UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
F O R M 10-KSB
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997;
or
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to _______
Commission file #0-15797
XIOX CORPORATION
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(Name of small business issuer as specified in its charter)
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Delaware 953824750
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
577 Airport Boulevard, Suite #700
Burlingame, California 94010
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (650) 375-8188
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value
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(Title of Class)
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Check whether the issuer (l) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
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Issuer's revenues for its most recent fiscal year were: $5,060,890.
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The aggregate market value of the voting stock held by non-affiliates as of
March 2, 1998 was approximately $ 5,716,937 (based upon the average bid and
asked prices of such stock as reported by the National Association of Securities
Dealers Quotations Listing on that date). As of March 1, 1998 the total number
of shares of common stock of the Registrant outstanding was 2,932,934.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the parts of Form
10-KSB indicated: (1) Xiox Annual Report to Stockholders for the year ended
December 31, 1997 for Part II; (2) Proxy Statement dated April 15, 1998 for the
Annual Meeting of Stockholders to be held May 18, 1998 for Part III.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results could differ materially from
those projected in the forward-looking statements included herein as a result of
a number of factors, including but not limited to those discussed in Item 1,
"Description of Business," of this report and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," incorporated by
reference to pages 2 through 5 of the Company's 1997 Annual Report to
Stockholders.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
A. The Company
Xiox Corporation, a Delaware corporation (the "Company" or "Xiox"), was
incorporated in California in September 1982 and became a publicly held company
in February 1986.
The Company designs, develops, manufactures and markets telecommunications
management software and hardware systems which operate on personal computers,
Local Area Networks and stand-alone proprietary hardware. The Company's systems
efficiently provide information to facilitate telephone expense control; client,
department or project billback; call traffic monitoring and analysis; and fraud
control prevention. In addition, the Company markets voice mail and a complete
family of telephone and network security products.
Since the Company's incorporation, its product line has expanded from a single
software system to a full range of Telecommunication Management Systems, each of
which has been designed to address the needs of small or large businesses in
many different industries. In addition to its software and hardware-based
systems, the Company also provides call costing rate tables and system
enhancements to end users under subscription arrangements.
The Company markets its systems with its own sales force, through dealers who
include subsidiaries of the Regional Bell Operating Companies ("RBOC's"), and
through Original Equipment Manufacturers ("OEM's"). The agreements with the
RBOC's and many other dealers do not include any commitment by such dealers to
purchase a minimum number of systems.
DEVELOPMENTS DURING 1997:
In March 1997 Xiox released Prophet H version 2.2. This upgrade enhances the
Prophet H's ability to handle multiple dialing requirements.
In April 1997 GBS for Windows Version 1.03 was released. This release included
an enhanced polling module allowing more flexibility in multi-site polling
applications. NANP text updates and the new Caribbean area codes were added to
the fraud report libraries. This release also included support for Windows NT
3.51 workstation.
In June 1997 the Company introduced FMS for Windows. The product features seven
integrated modules, including Facilities, Inventory, Equipment, Cable &
Circuits, Work Orders, Help Desk and Consolidated Billing, all managed in a LAN
enabled RDBMS system. The product includes the point and click ease of Microsoft
Windows(TM) and the ability to present and link scanned pictures of personnel,
technicians, inventory and even floor plans.
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In October 1997 the Company released GBS for Windows version 1.04. This upgrade
featured many marketing and support enhancements including an Intelligent
Configuration Wizard to help simplify the installation and set-up of the
software. Reporting libraries were enhanced, adding many reports that customers
had requested, including a new ANI (Automatic Number Identification) reporting
library. Descriptive text was also added for account codes and dialed numbers to
enhance reports for applications such as client bill-back. This release also
included support for Windows NT 4.0 workstation.
In October 1997 the Company released Summa Pro version 5.3 which included three
significant enhancements. The Summa Pro now has the capability to turn off a
hotel's guest phones if they exceed a user-definable credit limit. Version 5.3
also supports separate pricing for Internet users. This feature allows an
additional grace period to be set for local free, toll free, incoming and
operator assisted calls. Calls within this grace period will be charged at one
rate, and calls exceeding this grace period will, in addition, be charged for
all minutes beyond this grace period.
