<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|q?[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|q? TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
COMMISSION FILE NUMBER 000-14747
AZUL HOLDINGS INC.
(Formerly Xyvision, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 04-2751102
(State or other jurisdiction (I.R.S. Employer Identification
Number)
of incorporation or organization)
4450 Arapahoe Avenue, Suite 100, Boulder, CO 80303
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (303) 448-8833
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes ---------- No ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of
August 13, 1999.
Common Stock, $.03 par value 2,854,283
(Title of each class) (number of shares)
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<PAGE>
Form 10-Q/A
Table of Contents
EXPLANATORY NOTE: The purpose of this amendment to the Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 is to restate the financial statements
included therein to reclassify the gain on early extinguishment of debt as an
extraordinary item and to record the allocation of a consolidated subsidiary's
loss to the minority interests in the subsidiary. These change are consistent
with the audited financial statements included in the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 2000 and have the net result
of decreasing the interim period net loss reported herein. See Note 1 of the
Notes to Consolidated Financial Statements included herein.
Page
Part I. Financial Information
Consolidated Balance Sheets
at June 30, 1999 and March 31, 1999................................. 2
Consolidated Statements of Operations
for the three months ended June 30, 1999 and 1998................... 3
Consolidated Statements of Cash Flows
for the three months ended June 30, 1999 and 1998................... 4
Notes to Consolidated Financial Statements........................... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 9
Quantitative and Qualitative Disclosures About Market Risk........... 12
Part II. Other Information................................................ 13
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. For this purpose,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions
are intended to identify forward-looking statements. The important factors
discussed below under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," including risks related to the
Company's credit line availability and debt restructuring efforts, among
others, could cause actual results to differ materially from those indicated by
forward-looking statements made herein and presented elsewhere by management
from time to time. Such forward-looking statements represent management's
current expectations and are inherently uncertain. Investors are warned that
actual results may differ from management's expectations.
1
<PAGE>
ITEM 1.
AZUL HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
(Unaudited)
June 30, March 31,
1999 1999
---------- -------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 1,002 $ 446
Accounts receivable:
Trade, less allowance for doubtful accounts of $403 at June 30, 1999 and
$443 at March 31, 1999 ..................................................... 1,485 1,608
Inventories ................................................................... 245 513
Other current assets .......................................................... 483 297
---------- -------
Total current assets ...................................................... 3,215 2,864
Property and equipment, net ................................................... 674 639
Other assets, net, principally software development costs ..................... 505 563
---------- -------
Total assets ............................................................ $ 4,394 $ 4,066
========== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to a stockholder, less unamortized discount of $510 at
June 30, 1999 and $680 at March 31, 1999...................................... $ 12,640 $11,245
Current portion of long-term debt ............................................. 1,894 2,206
Accounts payable and accrued expenses ......................................... 2,623 2,829
Other current liabilities ..................................................... 2,379 2,501
---------- -------
Total current liabilities ................................................. 19,536 18,781
---------- -------
Minority interest in subsidiary ................................................. 948 1,015
Commitments and contingencies ................................................... - -
Stockholders' deficit:
Capital stock:
Series preferred stock, $1.00 par value; 1,700,000 shares authorized;
no shares issued ........................................................... - -
Series B convertible preferred stock, $1.00 par value; 300,000 shares
authorized; 234,977 issued and outstanding at June 30, 1999 and March 31,
1999 (aggregate liquidation preference of $3,269 and $3,246, respectively) 235 235
Series C convertible preferred stock, $.01 par value; 1,000,000 shares
authorized; 175,000 shares issued and outstanding at June 30, 1999 and
March 31, 1999 ............................................................. 1,750 1,750
Common stock, $.03 par value; 25,000,000 shares authorized; 2,949,616
issued and outstanding at June 30, 1999 and March 31, 1999 ................. 88 88
Additional paid-in capital .................................................... 51,124 51,124
Accumulated deficit ........................................................... (68,119) (67,759)
---------- -------
(14,922) (14,562)
Less:
Treasury stock, at cost; 95,333 shares at June 30, 1999 and
March 31, 1999 ............................................................. 1,168 1,168
---------- -------
