 1999, the Company employed 102 persons, which included 28
in research and development, 21 in sales and marketing, 36 in customer support,
and 17 in finance and administration.
The Company'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. From time to time, the Company also employs independent contractors
to support its research and development, marketing and administrative
organizations. 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.
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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 and 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. The Company is dependent on the
continued forbearance by the holders of the Debentures, 15% Promissory Notes
and 4% Promissory Notes. In addition, the Company has experienced financial
difficulties in recent years and it is dependent upon credit lines 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.
The Company also leases smaller sales and service facilities at other
locations in the United States and abroad.
ITEM 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
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, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<S> <C> <C>
NAME AGE POSITION
____________________________ __ ____________________________________________
Kevin J. Duffy ............. 44 President and Chief Operating Officer
of Xyvision and President and
Chief Executive Officer of XyEnterprise
Wendy Darland .............. 42 Vice President, Chief Financial Officer,
Treasurer and Secretary of Xyvision
and XyEnterprise
Mark G. LeBlanc ............ 38 Vice President, Engineering of XyEnterprise
Carol S. Bumbaca ........... 37 Vice President, Customer Support
of XyEnterprise
Michael S. Borin ........... 57 Vice President, Human Resources of
XyEnterprise
Gerald T. Ulbricht ......... 51 Vice President, North American Sales
of XyEnterprise
</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. In December
1998 he was elected President and Chief Executive Officer of XyEnterprise.
Ms. Darland joined Xyvision in September 1998 as Vice President, Chief
Financial Officer, Treasurer and Secretary. From September 1997 to June 1998
she served as Chief Financial Officer of Bitstream, Inc., a developer of font
and electronic publishing technology. From September 1993 to August 1997 she
served as President of Xitron, Inc., a developer of print servers, postscript
interpreters and custom interfaces for the printing industry. In December 1998
she was elected Vice President, Chief Financial Officer, Treasurer and
Secretary of XyEnterprise.
Mr. LeBlanc has served as Vice President, Engineering of XyEnterprise
since December 1998. From March 1998 to December 1998, he served as Vice
President, Engineering of Xyvision. 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 from April 1993 to
March 1998. Prior to joining Filemark, Mr. LeBlanc was Vice President of
Engineering at Hager Telecommunications and held various consulting positions
in the telecommunications industry. Mr. LeBlanc has over 16 years of
development experience including design work.
Ms. Bumbaca joined Xyvision in January 1984 and has served as Vice
President, Customer Support of XyEnterprise since December 1998. From April
1998 to December 1998, she served as Vice President, Customer Support of
Xyvision. 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 Xyvision in May 1989 as Manager, Human Resources. In
January 1992 he was promoted to Director, Human Resources. From September 1995
to December 1998 he served as Vice President, Human Resources of Xyvision. In
December 1998, he was elected Vice President, Human Resources of XyEnterprise.
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Mr. Ulbricht has been with Xyvision since May 1991, and served as Vice
President, North American Sales of XyEnterprise since December 1998. From
January 1996 to December 1998, he served as Vice President, North American
Sales of Xyvision. Previously, Mr. Ulbricht was the Sales Manager for
Commercial Publishing of Xyvision. With over 26 years of experience in the
electronic publishing industry, Mr. Ulbricht has held senior sales management
positions with Automix Keyboards, Inc., Penta System International, Texet
Corporation, and Omnipage, Inc.
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.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Xyvision's Common Stock is currently traded on the Nasdaq system under the
symbol "XYVI". The price per share of the Xyvision'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 and after giving effect to
the one-for-five reverse split of the Common Stock effective as of October 20,
1998.
<TABLE>
<S> <C> <C>
HIGH LOW
FISCAL YEAR ENDED MARCH 31, 1998
April 1 - June 30 ............... $ 2.81 $ 1.41
July 1 - September 30 ........... 1.88 1.25
October 1 - December 31 ......... 1.72 1.25
January 1 - March 31 ............ 1.56 1.25
FISCAL YEAR ENDED MARCH 31, 1999
April 1 - June 30 ............... $ 1.80 $ .70
July 1 - September 30 ........... 1.48 .70
October 1 - December 31 ......... .71 .31
January 1 - March 31 ............ 1.00 .81
</TABLE>
As of May 31, 1999, there were approximately 556 holders of record of the
Common Stock. 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. Xyvision's Certificate of
Incorporation and line of credit each currently prohibit the payment of
dividends on the Common Stock.
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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>
FISCAL YEAR ENDED
_____________________________________________________________________
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1997 1996 1995
________ _______ _______ _______ _______
(in thousands, except per share data)
INCOME STATEMENT DATA
Revenues ...................................... $ 10,555 $16,501 $22,234 $22,414 $24,559
Gross margin .................................. 4,570 5,675 10,406 10,170 12,045
Operating expenses ............................ 11,762 12,574 10,765 15,077 11,205
(Loss) income from operations ................. (7,192) (6,899) (359) (4,907) 840
(Loss) income before income taxes
and extraordinary item(1) .................... (8,707) (7,913) (1,359) (5,707) 321
Net (loss) income allocable to common
stockholders (1) ............................. (8,801) (8,007) (1,353) (5,793) 286
Basic (loss) earnings per share (1) ........... $ (3.08) $ (2.81) $ (.56) $ (3.32) $ .17
Diluted (loss) earnings per share ............. (3.08) (2.81) (.56) (3.32) .14
Weighted average common and common
equivalent shares outstanding, basic ......... 2,854 2,854 2,419 1,745 1,678
Diluted ....................................... 2,854 2,854 2,419 1,745 2,007
FINANCIAL POSITION
Cash and cash equivalents .................... $ 446 $ 357 $ 261 $ 332 $ 174
Working capital deficit ....................... (15,918) (10,788) (4,834) (6,751) (3,200)
Total assets .................................. 4,066 6,916 9,977 10,281 13,137
Long-term debt ................................ - - 165 5,421 4,655
Stockholders' deficit ......................... $(15,731) $(8,847) $(1,867) $(9,244) $(4,116)
OTHER INFORMATION
Research and development expenditures,
including capitalized software costs ......... $ 4,040 $ 4,743 $ 4,381 $ 4,512 $ 4,410
</TABLE>
- --------------------------------------------------------------------------------
(1) Fiscal 1997 results include an extraordinary item for a gain of $100,
or $.04 per share, adjusted for reverse split, 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).
12
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On December 31, 1998, Xyvision effected a corporate restructuring pursuant
to which substantially all of the assets of Xyvision's publishing business were
transferred to XyEnterprise in exchange for all the common shares of
XyEnterprise, while the majority of its liabilities remained with Xyvision. All
of the Company's revenues and most of its expenses occur at the XyEnterprise
level. Xyvision's financial statements are consolidated with the financial
statements of XyEnterprise.
RESULTS OF OPERATIONS
The Company, through XyEnterprise, derives its systems revenues from the
sale of perpetual licenses for its page composition, document management and
third party software. Service revenues includes maintenance, support,
consulting and training. Software licensing revenue is recognized upon shipment
of the product if collection of the resulting receivable is probable and
remaining Company obligations are insignificant. The Company's strategy of
providing customers with complete integrated publishing solutions may result in
bundling of services with software and recognition of software licensing
revenue and services over the length of the implementation. Revenue from annual
maintenance contracts is deferred and revenue is recognized ratably over the
duration of the contract. Revenue for consulting and training is recognized
when the services are performed and collectability is deemed probable.
Cost of systems sales is comprised of the amortization of capitalized
product development costs, royalty and third-party product expenses for the
licensing or resale of technology and personnel-related costs incurred in
providing consulting services, training to customers and telephone support.
YEAR ENDED MARCH 31, 1999 COMPARED TO YEAR ENDED MARCH 31, 1998
Revenues decreased $5,946,000 from $16,501,000 in fiscal 1998 to
$10,555,000 in fiscal 1999, primarily as a result of the sale of the Contex
division on September 18, 1998 and reductions in the systems revenues of the
publishing division during the first half of the year. Systems revenues
decreased 56% from 1998. Service revenues decreased 18% primarily due to
decreases in the services and maintenance billing of the Contex division.Gross
margins were 43% of revenues in 1999, an increase from 34% in 1998. Systems
margins were 61% of systems revenues, an increase from 47% in 1998. This
increase was attributable to reduced amortization of capitalized software as
well as changes in the mix of third-party software sold. Cost of sales in 1999
and 1998 included a write-down of $410,000 and $798,000, respectively of
previously capitalized software to net realizable value. Service margins were
35% of service revenues in 1999, an improvement from 23% of service revenues in
1998. The improvement in margins was attributable to better utilization of
personnel within the publishing division and the elimination of Contex expenses
after the sale of the division.