In 1997 Xiox began a large development effort in a new product line addressing
the combined telephony and data markets. In connection with this development
effort, the Company formed a subsidiary in Belgium, XIOX Flanders N.V., in which
the company holds an 94.9% interest and a shareholder of the Company holds a
5.1% interest.
B. Products
Xiox products are sold to the Commercial and Hospitality markets and are
comprised of six product categories: Call Accounting, Traffic Engineering,
Facilities and Alarm Management, PBX security, Voice Mail/Auto Attendant and
Answer Detection systems. Often the first four of these categories are combined
into an integrated package called Telecommunications Management System ("TMS").
These products are provided on several platforms: proprietary stand-alone
hardware, personal computers, Local Area Networks or as a Service Bureau
offering. The Company has implemented TMS for clients as a managed outsourcing
project when customers are looking for an alternative to running call accounting
themselves.
TMS or Telemanagement products can be used in most industries. The primary
benefits customers look for in implementing a telemanagement system are a
decrease in communications costs through reductions in the number of minutes of
telephone time utilized and a reduction in the cost per minute of
telecommunication usage.
Xiox Commercial Industry Product Applications
Call Accounting Software
Call Accounting software is used to collect data on telephone calls, generally
from the PBX, and to price these calls by applying interexchange and local
exchange carrier tariffs to them. The rated calls are placed into a database and
can be sorted, summed and printed in a variety of report formats. Savings
generated by implementing a call accounting system range between 10-40% of
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the total number of minutes used each month compared to telecommunication
networks not using a call accounting system. Call Accounting generates savings
by allowing a company to use its telecommunications network more efficiently by
reducing its minutes of usage. If each employee were to reduce phone usage by
five minutes per day, the direct savings for 100 employees at $0.12 per minute
cost would be $15,000 per year.
Call Accounting software systems and related subscription services are designed
to be utilized in connection with the user's computerized telephone system and
personal computer or local area network. The Company does not manufacture the
computers and provides them only upon customer request.
The Company's Call Accounting systems do not require additional expansion boards
to be inserted into the computer. Nor does an end user's computer need to be
dedicated to perform only call accounting functions under a Windows based
operating system (Win 3.1x, Win95 and NT3.5X workstations). For additional data
security, Xiox offers a Call Storage Buffer. These external call storage devices
are built to Xiox's specifications and are sold by Xiox through its channels of
distribution as part of an integrated system.
The software is also used by professional and legal firms to pass on, usually
with a mark-up, telephone expenses incurred on behalf of clients. Hotels,
university campuses, hospitals, and shared tenant organizations use the software
to charge guests, students, faculty, patients, and tenants for their telephone
usage.
GBS for Windows(TM) was designed for ease of use. All of the Xiox tools and
reports are accessible with point and click functionality, including macros for
viewing information in colorful graphical formats; Intelligent Configuration(TM)
(patent pending) for automatic and simple installation; scheduled polling,
processing and reporting; icon management of multiple sites; and rate table
updates at a click of a button.
By utilizing these tools, a Xiox GBS for Windows(TM) user can install, run, and
make high impact graphical presentations within hours. In comparison, DOS-based,
Windows(TM) and other competitive packages can take up to several days to
install, configure and train, with additional time needed to prepare the first
graph. Xiox GBS for Windows(TM) is built upon its predecessor GBS product's
reputation for accuracy, flexibility and quality of support.
The Xiox General Business Software Plus ("GBP") product line is designed to
operate on a Personal Computer and share data on Local Area Networks. Systems
are configured to report on up to 30,000 Telephone Extensions and can process an
unlimited number of Call Records.
A menu of standard reports provides selections from a library of up to 126
different detail and summary report topics, or from one of 324 available custom
reports. A pre-select feature allows users to retrieve small, manageable files
quickly from large databases in order to facilitate
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generation of any of the systems reports. The flexibility of this table-driven
interface provides the ability to pinpoint call exceptions and offer ad hoc
reporting.