Total stockholders' deficit .................................................. (16,090) (15,730)
---------- -------
Total liabilities and stockholders' deficit ............................. $ 4,394 $ 4,066
========== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
AZUL HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<S> <C> <C>
Three Months Ended
-------------------------------
June 30, June 30,
1999 1998
----------- -------
(Unaudited)
(Restated)
Revenues:
Systems .................................................. $ 763 $ 984
Service .................................................. 1,861 1,687
----------- -------
Total revenues ........................................ 2,624 2,671
----------- -------
Cost of sales:
Systems .................................................. 317 219
Service .................................................. 1,121 1,277
----------- -------
Total cost of sales ................................... 1,438 1,496
----------- -------
Gross margin ............................................... 1,186 1,175
----------- -------
Expenses:
Research and development ................................. 782 941
Marketing, general and administrative .................... 1,465 1,922
----------- -------
Total operating expenses .............................. 2,247 2,863
----------- -------
Loss from operations ....................................... (1,061) (1,688)
Minority interest share of loss ............................ 802 -
----------- -------
Loss from operations after minority interest share ......... (259) (1,688)
----------- -------
Other expense, net:
Interest income .......................................... 4 4
Interest expense - third party ........................... (60) (31)
Interest expense - stockholder ........................... (373) (248)
----------- -------
Total other expense, net ................................... (429) (275)
----------- -------
Loss before extraordinary item ............................. (688) (1,963)
Extraordinary item:
Gain on early extinguishment of debt ...................... 353 -
----------- -------
Net loss ................................................... (335) (1,963)
Accrued Preferred Stock dividends .......................... 24 24
----------- -------
Net loss allocable to common stockholders .................. $ (359) $(1,987)
=========== =======
Basic and diluted earnings (loss) per share:
Before extraordinary item .................................. (.25) (0.70)
Extraordinary item ......................................... .12 -
----------- -------
Net loss per share ......................................... (.13) (0.70)
=========== =======
Weighted average common and common
equivalent shares outstanding .......................... 2,854 2,854
=========== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
AZUL HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<S> <C> <C>
Three Months Ended
-------------------------------
June 30, June 30,
1999 1998
--------- -------
(Unaudited)
(Restated)
Operations:
Net loss .................................................................... $ (335) $(1,963)
Adjustments to reconcile net loss to net cash used for operating activities:
Gain on early extinguishment of debt ........................................ (353) -
Depreciation and amortization ............................................... 149 244
Minority interest share ofloss ofsubsidiary ................................. (802) -
Interest expense related to warrants ........................................ 170 86
Provisions for losses on accounts receivable ................................ - 153
Operating assets and liabilities:
Accounts receivable ........................................................ 122 657
Inventories ................................................................ 268 (13)
Accounts payable and accrued expenses ...................................... (206) (564)
Other current liabilities .................................................. (118) 38
Other assets ............................................................... (186) 110
--------- -------
Net cash used for operations ................................................ (1,291) (1,252)
Investments:
Additions to property and equipment ......................................... (128) (33)
Capitalized software ........................................................ - (143)
--------- -------
Net cash used for investments ............................................... (128) (176)
Financing:
Proceeds from line of credit from a stockholder ............................. 1,225 1,300
Proceeds from sale of Subsidiary's Series A Preferred Stock ................. 750 -
--------- -------
Net cash provided from financing ............................................ 1,975 1,300
Net decrease in cash and cash equivalents ................................... 556 (128)
Cash and cash equivalents at the beginning of the period .................... 446 357
--------- -------
Cash and cash equivalents at the end of the period .......................... $ 1,002 $ 229
========= =======
Supplemental Information:
Accrued Preferred Stock dividends .......................................... 24 24
Extinguishment of 4% note payable .......................................... 347 -
Extinguishment of Debenture ................................................ 25 -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
AZUL HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying financial statements reflect
all adjustments (including normal recurring adjustments) necessary to
present fairly the consolidated financial position as of June 30, 1999 and
the results of its consolidated operations and consolidated cash flows for
the quarter ended June 30, 1999 and 1998 of Azul Holdings Inc. ("Parent")
and its majority-owned subsidiary Xyvision Enterprise Solutions, Inc.