Research and development expenses, including capitalized software
development costs, were $4,040,000 in 1999, a decrease from $4,743,000 in 1998,
representing 38% and 29% of revenues for 1999 and 1998 respectively. These
expenses consisted primarily of salaries and benefits for software developers,
contracted development costs and related facilities costs. The decrease in the
dollar amount of expenses reflects the reduction of headcount and other
expenses of the Contex engineering staff. The increase as a percentage of total
revenue in 1999 from 1998 was a result of a decrease in total revenue. Research
and development expenditures for the publishing products reflect the Company's
engineering effort to support the development of new products and enhancements
of existing products.
Capitalized software costs were $263,000 in fiscal 1999 as compared to
$981,000 in fiscal 1998. The decrease in capitalized software costs primarily
resulted from the sale of Contex and fewer Publishing projects being
capitalized. Research and development expenses excluding capitalized software
costs were 36% and 23% of revenues in 1999 and 1998, respectively. The increase
in the percentage of net research and development expenses from fiscal 1998 to
fiscal 1999 was primarily due to the significant decrease of revenue.
Marketing, general and administrative expenses were $7,985,000, or 76% of
revenues, in 1999 as compared to $8,812,000, or 53% of revenues, in fiscal
1998. Sales and marketing expenses consist primarily of salaries,
13
<PAGE>
benefits, sales commissions, travel and other expenses related to a direct
sales force, and various marketing activities. General and administrative
expenses consist primarily of personnel costs for general corporate management,
finance, management information systems and human resources. The decrease in
expense from 1998 resulted primarily from reduced sales, marketing and
administrative costs as a result of the sale of the Contex division and the
relocation of corporate headquarters to its existing location. The 1999 general
and administrative costs included a charge of $564,000 for the direct
transaction costs, costs to write off assets and other accruals associated with
the sale of the Contex division.
Interest income was $15,000 and $9,000 in 1999 and 1998, respectively.
Interest expense accrued to third parties was $94,000 and $160,000 in fiscal
1999 and 1998, respectively. Interest expense payable 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 payable to third parties decreased in fiscal
1999 as a result of the program to exchange the Debentures and 4% Promissory
Notes for equity securities (note 8). Interest expense accrued to Tudor Trust,
the largest stockholder of the Company, was $1,436,000 and $864,000 in fiscal
1999 and 1998, respectively. The increase in the accrued interest was a result
of the increase in the borrowings under the line of credit (note 7).
On September 18, 1998, the Company sold substantially all the assets of
its Contex division, with the exception of approximately $300,000 of accounts
receivable, for approximately $200,000 pursuant to the terms of an Asset
Purchase Agreement dated September 18, 1998 between the Company and Barco, Inc.
Included in the assets sold were inventory, equipment, certain accounts
receivable, source code and object code for Contex PackageMaker, Contex
Professional, Contex Rip'n'Strip and Contex Object Library. In connection with
the sale, the Company recorded direct costs: costs to write-down other assets
and other accruals for cost directly associated with the sale of approximately
$564,000.
The Company accrued dividends of $94,000, $94,000, and $94,000 on the
Series B Preferred Stock of Xyvision during 1999, 1998, and 1997 as well as
$15,000 on Series A Preferred Stock of XyEnterprise during fiscal 1999.
The Company recorded net losses allocable to common stockholders of
$8,801,000 and $8,007,000 for fiscal 1999 and 1998, respectively.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
Revenues for 1998 decreased $5,733,000, a 26% decline, from $22,234,000 in
fiscal 1997 to $16,501,000 in 1998. The decrease in systems revenues in fiscal
1998 was a result of decreased publishing revenues in the Pacific Rim
geographic region and Contex European sales. Service revenues decreased 9% in
fiscal 1998 primarily due to a decrease in Contex European maintenance,
training and integration services.
Gross margins were 34% of revenues in 1998, a decrease from 47% in 1997.
Systems margins were 47% of systems revenues in fiscal 1998, a decrease from
63% in 1997. This decrease was primarily attributable to a charge of $798,000
for amortization of capitalized software written down to net realizable value.
Service margins were 23% of service revenues in 1998, a slight decline from 24%
in 1997. The decline in margin was attributable to the decrease in Publishing
division revenues and a relatively higher level of costs related to outsourcing
training and consulting.
Research and development expenses, including capitalized software
development costs, were $4,753,000 in 1998, an increase from $4,381,000 in
1997, representing 29% and 20% of revenues for 1998 and 1997, respectively.
Capitalized software costs were $981,000 and $1,477,000 in 1998 and 1997,
respectively. The increase in research and development expenditures in 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 23% and 13% of revenues in 1998
and 1997, respectively. The increase in the percentage of revenue of net
research and development expenses from 1997 to 1998 was due to the significant
decrease in revenue.
Marketing, general and administrative expenses were $8,812,000, or 53% of
revenues, in 1998 as compared to $7,861,000, or 35% of revenues, in fiscal
1997. The increase in expenses in 1998 was primarily a result of increased
domestic and international marketing expenditures and the opening of European
sales offices for the Publishing division.
Interest income was $9,000 and $7,000 in 1998 and 1997, respectively.
Interest expense accrued to third parties was $160,000 and $263,000 in fiscal
1998 and 1997, respectively. Interest expense paid to third parties includes
14
<PAGE>
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
as a result of the program to exchange the Debentures and 4% Promissory Notes
for equity securities (note 8). Interest expense paid to Tudor Trust, the
largest stockholder of the Company was $864,000 and $744,000 in fiscal 1998 and
1997, respectively. The increase in the accrued interest was a result of the
increase in the borrowings under the line of credit (note 7).
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, (ii) 27,400 shares of the 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 the exchanges, the Company
realized an extraordinary gain of $100,000, or $.04 per share.
The Company recorded net losses allocable to common stockholders of
$8,007,000 and $1,353,000 for fiscal 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents of $446,000,
which is an increase of $90,000 from the previous fiscal year end.
Approximately $3,834,000 of cash was used by operations and approximately
$551,000 of cash was used in investing activities in fiscal 1999.
In fiscal 1999, the Company invested $551,000 in capital assets, including
$263,000 of capitalized software development costs, reflecting the Company's
continuing commitment to its product development programs. The Company
anticipates that it will continue to invest in capital assets as required to
support its product development efforts and general business needs.
Xyvision has a $12,227,000 amended line of credit with Tudor Trust, the
largest stockholder of the Company of which $11,925,000 is outstanding at March
31, 1999. 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 Xyvision. This credit line, which is payable March 31, 2000 is
collateralized by the Company's stock in XyEnterprise and has been used for
working capital and general business purposes. The first $5,000,000 of the
principal balance outstanding bears interest at 6% per year and the remaining
principal balance bears interest at 8% per year. On December 31, 1998,
XyEnterprise and Tudor Trust entered into a Loan Agreement providing
XyEnterprise a $1,000,000 line of credit for working capital and general
business purposes. The line of credit bears an interest rate of 8%, and is
collateralized by substantially all of the assets of XyEnterprise. XyEnterprise
has reached an agreement in principle with Tudor Trust to amend the line of
credit, among other things, to increase the amount available thereunder to
$1,750,000 and extend the maturity date to June 30, 2001. As of June 25, 1999,
Xyvision had an outstanding credit line balance of $12,200,000 and XyEnterprise
had an outstanding line of credit balance of $850,000 (Note 7).
XyEnterprise has reached an agreement in principle with Tudor Trust
whereby XyEnterprise will issue and sell 300,000 shares of its Series A
Convertible Preferred Stock to Tudor Trust for an aggregate purchase price of
$750,000. The Series A Preferred Stock converts into Common Stock of
XyEnterprise on a one-for-one basis, subject to adjustment.
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 fact that the Company has
successfully restructured 96% of the Debentures, the Company can give no
assurance about the outcome of continued restructuring efforts and does not
expect the matters to be resolved in the near future.
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 1999 and has a working capital deficit and a stockholder's
deficit at March 31, 1999 and 1998 and is in default on its 6% Convertible
Subordinated Debentures and promissory notes (Note 8). The Company's attainment
of profitable operations and sufficient additional financing, as well as the
continued forebearance 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 classification of recorded asset
amounts or the amounts and classifications or liabilities that might be
necessary should the Company be unable to continue as a going concern.
The Company anticipates that its cash requirements for fiscal 2000 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.
15
<PAGE>
FOREIGN CURRENCY - CONVERSION TO EURO
Certain of the member countries of the European Union have agreed to adopt
the Euro as their legal currency. The Company has established plans and
developed the necessary modifications for the technical adaptation of its
internal information technology and other systems to accommodate
euro-denominated transactions. The Company has assessed the business
implications of the conversion to the euro, including long-term competitive
implications and does not expect the euro conversion to have a significant
impact on its results of operations, financial condition or cash flows.