Customers may choose from five separate Rate Table products to match their
common carrier rate options for accurate call rating. Specialized carrier
arrangements like SDN's, VPN's, and Tariff 12 offerings can also be integrated.
When coupled with Xiox's table driven interface for Dialing Recognition
Templates and Call Processing Rules, the 99.5% or greater accuracy in matching
actual rates provides increased customer use of the information as a management
tool and subsequently greater savings.
Customers with more than one location may elect to establish a central (host)
site that will poll remote sites over telephone lines or through Wide Area
Networks ("WANS"). Xiox Central Polling Software works in conjunction with
pollable call storage buffers to create a networked telemanagement system. Since
Xiox systems operate on Local Area Networks, customers may use existing
LAN-to-LAN connectivity to poll data.
Call Accounting Hardware
The Prophet Series, the Company's hardware-based Call Accounting Systems, are
microprocessor based stand-alone systems. Available with both general business
and lodging firmware, the Prophet systems are available in a range of sizes.
Call storage, call processing, and call rating are all performed within the
firmware of the device. An external keypad is available for report generation.
Reports may also be generated via a touch-tone telephone. This series is aimed
at the lower-cost end user market and is sold through Xiox's distribution
channels.
An enhancement to the product includes the Prophet Writer software. When
downloaded to a customer-provided PC, call records may be stored to the PC hard
disk. Prophet Writer software greatly enhances the reporting capabilities of the
Prophet system. Also, a polling option allows data from multiple remote Prophet
devices to be collected and reported on a central site.
Traffic Engineering for Windows Software
The Xiox Traffic Engineering for Windows Software ("XTES") is a management tool
used to reduce the cost per minute of telecommunications expenses. This is
accomplished by analyzing trunk utilization, and identifying problems with
Automatic Route Selection (also called "Least Call Routing") programs in the
PBX.
The product greatly simplifies the "Traffic Engineering" function. The "Alerts
and Suggestions" report identifies actions that should be considered to reduce
costs or eliminate blockage.
The Xiox Traffic Engineering Software works in conjunction with the Xiox Call
Accounting Software databases or as a separate application to reduce the user's
cost per minute. The use of the
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software and resulting improvements to automatic route selection from
implementation of the suggestions can materially reduce most companies' cost per
minute.
Facilities Management Software
The XIOX Windows Facilities Management ("XFMS") is a software system that
automates record keeping for voice and data facilities. XFMS provides financial
and operational control by integrating service order processing, equipment
inventory management, cost allocation, trouble management, directory, and cable
record management into a powerful database management system.
XFMS enables a user to integrate interrelated tasks with a minimum number of
entries. The system is also used to manage expenses and can be used in
conjunction with call accounting to provide a consolidated extension report of
all telephony-related expenses incurred by a user or tenant over a specific time
period.
Companies are becoming increasingly aware of this type of product and the
benefits it provides in managing a complex telecommunications installation.
Fort Knox (R) PBX Security Products
PBX toll fraud costs U. S. businesses billions of dollars each year in lost
resources. Theft of a company's long distance service by criminals erodes
profits and costs the victims additional losses in personnel time, litigation
and problem resolution. In addition to these costs, victims of toll fraud risk
the security of sensitive information conveyed either by telephone or data
networks.
The Company's Fort Knox (R) Family of products provide protection against toll
fraud and other illicit entry to the corporate telecommunications network. The
Fort Knox products can be used singly to protect specific hacker entry points or
in combination to provide protection to the telecommunications network.
The Xiox Hacker Preventer(R) ("XHP") utilizes artificial intelligence and voice
energy analysis to separate hackers from legitimate users. The XHP protects an
entire telecommunications system, while allowing authorized users full use of
all of the system's money saving features. These standard PBX features such as
Direct Inward Service Access ("DISA") are usually disabled to thwart hackers;
the XHP restores the functionality of the PBX back to the users and provides
secure access to voicemail and other internal communication destinations.
The Xiox Hacker Deadbolt(R) ("XHDB") provides protection for the remote
maintenance and testing ports of the PBX system, Voice Mail systems, and other
customer premises equipment. The XHDB can be purchased as a stand-alone unit or
as an integrated component of the Xiox Hacker Preventer(TM).