("Subsidiary") (Parent and Subsidiary are sometimes collectibly referred
to as the "Company"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1999.
The accompanying financial statements have been restated to reclassify the
gain on early extinguishment of debt as an extraordinary item and to
record the allocation of a subsidiary's loss to the minority interests in
the Subsidiary. $346,000 of 4% Notes were repurchased and cancelled during
the first quarter of fiscal 2000. The foregoing changes are consistent
with the audited financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 2000. The
restatement impacted the consolidated financial statements for the quarter
ending June 30, 1999 as follows (in thousands of dollars, except for per
share values):
<TABLE>
<S> <C> <C>
Previously reported As restated
--------------------- --------------
Minority interest share of loss .............. - 802
Loss before extraordinary item ............... (1,490) (688)
Extraordinary item:
Gain on early extinguishment of debt ........ - 353
Net loss ..................................... (1,490) (335)
Net loss allocable to common shareholders..... (1,514) (359)
Loss per share before extraordinary item ..... (.53) (.25)
Extraordinary item ........................... - .12
Net loss per share ........................... (.53) (.13)
</TABLE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets, liabilities and accrued litigation at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and would impact future results of operations and cash
flows. The results of consolidated operations for the quarter ended June
30, 1999 are not necessarily indicative of the results of consolidated
operations that may be expected for the complete fiscal year.
2. The Company sells its products to a wide variety of customers in a variety
of industries. The Company performs ongoing credit evaluations of its
customers but does not require collateral or other security to support
customer receivables. The Company maintains reserves for credit losses and
such losses have been within management's expectations. Trade receivables
do not contain any material amounts collectible over a period in excess of
one year.
3. Inventories are stated at the lower of cost, determined on a first-in,
first-out method, or market and consist primarily of third party products
and software.
4. Parent has a line of credit with Tudor Trust ("Tudor Trust"), the largest
stockholder of Parent. Mr. Jeffrey Neuman, the grantor, sole trustee and
sole current beneficiary of Tudor Trust, also serves as Chairman of the
Board of Directors of Parent. The line, which is payable on March 31,
2000, is collateralized by the common stock of Subsidiary held by Parent,
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 Parent's
common stock ("Parent Common Stock") based on the fair market value of the
Parent Common Stock on such payment dates.
5
<PAGE>
AZUL HOLDINGS INC.
Notes to Consolidated Financial Statements (Cont'd)
Since the initial adoption on June 30, 1992, there have been numerous
amendments to the line of credit, with each amendment increasing the
maximum loan amount thereunder and providing other terms and provisions.
On July 1, 1998, Parent 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 Parent Common Stock based on the fair market value of the Parent Common
Stock on the interest payment dates, (iv) provided for the issuance by
Parent to Tudor Trust of warrants to purchase 600,000 shares of Parent
Common Stock at an exercise price of $1.25 per share (representing the
fair market value of the Parent Common Stock on the date of issuance), and
(v) increased the interest rate on the line of credit from 6% to 8% per
annum. The value of the warrants (representing the parties' understanding
as to the fair market value of the Parent Common Stock as of the date the
warrants were issued) is part of the unamortized discount of the note
issued by Parent and payable to Tudor Trust evidencing the line of credit.
On December 31, 1998, as part of the corporate restructuring plan further
described in Note 5 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 Parent's Series C Preferred Stock ("Parent
Series C Preferred") (which are convertible into 1,750,000 shares of
Parent Common Stock). In addition, Parent 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
became convertible in June 1999, into shares of Parent Series C Preferred
at a rate of $10.00 per share 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 shares of
Parent Series C Preferred, (iv) Tudor Trust released its liens on the
assets of Parent that were transferred to Subsidiary while taking a
security interest in the stock of Subsidiary held by Parent, and (v) Tudor
Trust also surrendered for cancellation warrants to purchase an aggregate
of 4,956,000 shares of Parent Common Stock at various exercise prices.
Notwithstanding the fact such warrants have been cancelled, as described
in the preceding paragraph, Parent has continued to amortize the portion
of the warrants related to Parent's outstanding line of credit balance
into interest expense.