However, the Company will continue to assess the impact of euro conversion
issues as the applicable accounting, tax, legal and regulatory guidance
evolves.
YEAR 2000
The "Year 2000" problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with "19,"
but may not properly recognize the year 2000. If a computer system or software
application used by the Company or a third party dealing with the Company fails
or generates erroneous results because of the inability of the system or
application to properly read the date data, the results could conceivably have
a material adverse effect on the Company.
Products
Year 2000 problems are characteristic of applications in which sorting by
date is stored in a format that relies solely on the last two digits of the
calendar year. Neither Xyvision Production Publisher (XPP) nor Parlance
Document Manager (PDM) store date information in this type of truncated format.
Date information is stored in full standard UNIX date formats so that all four
digits of the year are available both within the applications and to any
applications built upon them. Both XPP and PDM have been tested internally and
meet the Company's qualifications for Year 2000 compliance. The total cost
relating to compliance by its products is not expected to be material to the
Company's financial position or operations. As a key supplier to the technical
documentation and publishing industries, the Company's major exposure for Year
2000 problems is the effect of shutting down page composition or document
management capabilities production at one of its customer's facilities. The
Company believes its contracts with its customers preclude liability for
consequential damages as a result of such claims.
Third-Party Products
The Company has completed its assessment of its exposure to failures of
products obtained from third parties regarding Year 2000 compliance. The
primary risk in that regard relates to software applications integrated within
its core applications, and the Company has received assurances that software
licensed for use within products sold are Year 2000 compliant. Unfortunately,
the Company cannot fully control the conduct of its suppliers, and there can be
no guarantee that Year 2000 problems originating with a supplier will not
occur. The Company has not yet developed contingency plans in the event of a
year 2000 failure caused by a supplier or third party, but intends to consider
developing such plans if a specific problem is identified. In some cases,
especially with respect to its software vendors, alternative suppliers may not
be available. Despite its efforts to test its own and third-party products,
these products may contain undetected problems associated with Year 2000
compliance.
Information Technology and Operating Equipment
The Company is in the process of identifying anticipated costs, problems
and uncertainties associated with making its internal use systems Year 2000
compliant. Costs identified to date approximate $244,000 of which $130,000 has
been expended. The Company expects to resolve the Year 2000 issue with respect
to its computer systems and software applications during calendar year 1999
through upgrade, conversion, modification or replacement of non-compliant
systems and applications. The Company's Year 2000 readiness task force
continues to assess the exposure of its internal information technologies (IT),
including operating equipment and software systems.
The Company has determined that the replacement of older personal
computers with non-compliant hardware and software with Year 2000 compliant
technology represents the most extensive task yet to be completed. The Company
has replaced its customer support database application with an application that
offers additional features, better interfaces and is warranted to be Year 2000
compliant. The Company is currently approximately 80% complete with replacement
of its human resource and financial business system, which it believes will
offer substantial benefits of improved functionality, ease of use and
maintenance and is Year 2000 compliant. The Company has identified a Year 2000
compliant vendor for its payroll application which will require minimal
commitment from its IT group. The Company has identified and budgeted $100,000
in fiscal year 2000 for software and hardware replacement.
16
<PAGE>
The Company's communications infrastructure was partially upgraded in
conjunction with its corporate relocation in February, 1998. The replacement of
its voicemail system was accomplished in March 1999. The Company's
telecommunication systems and internet connectivity is assured by its current
suppliers to be Year 2000 compliant.
The Company believes that it has an effective compliance plan in place,
supported by its product planning and support organizations, and its internal
IT support function. The remediation efforts are expected to be substantially
complete by July 1999, with continued testing and remediation efforts through
the following four to five months.
The Company does not use operating equipment beyond systems which support
what is considered to be merely office space. Maintenance of building support
systems is wholly the responsibility of the Company's landlord according to the
current lease agreement, and remediation of failures in this regard would fall
under the landlord's extensive on-site maintenance operation.
Contingency Plans
The Company would expect Year 2000 related problems to be addressed by
reliance upon its backup of its IT-related information assets with its physical
hardcopy of customer files containing amounts owed, software and services
previously delivered, and software options currently licensed by its customer
base. There is no formal contingency plan under development, nor is one
expected to be produced. The most likely worst case scenario is that the
Company will have to upgrade applications without enhancing features and
benefits in the financial, human resource and payroll applications. The Company
has centralized the majority of its administrative functions at its corporate
headquarters, and has a minimal reliance on widely geographically dispersed
systems or networks to support its information resource needs.
The foregoing shall be considered a Year 2000 readiness disclosure to the
maximum extent allowed under the Year 2000 Information and Readiness Disclosure
Act.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company does not currently use derivative financial instruments. We
generally place our marketable security investments in high credit quality
instruments, primarily U.S. Government and Federal Agency obligations,
tax-exempt municipal obligations and corporate obligations with contractual
maturities of ten years or less. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material.
Internationally, the Company invoices customers primarily in local
currency. We are exposed to foreign exchange rate fluctuations from when
customers are invoiced in local currency until collection occurs. We do not
currently enter into foreign currency hedge transactions. Through March 31,
1999, foreign currency fluctuations have not had a material impact on our
financial position or results of operations.
17
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Xyvision, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statement of operations, changes in stockholders' deficit
and of cash flows present fairly, in all material respects, the financial
position of Xyvision, Inc. and its subsidiaries (the "Company") at March 31,
1999 and March 31, 1998, and the result of their operations and their cash
flows for each of the three years in the period ended March 31, 1999 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has recurring losses from operations, a
working capital deficit, stockholders' deficit and is in default on interest
payments on its 6% Convertible Subordinated Debentures, 15% Promissory Notes
and its 4% Promissory Notes. These uncertainties raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
June 25, 1999
18
<PAGE>
XYVISION, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
ASSETS 1999 1998
___________ ___________
Current assets:
Cash and cash equivalents ............................................. $ 446,417 $ 356,526
Accounts receivable:
Trade, less allowance for doubtful accounts of $442,946
and $732,738 at March 31, 1999 and 1998, respectively ............... 1,607,699 3,630,365
Inventories ........................................................... 513,144 337,045
Other current assets .................................................. 296,327 650,664
______________ ______________
Total current assets .................................................. 2,863,587 4,974,600
Property and equipment, net ........................................... 639,127 850,583
Other assets, net, principally capitalized software costs ............. 562,871 1,090,453
______________ ______________
Total assets .......................................................... $ 4,065,585 $ 6,915,636
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to stockholder, less unamortized discount of $679,730
at March 31, 1999 and $1,031,710 at March 31, 1998 ................... $ 11,245,270 $ 9,168,290
Current portion of long-term debt ..................................... 2,206,110 2,206,110
Accounts payable and accrued expenses ................................. 2,829,060 2,277,339
Deferred service revenues ............................................. 1,378,097 1,164,482
Other current liabilities ............................................. 1,122,805 946,720
______________ ______________
Total current liabilities ............................................. 18,781,342 15,762,941
______________ ______________
Total liabilities ..................................................... 18,781,342 15,762,941
______________ ______________
Minority interest in subsidiary 1,015,000 -
Commitments and contingencies
Stockholders' deficit:
Capital stock:
Series preferred stock, $1.00 par value; 1,700,000 shares
authorized; no shares issued and outstanding ....................... - -
Series B convertible preferred stock, $1.00 par value: 300,000 shares
authorized; 235,299 issued and outstanding at March 31, 1999
and 1998 (aggregate liquidation preference of $3,245,567 and
$3,151,447, respectively) .......................................... 235,299 235,299
Series C convertible preferred stock, $.01 par value; 1,000,000
shares authorized; 175,000 shares issued and outstanding at
March 31, 1999 ..................................................... 1,750,000 -
Common stock, $.03 par value; 25,000,000 shares authorized;
2,949,616 issued and outstanding at March 31, 1999 and 1998,
including treasury stock ........................................... 88,488 88,488
Additional paid-in capital ............................................ 51,123,809 50,956,310
Accumulated deficit ................................................... (67,759,816) (58,958,865)
______________ ______________
(14,562,220) (7,678,768)
Less:
Treasury common stock, at cost; 95,333 shares at March 31, 1999 and
1998, respectively .................................................... (1,168,537) (1,168,537)
______________ ______________
Total stockholders' deficit ........................................... (15,730,757) (8,847,305)
______________ ______________
Total liabilities and stockholders' deficit ........................... $ 4,065,585 $ 6,915,636
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
XYVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
____ ____ ____
Revenues:
Systems .......................................... $ 3,474,551 $ 7,914,014 $ 12,792,836
Service .......................................... 7,080,646 8,586,803 9,441,164
____________ ____________ ____________
Total revenues ................................. 10,555,197 16,500,817 22,234,000
____________ ____________ ____________
Cost of sales:
Systems .......................................... 1,371,012 4,213,480 4,679,212
Service .......................................... 4,613,865 6,612,198 7,148,693
____________ ____________ ____________
Total cost of sales ............................ 5,984,877 10,825,678 11,827,905
____________ ____________ ____________
Gross margin ...................................... 4,570,320 5,675,139 10,406,095
____________ ____________ ____________
Expenses:
Research and development ......................... 3,776,692 3,761,973 2,904,137
Marketing, general, and administrative ........... 7,985,172 8,812,483 7,861,312
____________ ____________ ____________
Total operating expenses ....................... 11,761,864 12,574,456 10,765,449
____________ ____________ ____________
Net loss from operations .......................... (7,191,544) (6,899,317) (359,354)
____________ ____________ ____________
Other income (expense), net:
Interest income .................................. 14,639 9,134 7,486
Interest expense - third party ................... (93,627) (159,515) (262,555)
Interest expense - stockholder ................... (1,436,299) (863,512) (744,308)
____________ ____________ ____________
Total other expense, net ....................... (1,515,287) (1,013,893) (999,377)
____________ ____________ ____________
Loss before income taxes and
extraordinary item ............................... (8,706,831) (7,913,210) (1,358,731)
Provision for income taxes ........................ - - -
____________ ____________ ____________
Loss before extraordinary item .................... (8,706,831) (7,913,210) (1,358,731)
Extraordinary item:
Gain on exchange of convertible subordinated
debentures ...................................... - - 100,000
____________ ____________ ____________
Net loss .......................................... (8,706,831) (7,913,210) (1,258,731)
Accrued preferred stock dividends ................. 94,120 94,120 93,795
____________ ____________ ____________
Net loss allocable to common stockholders ......... $ (8,800,951) $ (8,007,330) $ (1,352,526)
============ ============ ============
Basic and diluted earnings per share:
Loss allocable to common stockholders before
extraordinary item ............................... (3.08) (2.81) (0.60)
Extraordinary item ................................ - - 0.04
____________ ____________ _____________
Net loss per share ................................ (3.08) (2.81) (0.56)
============ ============ =============
Weighted-average common and common equivalent
shares outstanding ............................... 2,854,283 2,853,881 2,419,383
============ ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
XYVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
___________ ___________ ___________
OPERATIONS:
Net loss ............................................................. $ (8,706,831) $ (7,913,210) $ (1,258,731)
Adjustments to reconcile net loss to net cash used by
operations:
Gain on exchange of convertible subordinated debentures .............. - - (100,000)
Depreciation and amortization ........................................ 1,225,278 1,960,900 1,689,477
Interest expense related to warrants ................................. 519,479 318,290 250,000
Writedown of capitalized software to net realizable value ............ 410,000 798,000 -
Loss on sale of Contex assets ........................................ 379,000 - -
Provision for losses on accounts receivable .......................... 366,184 868,921 483,636
Operating assets and liabilities:
Accounts receivable ................................................. 1,656,482 1,044,978 (139,051)
Inventories ......................................................... (176,099) (25,643) 65,300
Other current assets ................................................ 347,539 83,050 28,719
Accounts payable and accrued expenses ............................... (180,624) (691,319) (796,492)
Other current liabilities ........................................... 325,719 (74,597) (262,909)
______________ ______________ ______________
Net cash used by operations .......................................... (3,833,873) (3,630,630) (34,892)
______________ ______________ ______________
INVESTMENTS:
Additions to property and equipment .................................. (288,287) (592,577) (503,216)
Proceeds from sales of property and equipment ........................ - - 6,621
Capitalized software costs ........................................... (262,949) (981,299) (1,477,154)
______________ ______________ ______________
Net cash used by investments ......................................... (551,236) (1,573,876) (1,973,749)
______________ ______________ ______________
FINANCING:
Proceeds from line of credit and warrants from a stockholder ......... 3,575,000 5,500,000 4,000,000
Proceeds from sale of subsidiary's preferred stock ................... 1,000,000 - -
Repayment of line of credit to a stockholder ......................... (100,000) (200,000) (2,500,000)
Proceeds from issuance of common stock from treasury ................. - - 510
Exercise of warrants ................................................. - - 200,000
Loan payment from Employee Stock Ownership Plan ...................... - - 237,142
______________ ______________ ______________
Net cash provided from financing ..................................... 4,475,000 5,300,000 1,937,652
______________ ______________ ______________
Net increase (decrease) in cash and cash equivalents ................. 89,891 95,494 (70,989)
Cash and cash equivalents at the beginning of the year ............... 356,526 261,032 332,021
______________ ______________ ______________
Cash and cash equivalents at the end of the year ..................... $ 446,417 $ 356,526 $ 261,032
============== ============== ==============
Supplemental cash flow information:
Conversion of debt from shareholder .................................. $ 1,750,000 - -
Accrued dividends on preferred stock ................................. 94,120 94,120 93,795
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
Conversion of 15% notes to 4% notes .................................. - - 177,000
Conversion of accrued interest on 15% notes to Series B
Preferred Stock ..................................................... - - 75,460
Issuance of common stock purchase warrants to stockholder ............ - 1,000,000 600,000
Interest payments .................................................... - 406,000 409,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
XYVISION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
<TABLE>
<S> <C> <C> <C> <C>
PREFERRED PREFERRED ADDITIONAL
STOCK STOCK COMMON PAID-IN
SERIES B SERIES C STOCK CAPITAL
___________ _____________ _____ _________
Balance, March 31, 1996 .................................. $222,943 $55,802 $41,485,203
Reduction of common stock with the reversal of
$30,000 of 15% notes payable to Convertible
Subordinated Debentures, 643 shares .................... (19) (684)
Issuance of common stock with the
exchange of $370,000 of Convertible Subordinated
Debentures into 4% notes payable, 10,138 shares ........ 304 15,547
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,
3,540 shares 106 5,381
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, 159,079 shares ............................ 4,772 2,615,697
Issuance of common stock with the exchange of
$4,973,500 4% notes payable into equity 497,350
shares ................................................. 14,920 4,912,515
Issuance of common stock for exercise of warrants,
418,500 shares ......................................... 12,555 187,445
Issuance of common stock from treasury for
employment service awards, 240 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 88,440 49,929,218
________ __________ _______ ___________
Issuance of common stock with the
exchange of $20,000 of Convertible Subordinated
Debentures into equity, 1,645 shares ................... 48 27,092
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 88,488 50,956,310
________ _______ ___________
Issuance of Series C convertible preferred
175,000 shares issued .................................. 1,750,000
Issuance of Common Stock purchase warrants to
shareholder .............................................. $ 300,000
Writedown of discount from forgiveness of warrants ....... (132,501)
Dividends on Series B Preferred ..........................
Net Loss .................................................
Balance, March 31, 1999 .................................. $235,299 $1,750,000 $88,488 $51,123,809
======== =========== ======= ===========
<S> <C> <C> <C> <C>
RECEIVABLE
FROM
EMPLOYEE
STOCK TOTAL
ACCUMULATED TREASUR Y OWNERSHIP STOCKHOLDERS'
DEFICIT STOCK PLAN DEFICIT
_________ _______ _______ ___________
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, 643 shares .................... (703)
Issuance of common stock with the
exchange of $370,000 of Convertible Subordinated
Debentures into 4% notes payable, 10,138 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,
3,540 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, 159,079 shares ............................ 2,620,469
Issuance of common stock with the exchange of
$4,973,500 4% notes payable into equity 497,350
shares ................................................. 4,927,435
Issuance of common stock for exercise of warrants,
418,500 shares ......................................... 200,000
Issuance of common stock from treasury for
employment service awards, 240 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, 1,645 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)
_____________ ____________ ___________ ______________
Issuance of Series C convertible preferred
175,000 shares issued .................................. 1,750,000
Issuance of Common Stock purchase warrants to
shareholder .............................................. 300,000
Writedown of discount from forgiveness of warrants ....... (132,501)
Dividends on Series B Preferred .......................... (94,120) (94,120)
Net Loss ................................................. (8,706,831) (8,706,831)
_____________ ______________
Balance, March 31, 1999 .................................. $ (67,759,816) $ (1,168,537) $ - $ (15,730,757)
============= ============ =========== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
a. Nature of Business: Xyvision, Inc. (the "Company"), through its
subsidiaries, develops, markets, and supports content management and
publishing software products. These products help companies create, manage
and distribute large amounts of information and automate the compilation
and delivery of this content into paper, electronic and web based formats.
b. Basis of Presentation: 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 1999, has a working
capital deficit, a stockholder's deficit and is in default on its 6%
Convertible Subordinated Debentures, 15% Promissory Notes, and its 4%
Promissory Notes (Note 8). The Company's attainment of profitable
operations and sufficient additional financing, as well as the continued
forebearance 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 classification 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.
c. Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries
Xyvision Enterprise Solutions and Xyvision Design Systems. The
consolidated financial statements of Xyvision Enterprise Solutions include
the accounts of Xyvision Enterprise Solutions and its wholly owned
subsidiaries: Xyvision Enterprise Solutions Europe Ltd. (an English
corporation), Xyvision S.A.R.L. (a French corporation) and Xyvision
Enterprise Solutions GmbH (a German corporation). All material
intercompany transactions and balances have been eliminated in
consolidation.
d. Cash and cash equivalents: 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 2000 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.