On December 31, 1998, Subsidiary and Tudor Trust entered into a Loan
Agreement providing Subsidiary with a $1,000,000 line of credit for
working capital and general business purposes, which was subsequently
amended to $1,750,000 with a maturity extended to June 30, 2001. This line
of credit bears an interest rate of 8% per annum, and is collateralized by
substantially all of the assets of Subsidiary.
As of June 30, 1999, a total of $13,150,000 was drawn down on these two
lines of credit. As of August 13, 1999, the Company had borrowed
$13,070,000 of the $13,977,000 available under the credit lines,
5. In May 1987, Parent issued $25,000,000 principal aggregate amount of 6%
Convertible Subordinated Debentures due 2002 (the "Debentures")
convertible into Parent 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 Parent under certain conditions. During fiscal 1992,
Parent began a program to restructure its financial position,
specifically, the Debentures, which continues to this date.
From March 10, 1992 to September 30, 1996, Parent completed restructuring
transactions pursuant to which the holders of a total of $19,035,000
aggregate principal amount of Debentures exchanged such Debentures for a
combination of unsecured, unsubordinated promissory notes issued by Parent
bearing interest at 15% per year (the "15% Notes") and shares of Parent
Common Stock. Between September 30, 1996 and December 31, 1998, Parent
completed restructuring transactions pursuant to which holders of a total
of an additional $2,020,000 aggregate principal amount of Debentures
generally exchanged such Debentures for shares of Parent Common Stock.
Tudor Trust has made an offer to purchase certain outstanding Debentures,
15% Notes and 4% Notes. Tudor Trust has agreed to reduce Parent's
liability with respect to such securities to the purchase price paid by
Tudor Trust.
6
<PAGE>
AZUL HOLDINGS INC.
Notes to Consolidated Financial Statements (Cont'd)
As of June 30, 1999, a total of $1,330,000 principal amount of Debentures
remained outstanding. Parent may seek to restructure the remaining
Debentures, but there can be no assurance that it will do so.
Parent did not make the interest payments due on the Debentures on May 5,
of 1992, 1993, 1994, 1995, 1996, 1997, 1998 or 1999. As of June 30, 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
Debentures have the right to accelerate the maturity date of the remaining
Debentures. As of June 30, 1999, no such acceleration had occurred or been
threatened.
As of March 31, 1998, Parent completed restructuring transactions pursuant
to which holders of 15% Notes in an aggregate principal amount of
$5,709,000 with accrued interest of $2,353,000 generally exchanged such
15% Notes (including all rights to receive any interest accrued thereon)
for a combination of (i) unsecured, unsubordinated promissory notes of
Parent bearing interest at 4% per year (the "4% Notes"), (ii) shares of
Parent Common Stock and (iii) shares of Parent Series B Preferred. The
Parent Series B Preferred 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 30, 1999, cumulative accrued but unpaid dividends on
the Parent Series B Preferred totaled $328,000. As of June 30, 1999, 15%
Notes in an aggregate principal amount of $60,000 with accrued interest of
$78,000 were overdue. Parent may seek to restructure the remaining 15%
Notes, but there can be no assurance that it will do so. No 15% notes have
been repurchased by Tudor Trust.
As a result of Tudor Trust's offer to purchase certain outstanding
Debentures, 15% Notes and 4% Notes, $346,500 of 4% Notes were repurchased
and cancelled during the first quarter of fiscal 2000. As of June 30,
1999, Parent had completed restructuring transactions pursuant to which
the holders of 4% Notes in an aggregate principal amount of $5,321,000
exchanged such 4% Notes for shares of Parent Common Stock plus accrued but
unpaid interest. As of June 30, 1999, 4% Notes in an aggregate principal
amount of $389,000 with accrued interest of $19,000 were overdue. Tudor
Trust has made an offer to certain holders of Debentures, 15% Notes and 4%
Notes to purchase such securities at 10% of their face value. Tudor Trust
has agreed to reduce Parent's liability with respect to such securities to
the purchase price paid by Tudor Trust. Despite the fact that 96% of the
original Debentures have been exchanged or sold by the holders for such
securities, Parent has been unable to identify most of the remaining
original Debentureholders. For this reason, Parent can still give no
assurance about the outcome of the effort to restructure the Debentures
and does not expect the matters to be resolved in the near future.
On December 31, 1998, Parent completed a corporate restructuring plan (the
"Restructuring") pursuant to which, among other things, substantially all
of the assets of Parent's publishing business were transferred to
Subsidiary in exchange for shares of the common stock of Subsidiary, while
the majority of Parent's liabilities, including obligations under its line
of credit with Tudor Trust, remained with Parent. As described in Note 4
to the Consolidated Financial Statements, Parent's credit line with Tudor
Trust was amended. In addition, Tudor Trust converted $1,750,000 of
Parent's outstanding indebtedness under a line of credit with Parent into
175,000 shares of Parent Series C Preferred, which are convertible into
Parent Common Stock. An additional $5,000,000 of Parent's outstanding
indebtedness became convertible into Parent Series C Preferred 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 warrants to
purchase an aggregate of 4,956,000 shares of Parent Common Stock at
various exercise prices. Tudor Trust has also provided Subsidiary with a
$1,750,000 line of credit, and has invested $1,750,000 to purchase 700,000
shares of Subsidiary's Series A Preferred Stock (the "Subsidiary Series A
Preferred"). The Subsidiary Series A Preferred converts into Subsidiary's
common stock on a one-for-one basis, subject to adjustment.
6. The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. Management has assigned a valuation allowance to fully
offset the future tax benefits of these deferred tax assets.
7
<PAGE>
7. Earnings Per Share (in thousands, except per share data)
<TABLE>
<S> <C> <C>
Three Months Ended
-------------------------------
June 30, June 30,
1999 1998
------------ ------
(Unaudited)
(Restated)
Loss before extraordinary item .................... (688) (1,963)
Extraordinary item:
Gain on early extinguishments of debt ............ 353 -
------------ ------
Net loss .......................................... (335) (1,963)
Accrued Preferred Stock dividends ................. 24 24
Net loss allocable to common stockholders ......... (359) (1,987)
------------ ------
Basic and diluted EPS computation:
Before extraordinary item ........................ (.25) (.70)
Extraordinary item ............................... 12 -
------------ ------
Net loss per share ................................ (.13) (.70)
============ ======
Basic and diluted weighted average common and
equivalent shares outstanding ..................... 2,854 2,854
============ ======
</TABLE>
On October 20, 1998 Parent amended its Certificate of Incorporation to effect a
one-for-five reverse split of Parent Common Stock and to change the number of
authorized shares from 50,000,000 to 25,000,000. All references to number of
shares and per share information in the consolidated financial statements have
been
adjusted to reflect the reverse stock split on a retroactive basis.
8. Sale of Assets: On September 18, 1998, the Company sold substantially all
of 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
transaction costs, costs to write-off other assets and other accruals for
costs directly associated with the sale in the amount of approximately
$564,000.
8
<PAGE>
ITEM 2.
AZUL HOLDINGS INC.
(Formerly Xyvision, Inc.)
Management's Discussion and Analysis of Financial Condition and Results of
Operations
For the three month periods ended June 30, 1999 and 1998
Results of Operations
Revenues for the first quarter of fiscal 2000 were $2,624,000, a decrease
of approximately $47,000, or 2%, from the first quarter of fiscal 1999. Systems
revenues in the first quarter of fiscal 1999 include both the Contex and
Publishing divisions. On September 18, 1998, the Company sold substantially all
the assets of its Contex division, pursuant to the terms of an Asset Purchase
Agreement dated September 18, 1998 between the Company and Barco, Inc. (see
Note 8 to the Consolidated Financial Statements). For that reason, systems
revenues in the first quarter of fiscal 2000 include revenues from only the
Publishing division and increased $275,000, or 54%, when compared to publishing
systems revenues of the same quarter of fiscal 1999. One significant customer
sale and related services accounted for 21% of the revenues in the first
quarter of fiscal 2000. Overall, combined system revenues declined $221,000, or
22%, from $984,000 to $763,000, as a result of the sale of the Contex division.