There can be no assurance that the forbearance by the debtholders will
continue.
e. Inventories: Inventories are stated at the lower of cost, determined
under the first-in, first-out method, or market.
f. Property and Equipment: Property and equipment are stated at cost less
accumulated depreciation and amortization. Major 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 which 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>
23
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
g. Revenue Recognition: During 1999, the Company recognized revenue in
accordance with Statement of Position No. 97-2 ("SOP 97-2") "Software
Revenue Recognition." The Company's systems revenue is derived from the
sale of perpetual licenses for its page composition, document management
and third party software. Services revenues include maintenance and
support, consulting and training services. Revenue from license
arrangements is recognized upon shipment of the product if collection of
the resulting receivable is probable and remaining Company obligations are
insignificant. The Company's strategy of providing customers with complete
integrated publishing solutions may result in bundling of services with
software and recognition of software licensing revenue and services over
the length of the implementation in conformity with Accounting Research
Bulletin No. 45, Long-Term Construction Type Contracts" using the relevant
guidance of SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production Type Contracts." If vendor specific evidence does not
exist for all undelivered elements, revenue is deferred until all elements
have been delivered.
Payments received in advance of shipment are recorded as deferred revenue
until services are delivered. Revenue from annual maintenance contracts
are deferred and revenue is recognized ratably over the duration of the
contract. Revenue for consulting and training is recognized when the
services are performed and collectability is deemed probable.
The loss of a major customer or a delay in an order by such customer may
have a material adverse effect on the Company's business, operating
results and financial condition.
h. 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") 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 the
estimate of anticipated future gross revenues, the remaining estimated
economic life of the product or both could vary from management's
estimates. The Company periodically reviews capitalized software for net
realizable value. Any adjustments resulting from this analysis is included
in income.
i. Earnings Per Common Share: The Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), "Earnings per share,"
beginning with the fiscal year ended March 31, 1998. This statement
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
stockholders 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. The Company has restated
all share references due to 5 for 1 stock split effective October 20,
1998.
j. Foreign Currency: The Company has elected to use the US dollar as its
functional currency, accordingly, all balance sheet accounts of foreign
operations are translated into US dollars at the year-end rate of exchange
and statements of operations items are translated at the weighted average
exchange rate for the year. Gains and losses from foreign currency
translations and transactions, such as those resulting from the settlement
of foreign receivables or payables, are charged to the Statement of
Operations as incurred.
k. Concentration of Credit Risk: Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally
of trade receivables. The Company sells its products primarily to major
corporations and systems integrators that serve a wide variety of U.S. and
foreign markets. The practice of establishing reasonable credit lines
limits risk. The Company maintains allowances for doubtful accounts and
believes these are adequate to cover potential credit risks.
24
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
m. New Accounting Pronouncements:In December 1997, the FASB issued
Statement of Position No. 97-2 ("SOP 97-2") Software Revenue Recognition."
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-9 ("SOP 98-9"),
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions." The provisions of SOP 98-9 have been adopted for
transactions entered into during the fiscal period beginning January 1,
1999. The adoption of SOP 98-9 did not have a material impact on revenue
recognized during the period or year ended March 31, 1999.
n. Accounting for Stock-Based Compensation: Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), issued in 1995, defined a fair value method of accounting
for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is
usually the vesting period. As provided for in SFAS 123, the Company
elected to apply Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its stock-based compensation
plans. The required disclosures under SFAS 123, as if the Company had
applied the new method of accounting, are included in Note 10.
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
for 1999. For 1998 inventory consisted primarily of hardware, third-party
software, and support of Contex and Eclipse business.
4. Property and Equipment
Property and equipment consists of:
<TABLE>
<S> <C> <C>
MARCH 31, 1999 MARCH 31, 1998
________________ _________________
Design, test, and manufacturing equipment ......... $1,871,158 $2,332,982
Office furniture and fixtures ..................... 155,406 335,128
Leasehold improvements ............................ 432,771 422,289
Purchased software ................................ 377,151 270,181
Delivery and service vehicles ..................... 9,333 9,333
__________ __________
2,845,819 3,369,913
Accumulated depreciation and amortization ......... (2,206,692) (2,519,330)
__________ __________
$ 639,127 $ 850,583
========== ==========
</TABLE>
Depreciation and amortization expense for property and equipment for
fiscal 1999, 1998 and 1997 was $452,000, $471,000 and $483,000, respectively.
25
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Other Assets
Other assets consists of the following, which are presented net of any
accumulated amortization
<TABLE>
<S> <C> <C>
MARCH 31, 1999 MARCH 31, 1998
________________ _______________
Capitalized software costs ......... $479,297 $ 975,307
Debenture issuance costs ........... 7,161 10,622
Other .............................. 76,413 104,524
________ __________
$562,871 $1,090,453
======== ==========
</TABLE>
The Company continually evaluates the future benefit of its capitalized
software costs. During fiscal 1999 and 1998, the Company determined that
certain costs exceeded its net realizable value due to new software
technologies developed and released by the Company. Accordingly, the Company
wrote down these capitalized software costs by $410,000 in fiscal 1999 and
$798,000 in fiscal 1998. Capitalized software costs amortized and charged to
expense were $262,000, $2,275,000, and $1,152,000, in fiscal 1999, 1998, and
1997, respectively. Capitalized software costs are presented net of accumulated
amortization of $2,478,000 and $2,653,000 at March 31, 1999 and 1998,
respectively.
Debenture issuance costs amortized and charged to expense were $3,000,
$4,000, and $6,000, in fiscal 1999, 1998, and 1997, 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 $777,000 and $774,000 at March 31, 1999 and 1998,
respectively. (See Note 8)
6. Other Current Liabilities
Other current liabilities consists of:
<TABLE>
<S> <C> <C>
MARCH 31, 1999 MARCH 31, 1998
________________ _______________
Interest payable on debentures ........................ 642,603 561,303
Dividends payable on Series B Preferred Stock ......... 304,328 210,209
Other ................................................. 175,874 175,208
__________ ________
$1,122,805 $946,720
========== ========
</TABLE>
7. Note Payable to Stockholder
Xyvision has a 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 Xyvision. The line, which is payable on March 31,
2000, is collateralized by the Company's stock in Xyvision Enterprise
Solutions, Inc., a majority owned subsidiary ("XyEnterprise), and has been used
for working capital and general business purposes. Interest on the line of
credit is payable on March 31, 2000 in cash, provided that Tudor Trust has the
option to receive interest on a quarterly basis after January 1, 1999, payable
in shares of common stock based on the fair market value of the Common Stock.
Since the initial establishment of the credit line on June 30, 1992, there have
been numerous amendments, each amendment has increased the maximum loan amount
thereunder and provided other terms and provisions.
On July 1, 1998, the Company and Tudor Trust entered into an additional
amendment to the line of credit that, among other things, (i) increased the
maximum loan amount thereunder to $13,500,000, (ii) provided that Tudor Trust
shall have the sole discretion to decide whether or not to make advances of
funds thereunder, (iii) provided 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) provided for the issuance by the
Company to Tudor Trust
26
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of a common stock purchase warrant covering 600,000 shares of Common Stock of
the Company at an exercise price of $1.25 per share (representing the fair
market value of the Common Stock on the date of issuance),(v) increased the
interest rate on the line of credit from 6% to 8% per annum, and (vi) the value
of the warrants (representing the parties understanding as to the fair market
value of the common stock of the Company as of the date of warrant issue) is
part of the unamortized discount of the note payable to stockholder.
Notwithstanding the fact the warrants have been cancelled, as described in the
following paragraph, the Company has continued to amortize the portion of these
warrants related to the outstanding line of credit balance into interest
expense.
On December 31, 1998, as part of the corporate restructuring plan approved
by the Board of Directors and further described in Note 9 to the Consolidated
Financial Statements, Tudor Trust converted $1,750,000 of the outstanding
indebtedness under the line of credit into 175,000 shares of Series C Preferred
Stock of Xyvision (which are convertible into 1,750,000 shares of Common
Stock). In addition, the Company and Tudor Trust entered into an additional
amendment to the line of credit that, among other things (i) provided that an
additional $5,000,000 of the outstanding indebtedness will become convertible
at a rate of $10.00 per share into shares of Series C Preferred Stock beginning
in June 1999 at the option of Tudor Trust, (ii) decreased the interest rate on
the convertible portion of the line of credit from 8% to 6% per annum, (iii)
decreased the maximum loan amount thereunder to $12,227,000 less any amount
converted from time to time into the Company's Series C Preferred Stock, and
(iv) Tudor Trust released its liens on the assets of Xyvision that were
transferred to XyEnterprise while taking a security interest in the stock of
XyEnterprise held by Xyvision.
On December 31, 1998, XyEnterprise and Tudor Trust entered into a Loan
Agreement providing XyEnterprise with a $1,000,000 line of credit for working
capital and general business purposes. The line of credit bears an interest
rate of 8% per annum, and is collateralized by substantially all of the assets
of XyEnterprise. XyEnterprise has reached an agreement in principle with Tudor
Trust to amend the line of credit, among other things, to increase the amount
available thereunder to $1,750,000 and extend the maturity date to June 30,
2001. As of March 31, 1999, including the line of credit available to
XyEnterprise, the Company had an outstanding line of credit balance of
$11,925,000. As of June 25, 1999, the Company had borrowed $13,050,000 of the
$13,977,000 available under the credit lines (Note 7).
8. Current Maturities of Long-Term Debt
Current portion of long-term debt consists of:
<TABLE>
<S> <C> <C>
MARCH 31, MARCH 31,
1999 1998
__________ __________
6% Convertible Subordinated Debentures ................ $1,355,000 $1,355,000
15% promissory notes, due fiscal 1996 ................ 116,110 116,110
4% promissory notes, due fiscal 1998 and 1999 ......... 735,000 735,000
__________ __________
2,206,110 2,206,110
Current maturities of long-term debt .................. 2,206,110 2,206,110
__________ __________
</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 $112.50 per share. Interest on the
Debentures is payable annually and the Debentures may be called by the Company
under certain conditions. During fiscal 1992, the Company began a program to
restructure its financial position, specifically, the Debentures, which program
continues to this date.
From March 10, 1992 to September 30, 1996, the Company completed
restructuring transactions pursuant to which the holders of a total of
$19,035,000 aggregate principal amount of Debentures generally exchanged
Debentures for a combination of unsecured, unsubordinated promissory notes of
the Company bearing interest at 15% per year and shares of Common Stock.
Between September 30, 1996 and December 31, 1998, the Company completed
restructuring transactions pursuant to which the holders of a total of
$2,020,000
27
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
aggregate principal amount of Debentures generally exchanged Debentures for
shares of Common Stock. As of June 25, 1999, a total of $1,330,000 principal
amount of Debentures remained outstanding. The Company may seek to restructure
the remaining Debentures, but there can be no assurance that it will do so.
The Company did not make the interest payment due on the Debentures on May
5, of 1992, 1993, 1994, 1995, 1996, 1997, 1998 or 1999. As of June 25, 1999,
the cumulative unpaid interest due on the Debentures totaled $663,000. Under
the terms of the Indenture covering the Debentures, the Trustee or the holders
of no less than 25% of outstanding principal amount of the Debentures have the
right to accelerate the maturity date of the remaining Debentures. As of June
25, 1999, no such acceleration had occurred or been threatened.
As of March 31, 1998, the Company had completed restructuring transactions
pursuant to which the holders of 15% Promissory Notes in the aggregate
principal amount of $5,709,000 with accrued interest of $2,353,000 generally
exchanged 15% Promissory Notes (including all rights to receive any interest
accrued thereon) for a combination of unsecured, unsubordinated promissory
notes of the Company bearing interest at 4% per year, for shares of Common
Stock and shares of Series B Preferred Stock. 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. As of June 25, 1999,
cumulative accrued but unpaid dividends on the Series B Preferred Stock totaled
$328,000. As of June 25, 1999, 15% Promissory Notes in an aggregate principal
amount of $60,000 with accrued interest of $67,250 were overdue. The Company
may seek to restructure the remaining 15% Promissory Notes, but there can be no
assurance that it will do so.
As of March 31, 1999, the Company had completed restructuring transactions
pursuant to which the holders of 4% Promissory Notes in the aggregate principal
amount of $4,974,000 generally exchanged 4% Promissory Notes for shares of
Common Stock plus accrued but unpaid interest. As of June 25, 1999, 4%
Promissory Notes in an aggregate principal amount of $389,000 with accrued
interest of $19,000 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. Independently of the
Company, Tudor Trust has made an offer to certain holders of Debentures, 15%
Promissory Notes and 4% Promissory Notes to purchase such securities at 10% of
their face amount. Tudor Trust has agreed to reduce the Company's liability
with respect to such securities to the purchase price paid by Tudor Trust. As
of June 25, 1999, $347,000 aggregate principal amount of the 4% Promissory
Notes and $25,000 of the Debentures have been purchased. However, despite the
fact that 96% of the Debentures have been restructured and the Company has been
unable to identify 4% of the remaining Debentures, 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.
9. Restructuring
On December 31, 1998, the Company completed a corporate restructuring plan
(the "Restructuring") pursuant to which, among other things, substantially all
of the assets of Xyvision's publishing business were transferred to
XyEnterprise in exchange for shares of common stock of XyEnterprise, while the
majority of its liabilities, including obligations under its line of credit
with Tudor Trust, remained with Xyvision. As described in Note 7 to the
Consolidated Financial Statements, Xyvision's credit line with Tudor Trust was
amended. In addition, Tudor Trust converted $1,750,000 of the outstanding
indebtedness under the Xyvision line of credit into 175,000 shares of
Xyvision's Series C Preferred Stock, which are convertible into Xyvision Common
Stock. An additional $5,000,000 of the outstanding indebtedness under the
Xyvision line of credit became convertible into shares of Series C Preferred
Stock in June 1999 at the option of Tudor Trust at the conversion ratio of
$10.00 per share. Tudor Trust has also surrendered for cancellation all of its
Common Stock Purchase Warrants, covering an aggregate of 4,956,000 shares of
Xyvision Common Stock at various exercise prices. Tudor Trust has initially
provided XyEnterprise with a $1,000,000 line of credit, as well as
28
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
invested $1,000,000 to purchase 400,000 shares of Series A Preferred Stock of
XyEnterprise. XyEnterprise has reached an agreement in principle with Tudor
Trust to amend the line of credit, among other things, to increase the amount
available thereunder to $1,750,000 and extend the maturity date to June 30,
2001.
Xyvision has reached an agreement in principle with Tudor Trust whereby
XyEnterprise will issue and sell 300,000 shares of its Series A Convertible
Preferred Stock to Tudor Trust for an aggregate purchase price of $750,000. The
Series A Preferred Stock converts to Common Stock of XyEnterprise on a
one-for-one basis, subject to adjustment.
10. Income Taxes
For fiscal years 1999, 1998, and 1997 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 1997, 1998 or 1999.
As of March 31, 1999, the Company had net operating loss carryforwards of
$53,568,000 expiring at various dates from fiscal 2005 to fiscal 2019,
investment tax credits of $58,000 expiring at various dates from fiscal 2000 to
fiscal 2002, and research and development credits of $1,316,000 expiring at
various dates from fiscal 2000 to fiscal 2009. These items are available to
reduce future income taxes payable.
As of March 31, 1999, 1998, and 1997 the Company's deferred tax assets of
approximately $21,730,000, $21,693,000, and $20,157,000, 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 or classification of
debt of the Company, which may not be within the Company's control, may
restrict future utilization of these carryforwards.
11. 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. There
were options to purchase 14,339 shares of common stock outstanding under the
1982 Stock Option Plan at March 31, 1999.
During fiscal 1992 the Board adopted the 1992 Stock Option Plan for which
200,000 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 200,000 to
400,000. Options issued under the 1992 Stock Option Plan remain under the terms
of such plan. There were options to purchase 320,927 shares of Common Stock
outstanding under the 1992 Stock Option Plan at March 31, 1999. During fiscal
1998, the Board adopted the 1997 Stock Incentive Plan for which 400,000 shares
of common stock are reserved. No options had been granted under the 1997 Stock
Incentive Plan at March 31, 1999.