Service revenues increased $174,000 or 10% from $1,687,000 in the first quarter
of fiscal 1999 (which includes Contex service revenues) to $1,861,000 in the
first quarter of fiscal 2000. Service revenues for the Publishing division for
the first quarter of fiscal 2000 increased $493,000, or 36%, from the first
quarter of fiscal 1999. The increase in service revenues was primarily a result
of increased consulting service revenues and maintenance revenues from new
accounts.
Gross margins in the first quarter of the current fiscal year increased to
45% of revenues from 44% in the comparable quarter of fiscal 1999. Systems
margins were 58% of systems revenues in the current fiscal quarter as compared
to 78% of systems revenues in the first quarter of the previous fiscal year.
The decrease of system margins in the first quarter of fiscal 2000 was
primarily a result of third party software included in the significant customer
sale. The service margins in the first quarter of fiscal 2000 were 40% as
compared with service margins of 24% in the first quarter of the previous
fiscal year. The increase was a result of reduced employee headcount and other
cost containment.
Research and development expenses in the first quarter of fiscal 2000, net
of capitalized software development costs, were $782,000, a decrease of
$159,000, or 17%, from the first quarter of fiscal 1999. The decrease was
primarily due to reduced development headcount and payroll as a result of the
sale of the Contex business. Capitalized software costs were none and $143,000
for the first three months of fiscal 2000 and 1999, respectively.
Marketing, general and administrative expenses were $1,465,000 for the
first quarter of fiscal 2000, a decrease of $457,000, or 24%, from the first
quarter of fiscal 1999. The decline in corporate administrative expenses
reflected savings associated with the relocation of corporate headquarters, a
reduction in headcount as a result of the sale of the Contex business, as well
as other cost containment programs.
Net total other expense was $429,000 for the first quarter of fiscal 2000,
an increase of $154,000, or 56%, from the first quarter of 1999, due to an
increase in interest expense primarily due to the increase in warrant
amortization expense as a result of a shorter life for the line of credit. (see
Note 4 to the Consolidated Financial Statements) as well as a rate increase on
the note payable to Tudor Trust from 6% to 8% on a higher average balance of
the Parent's credit line.
The Company's deferred tax assets consist primarily of its net operating
loss carryforwards. The Company has a valuation allowance to fully offset
future tax benefits of these deferred assets.
The Company accrued dividends of $24,000 on the Parent Series B Preferred
in each of the first quarters of fiscal 2000 and 1999, as well as $15,000 on
the Subsidiary Series A Preferred in the first quarter of fiscal 2000.
The Company recorded a net loss before extraordinary items of $688,000 for
the first quarter of fiscal 2000 as compared to a net loss of $1,987,000 for
the first quarter of fiscal 1999 or an improvement of nearly $1,300,000. Of
this amount, $500,000 in savings was a result of the Company's concerted cost
reduction program; and, $800,000 was the result of allocating losses to the
minority interests, which minority interest did not exist in the fiscal 1999
period. The Company further recorded a gain of $353,000 as a result of its
repurchasing and cancelling $346,000 of 4% Notes and $25,000 of Debentures at a
discount of 90% from face value.
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Liquidity and Capital Resources
At June 30, 1999, the Company had cash of $1,002,000, an increase of
$556,000 from March 31, 1999. For the first three months of fiscal 2000, the
Company's operating and investment activities used $1,419,000 of cash,
primarily for operations. The Company invested $128,000 in capital expenditures
during the quarter.
Parent has a $12,227,000 line of credit with Tudor Trust, the largest
stockholder of Parent. 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 Parent. This credit line has been used for working capital and
general business purposes. As of June 30, 1999, Parent had an outstanding line
of credit balance of $12,300,000. As of August 13, 1999, Parent had an
outstanding credit line balance of $12,220,000. Subsidiary has a separate
$1,750,000 line of credit with Tudor Trust. As of June 30, 1999, Subsidiary had
drawn down $850,000 of the line of credit. As of August 13, 1999, Subsidiary
had an outstanding credit balance of $850,000. See Note 4 to the Consolidated
Financial Statements for a further description of these lines of credit.
See Note 4 to the Consolidated Financial Statements for a description of
Parent's efforts to restructure its outstanding Debentures, 15% Notes and 4%
Notes. Despite the fact that 96% of the Debentures have been exchanged or sold
by the holders thereof, Parent has been unable to identify the holders of the
remaining Debentures. For this reason, Parent can give no assurance about the
outcome of the effort to restructure 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
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.
As a result of Tudor Trust's offer to purchase certain outstanding
Debentures, 15% Notes and 4% Notes, $346,500 of 4% Notes and $25,000 of
Debentures were repurchased and cancelled during the first quarter of fiscal
2000. The gain created by such retirement was treated as a contribution of
capital.
The Company anticipates that its cash requirements for fiscal 2000 will be
satisfied mainly from its credit lines, or otherwise from Tudor Trust, assuming
the continued forbearance by the holders of the Debentures, 15% Notes and 4%
Notes.
Foreign Currency - Conversion To Euro
On January 1, 1999, 11 of the 15 members of the European Union established
fixed conversion rates between their existing currencies and the "euro." The
euro will trade on currency exchanges and the legacy currencies will remain
legal tender for a transition period between January 1, 1999 and January 1,
2002. During the transition period, goods and services may be paid for using
the euro or the participating country's legacy currency. Participating
countries no longer control their own monetary policies by directing
independent interest rates for their legacy currencies. Instead, the authority
to direct monetary policy, including money supply and official interest rates
will be exercised by the new European Central Bank. No later than July 1, 2002,
the legacy currencies of the participating countries will no longer be legal
tender for any transaction, making conversion to the euro complete.
The Company has established plans and has begun developing the necessary
modifications for the technical adaptation of its internal information
technology and other systems to accommodate euro-denominated transactions. The
Company is also assessing the business implications of the conversion to the
euro, including long-term competitive implications. The Company 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
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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 continue to be tested
internally to 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 continues to assess its exposure to failures of products
obtained from third parties to be Year 2000 compliant. 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 its products are Year 2000 compliant. This assessment and
testing program will be ongoing and the Company's efforts with respect to
specific problems identified will depend in part upon its assessment of the
risk that any such problems may cause. 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 through the programs described above. 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 has identified anticipated costs, problems and uncertainties
associated with making its internal use systems Year 2000 compliant. Costs
identified by June 30, 1999 approximate $244,000 of which $150,000 has been
expended at June 30, 1999. The Company expects to resolve the Year 2000 issue
with respect to its computer systems and software applications during calendar
year 1999 through the 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 non-compliant
personal computers 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 85% 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
which 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.
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 has been
assured by its suppliers that its telecommunication systems and internet
connectivity is 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 substantially complete, and
the Company expects that continued testing and remediation efforts will
continue for four to five months after June 30, 1999.
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
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the Company will have to upgrade applications without enhancing features and
benefits in its 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 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not currently use derivative financial instruments. The
Company generally places its 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. The Company does not expect any material loss
from its marketable security investments and therefore believes that its
potential interest rate exposure is not material.
Internationally, the Company invoices customers primarily in local
currency. The Company is exposed to foreign exchange rate fluctuations from
when customers are invoiced in local currency until collection occurs. The
Company does not currently enter into foreign currency hedge transactions.
Through June 30, 1999, foreign currency fluctuations have not had a material
impact on the Company's financial position or results of operations.
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PART II: OTHER INFORMATION
Item 3. Defaults Upon Senior Securities:
For a description of defaults upon the Debentures, 15% Notes and 4% Notes
and arrearage in the payment of dividends on the Parent Series B
Preferred, see Note 4 to the Consolidated Financial Statements, which is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K:
(a) The exhibits listed in the Exhibit Index immediately preceding such
exhibits are filed as part of or are included in this report.
(b) Parent filed no reports on Form 8-K during the quarter of which this
report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AZUL HOLDINGS INC.
------------------------------
(Formerly Xyvision, Inc.)
(Registrant)
August 22, 2000
/s/ Edward S. Wittman
------------------------------
Edward S. Wittman
Vice President, Chief
Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit No. Description
------------- --------------------------------------------------
27 Financial Data Schedule (Electronic version only)
</TABLE>
15