29
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997,
1998 and 1999:
<TABLE>
<S> <C> <C>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
_____ ____________________
Options outstanding at March 31, 1996 ......... 246,071 2.45
Granted .................................... 278,600 2.50
Canceled ................................... (92,110) 2.00
Exercised .................................. - -
_______
Options outstanding at March 31, 1997 ......... 432,561 $ 2.60
Granted .................................... 10,800 2.30
Canceled ................................... (90,581) 2.45
Exercised .................................. - -
_______
Options outstanding at March 31, 1998 ......... 352,780 $ 2.60
Granted .................................... 81,600 .82
Canceled ................................... (107,629) 2.70
Exercised - -
________
Options outstanding at March 31, 1999 ......... 326,751 $ 2.10
========
</TABLE>
Under the 1982 Stock Option Plan and the 1992 Stock Option Plan, options
were exercisable for 85,419, 135,008, and 140,072 shares of Common Stock at
March 31, 1997, 1998 and 1999, respectively. At March 31, 1997, 1998 and
1999, options for the purchase of 6,219, 473,477, and 493,992 shares of
Common Stock, respectively, were available for future grants under the 1992
Stock Option Plan and the 1997 Stock Incentive Plan.
<TABLE>
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
____________________________________________________________________________ __________________________________
WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE EXERCIS- AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE ABLE EXERCISE PRICE
__________________ ______ ____________________ __________________ _______ __________________
$0.75 to $1.45 96,600 8.98 $ .85 6,900 $ 1.40
1.50 to 2.45 36,393 3.30 1.65 36,393 1.65
2.50 to 3.45 169,600 7.60 2.50 81,650 2.50
3.50 to 4.45 1,500 2.46 4.05 1,500 4.05
4.50 to 5.45 22,658 6.38 4.75 13,629 4.75
__________ ________
$0.75 to $5.45 326,751 7.38 $ 2.10 140,072 $ 2.45
========== ========
</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 30,000 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 4,000 shares of Common Stock, at an
exercise price equal to the fair market value of the Common Stock on the
date of grant. 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 12,000 shares of Common Stock were outstanding at March 31,
1997, 1998 and 1999, respec-
30
<PAGE>
XYVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
tively. At March 31, 1997, 1998 and 1999, options for the purchase of
10,400, 11,200 and 12,000 shares of Common Stock, respectively, were
exercisable. At March 31, 1997, 1998 and 1999, there were 18,000 options
for the purchase of shares of Common Stock 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 1997, 1998 and 1999 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
1999 1998 1997
_______ ______ ______
Dividend yield .................. 0 0 0
Expected volatility ............. 100.0% 80.0 % 80.0%
Risk-free interest rate ......... 5.3% 6.5 % 6.6%
Expected life (years) ........... 8.0 10.0 10.0
Weighted-average fair value of options granted at or above
fair value during:
Fiscal 1999 ..................... $ 0.58
Fiscal 1998 ..................... $ 1.21
Fiscal 1997 ..................... $ 2.13
</TABLE>
Had compensation cost for the Company's fiscal 1997, 1998, and 1999 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 1999 ......... $(8,800,951) (3.08)
Fiscal 1998 ......... $(8,007,330) (2.81)
Fiscal 1997 ......... $(1,352,526) (0.56)
Pro Forma:
Fiscal 1999 ......... $(9,002,168) (3.15)
Fiscal 1998 ......... $(8,147,356) (2.82)
Fiscal 1997 ......... $(1,453,344) (0.60)
</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 1996. Additional awards in future years are anticipated.
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 80,000 shares of
the Company's Common Stock at $22.50 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 were made to the Trust, which the Trust applied against its
loan to the Company. These payments caused an allocation to
31
<PAGE>
the eligible employees of 10,540 shares of the Company's Common Stock for
fiscal 1997. No payment was required or made during fiscal 1998 or 1999.
The Company charged $87,000 in fiscal 1997 to operations for contributions
to the Trust. The Company incurred no charges to operations for
contributions to the Trust in fiscal 1998 and 1999.
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 $62,000, $72,000, and $67,000
in fiscal 1999, 1998 and 1997, respectively.
13. Commitments and Contingencies
a. Leases
At March 31, 1999, 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, 1999 are as follows:
<TABLE>
<S> <C>
FISCAL YEAR
______________________
2000 ............... 697,946
2001 ............... 721,998
2002 ............... 718,847
2003 ............... 106,558
2004 ............... 106,558
Thereafter ......... 44,422
________
Total $2,396,329
==========
</TABLE>
Rental expense under all operating leases was approximately $743,000,
$767,000 and $742,000 in fiscal 1999, 1998 and 1997, 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 not a party to any material legal proceedings. The Company
has been party to several legal proceedings and claims in the past.
Although there can be no assurances that new proceedings and claims will
not be asserted, the Company's management has no knowledge of actions that
would give rise to a claim.
d. Minority Interest
The minority interest of $1,015,000 is represented by 400,000 shares of
Series A preferred stock of Xyvision Enterprise Solutions, that is owned by
Tudor Trust. These shares are eliminated in consolidation. The Series A
Preferred Stock is entitled to a dividend of $0.15 per share per annum.
32
<PAGE>
14. Industry Segments and Operations by Geographic Areas
Sales to unrelated customers by geographic region for fiscal 1999, 1998
and 1997 were as follows:
<TABLE>
<S> <C> <C> <C>
FISCAL 1999 FISCAL 1998 FISCAL 1997
______________ ______________ ______________
North America .......... $ 8,029,850 $12,439,198 $15,537,000
Western Europe ......... 1,861,347 3,320,069 5,312,000
Asia/PacRim ............ 664,000 741,550 1,385,000
___________ ___________ ___________
Total ................. $10,555,197 $16,500,817 $22,234,000
=========== =========== ===========
</TABLE>
The Company operates predominantly in one product segment, that being the
development and marketing of content management and publishing software. No
single customer accounted for more than 10% of revenues in fiscal 1999, 1998
or 1997.
15. Earnings Per Share
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 1999 FISCAL 1998 FISCAL 1997
_______________ _______________ _______________
Basic and diluted EPS Computation:
Loss before extraordinary item ................. (8,706,831) (7,913,210) (1,358,731)
Less: Accrued Preferred Stock Dividends ........ 94,120 94,120 93,795
__________ __________ __________
Loss allocable to common stockholders before
extraordinary item ............................ (8,800,951) (8,007,330) (1.452,526)
Extraordinary item ............................. - - 100,000
Loss allocable to common stockholders .......... (8,800,951) (8,007,330) (1,352,526)
========== ========== ==========
Weighted average common shares outstanding ..... 2,854,283 2,853,881 2,419,383
========== ========== ==========
Basic and diluted EPS:
Loss allocable to common stockholders before
extraordinary item ............................ (3.08) (2.81) (0.60)
Extraordinary item ............................. - - 0.04
__________ __________ __________
Net loss per share ............................. (3.08) (2.81) (0.56)
========== ========== ==========
</TABLE>
At March 31, 1999, 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 326,751 shares of common stock, (ii)
235,299 shares of Series B Preferred Stock, (iii) 175,000 shares of Series C
Preferred Stock, (iv) and 99,478 common equivalents as a result of certain
debt to equity transactions.
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 352,780 shares of common stock, (ii)
common stock warrants to purchase 4,432,500 shares of common stock, (iii)
235,299 shares of Series B Preferred Stock and (iv) 99,478 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 432,561 shares of common stock, (ii)
common stock warrants to purchase 2,432,500 shares of common stock (iii)
235,299 shares of Series B Preferred Stock, and (iv) 96,086 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.
33
<PAGE>
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 1999 Annual
Meeting of Stockholders (the "1999 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" and "Executive Compensation" in the 1999 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 1999
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 1999 Proxy Statement, which information is
incorporated herein by reference.
34
<PAGE>
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.......................................18
Consolidated Balance Sheets-March 31, 1999 and 1998.....................19
Consolidated Statements of Operations
for the years ended March 31, 1999, 1998 and 1997......................20
Consolidated Statements of Cash Flows
for the years ended March 31, 1999, 1998 and 1997......................21
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended March 31, 1999, 1998 and 1997......................22
Notes to Consolidated Financial Statements...........................23-33
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
On January 6, 1999, the Company filed a Current Report on Form 8-K, dated
December 31, 1998, to report under Item 5 (Other Events) the completion of
the Company's corporate restructuring. No financial statements were
required to be filed with such report.
35
<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 29, 1999
/s/ WENDY DARLAND
------------------------------------------------
WENDY DARLAND
Vice President and Chief Financial 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, Chief Operating Officer and June 29, 1999
- ------------------------------
Director (Principal Executive Officer)
KEVIN J. DUFFY
Vice President, Chief Financial Officer,
/s/ WENDY DARLAND Treasurer and Secretary (Principal
- ------------------------------
Financial and Accounting Officer)
WENDY DARLAND
/s/ LELAND S. KOLLMORGEN Director
- ------------------------------
LELAND S. KOLLMORGEN
/s/ JAMES S. SALTZMAN Director
- ------------------------------
JAMES S. SALTZMAN
</TABLE>
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
EXHIBIT NO. DESCRIPTION
________________ ____
2.1 Asset Purchase Agreement, dated as of September 18, 1998, by and between
the Registrant and Barco, Inc. is incorporated by reference to Exhibit 2 to the
Registrant's Current Report on Form 8-K, dated September 18, 1998
2.2 Agreement dated as of December 22, 1998, by and among the Registrant,
Xyvision Enterprise Solutions, Inc. and Jeffrey L. Neuman, as trustee of the
Tudor Trust u/d/t December 12, 1997 is incorporated herein by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K, dated December 31,
1998.
2.3 Contribution and Assumption Agreement, dated as of December 31, 1998, by
and between the Registrant and Xyvision Enterprise Solutions, Inc. is
incorporated herein by reference to Exhibit 2.2 to the Registrant's Current Report
on Form 8-K, dated December 31, 1998.
3.1 Restated Certificate of Incorporation of the Registrant is incorporated herein by
reference to the Registrant's Annual Report on Form 10-K for the year ended
March 31, 1988
3.2 Certificate of Amendment to Certificate of Incorporation of the Registrant is
incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the year ended March 31, 1993
3.3 Certificate of Amendment to Certificate of Incorporation of the Registrant is
incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the year ended March 31, 1996
3.4 Certificate of Designation to Certificate of Incorporation of the Registrant
designating Series B Preferred Stock is incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended March 31, 1996
3.5 Certificate of Amendment of Amended and Restated Certificate of Incorporation
of the Registrant is incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996
3.6 Certificate Eliminating the Series A Junior Participating Preferred Stock of the
Registrant is incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998
3.7 Certificate of Designations of the Preferred Stock of the Registrant to be
Designated Series C Preferred Stock is incorporated by reference to Exhibit 3.2
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998
3.8 Certificate of Amendment of Amended and Restated Certificate of Incorporation
of the Registrant
3.9 Amended and Restated By-laws of the Registrant, as amended, are incorporated
herein by reference to the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1990
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 Subordinated Debentures Due 2002 is incorporated herein by
reference to the Registrant's Annual Report on Form 10-K for the year ended
March 31, 1987
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
*10.1 1992 Stock Option Plan of the Registrant is incorporated herein by reference to
the Registrant's Annual Report on Form 10-K for the year ended March 31, 1992
*10.2 1997 Stock Incentive Plan of the Registrant is incorporated herein by reference
to Annex A to the Registrant's Preliminary Schedule 14A filed August 4, 1997
*10.3 1992 Director Stock Option Plan is incorporated herein by reference to the
Registrant's Registration Statement on Form S-8 (File No. 33-54018)
*10.4 Employee Severance Benefit Plan is incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended March 31, 1990
*10.5 Employee Stock Ownership Plan and Trust is incorporated herein by reference
to the Registrant's Annual Report on Form 10-K for the year ended March 31,
1990
*10.6 Xyvision Enterprise Solutions, Inc. 1998 Stock Incentive Plan is incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998
10.7 Second Amended and Restated Advance Facility Loan Agreement, dated as of
July 1, 1998, by and between the Registrant and Tudor Trust is incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998
10.8 Letter Agreement and Promissory Note, dated as of November 30, 1998, by and
between the Registrant and Jeffrey L. Neuman, as trustee of the Tudor Trust
u/d/t December 12, 1997 is incorporated by reference to Exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31,
1998
10.9 First Amendment to Second Amended and Restated Secured Advance Facility
Loan Agreement, dated as of December 31, 1998, by and between the
Registrant and Jeffrey L. Neuman, as trustee of the Tudor Trust u/d/t December
12, 1997 is incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998
10.10 Secured Advance Facility Loan Agreement, dated as of December 31, 1998, by
and between Xyvision Enterprise Solutions, Inc. and Jeffrey L. Neuman, as
trustee of the Tudor Trust u/d/t December 12, 1997 is incorporated by reference
to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998
10.11 Letter Agreement, dated December 31, 1998, by and between the Registrant
and Jeffrey L. Neuman, as trustee of the Tudor Trust u/d/t December 12, 1997 is
incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1998
10.12 Series A Convertible Preferred Stock Purchase Agreement, dated as of
December 31, 1998, by and between Xyvision Enterprise Solutions, Inc. and
Tudor Trust is incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998
10.13 Services Agreement, dated as of December 31, 1998, by and between the
Registrant and Xyvision Enterprise Solutions, Inc. is incorporated by reference to
Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
10.14 Letter Agreement, dated as of December 31, 1998, by and between Xyvision
Enterprise Solutions, Inc. and Jeffrey L. Neuman, as trustee of the Tudor Trust
u/d/t December 12, 1997 is incorporated by reference to Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31,
1998
10.15 Form of Exchange Agreement for 15% Promissory Notes is incorporated herein
by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994
10.16 Form of Exchange Agreement for 4% Promissory Notes is incorporated herein
by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996
10.17 Form of Exchange Agreement for 6% Convertible Subordinated Debentures due
2002 is incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996
10.18 Sublease Agreement, dated as of September 18, 1997, by and between the
Company and TASC, Inc. is incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1997
21 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
- -------------------------------
* Management contract or compensatory plan or arrangement filed in response to
Item 14(a)(3) of the instructions to Form 10-K
39
<PAGE>
EXHIBIT 3.8
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
XYVISION, INC.
PURSUANT TO SECTION 242 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
- ----------------------------------------------------
XYVISION, INC. (the "Corporation"), organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, does hereby
certify as follows:
At a meeting of the Board of Directors of the Corporation on July 1, 1998,
the Board of Directors duly adopted resolutions pursuant to Section 242 of the
General Corporation Law of the State of Delaware setting forth an amendment to
the Restated Certificate of Incorporation of the Corporation, as amended, and
declaring said amendment to be advisable. The stockholders of the Corporation
duly approved, pursuant to said Section 242, said proposed amendment at the
Annual Meeting of Stockholders held on September 17, 1998. The amendment to the
Restated Certificate of Incorporation is as follows:
RESOLVED: That the first paragraph of Article IV of the Certificate of
Incorporation be and hereby is deleted and the following two
paragraphs shall be inserted in lieu thereof:
"That upon the filing date of the Certificate of Amendment of
Amended and Restated Certificate of Incorporation of the
Corporation (the "Effective Date"), a one-for-five reverse split
of the Corporation's Common Stock (as defined below) shall become
effective, such that each five shares of Common Stock outstanding
and held of record by each stockholder of the Corporation
(including treasury shares) immediately prior to the Effective
Date shall represent one share of Common Stock from and after the
Effective Date, with cash paid in lieu of any fractional share
which might result from the reverse split, based on the fair
market value of the Common Stock on the Effective Date. The total
number of shares of all classes of stock which the Corporation
shall have the authority to issue is twenty-eight million
(28,000,000). All such shares are to have par value and are
classified as follows: three million (3,000,000) shares of
Preferred Stock, par value $1.00 per share ("Preferred Stock"),
and twenty-five million (25,000,000) shares of Common Stock, par
value $.03 per share ("Common Stock")."
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be executed by its President this 20th day of October, 1998.
XYVISION, INC.
By: /s/ Kevin Duffy
---------------------
Kevin Duffy
President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 446
<SECURITIES> 0
<RECEIVABLES> 2,051
<ALLOWANCES> (443)
<INVENTORY> 513
<CURRENT-ASSETS> 296
<PP&E> 5,583
<DEPRECIATION> 4,381
<TOTAL-ASSETS> 4,066
<CURRENT-LIABILITIES> 19,796
<BONDS> 0
235
1,750
<COMMON> (16,547)
<OTHER-SE> (1,169)
<TOTAL-LIABILITY-AND-EQUITY> 4,066
<SALES> 10,555
<TOTAL-REVENUES> 10,555
<CGS> 5,985
<TOTAL-COSTS> 5,985
<OTHER-EXPENSES> 11,762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,515)
<INCOME-PRETAX> (8,707)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,707)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,707)
<EPS-BASIC> (3.08)
<EPS-DILUTED> (3.08)
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<S> <C>
SUBSIDIARY NAME JURISDICTION OF ORGANIZATION
__________________________________________________ _____________________________
Xyvision Enterprise Solutions, Inc. Delaware
Xyvision Design Systems, Inc. Delaware
Xyvision Enterprise Solutions Europe Ltd. United Kingdom
Xyvision S.A.R.L. France
Xyvision Enterprise Solutions GmbH Germany
</TABLE>
<PAGE>
EXHIBIT 23.1
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, 333-19529, 33-54014, 33-54018,
33-41846, 33-15474) of Xyvision, Inc. of our report dated June 25, 1999
relating to the financial statements which appears in the Annual Report to
Shareholders, which is incorporated in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers L.L.P
PricewaterhouseCoopers L.L.P.
Boston, Massachusetts
June 28, 1999
1