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The Xiox Hacker Tracker(R) ("XHT") is a cost-effective, dedicated software
package that alarms and reports on "suspicious" PBX traffic to help reduce the
risk of Toll Fraud. The XHT comes pre-configured with the most useful reports
for tracking and trapping illicit hackers. The XHT includes complete, easy to
follow software documentation, and allows a customer to silently monitor system
usage and traffic to potential fraudulent destinations.
Xiox Hospitality Industry Product Applications
Voice Mail/Auto Attendant
Summa Voice is a voice mail/auto attendant product specifically engineered for
50 to 250-room hotels. This product enables these properties to offer their
guests voice mail services that are easy to install, operate and use. With a
voice mail product, hotels are able to provide accurate, timely and confidential
message-taking service for their guests, thereby improving guest satisfaction.
The product also reduces the amount of time that hotel staff spend writing
messages. This increases the amount of time available for personal service to
guests, which in turn improves guest satisfaction.
Call Accounting Software
Xiox Lodging Software is specifically designed for hotels, motels, hospitals and
nursing homes. It immediately prices calls and produces a call receipt which is
posted to the guest's or patient's folio. If the business has a computerized
property management system, the call accounting system prices and processes call
records and communicates them to the property management system for automatic
integration into a guest's records.
Call Accounting Hardware
Xiox Summa Prophet H Series prices, marks up and can post to the hotel's
property management system or can provide easy-to-use guest billback capability
for properties without a Property Management System ("PMS"). The Prophet H
stores 1,000 call records and is available in two models: the H-3, which manages
up to 300 extensions, and the H-10, which manages up to 10,000 extensions.
Both Lodging systems interface with almost all available Property Management
Systems and produce daily and monthly profit reports.
Xiox Summa Pro is a stand-alone call accounting system designed for budget and
economy hotels with up to 500 extensions and provides a call storage capacity of
14,000 call records. The product allows smaller properties to afford the
revenue-producing benefits of call accounting systems such as accurate tracking
and billing of guest calls. It features smart, easy-to-use commands that allow
any property manager or front desk employee to learn to operate without lengthy
training and includes one-touch reporting and credit limit alarm.
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The Xiox Summa Pro offers one-step processing of guest checkout, night audit
procedures, credit limit and current call reports. Additionally, it features an
array of system alarms including 911, accurate tracking and billing of guest
calls, with separate billing for administrative extensions, and a four line
display with easy prompting and descriptive problem identification. The compact
physical size of the Xiox Summa Pro is designed for the limited space in a front
desk environment.
Answer Detection
The Xiox Summa Call Detection Unit ("SCD") is a hardware system offered to
lodging properties to help accurately bill customers and often increase revenue.
With a 288-trunk capacity, the SCD can interface with most PBX's and supports
direct T-1 connection. This stand-alone unit provides diagnostics for remote
trunk troubleshooting and alarms for hardware or software failure. Detailed
reporting enables tracking of Answered Calls, Unanswered Calls and Recovered
Revenue.
In the lodging industry, a 45-second grace period is usually used to determine
if a call is completed. Guests are charged for all calls over this threshold,
including calls to invalid numbers or numbers where no one answered. Shorter
calls, even those completed within 45 seconds, are not charged to the guest.
The SCD tags call records as having an actual answer instead of relying upon a
predetermined time period to presume actual call completion. This definite
tagging allows the typical lodging customer to charge for short calls that would
not have been charged prior to the installation. The average customer's
telephone related revenues are estimated to increase using this device.
Although hotels have used call accounting to bill guests for some time, these
systems have been unable to determine if calls were actually completed. Lost
revenues from undetected, yet completed calls under the 45-second threshold
result in lost revenue, as well as unrecovered expense. Furthermore, guest
complaints about billed calls not completed have been a problem for hotels,
motels and resorts.
Product Support and Subscription Services
The Company obtains and resells third-party hardware, primarily external
buffers. In addition, the Company provides an option for its customers and its
dealers for system installation and training and travel costs associated with
familiarizing customers with the Company's systems.
The Company renews Product Support subscriptions for its customers on an annual
basis. Renewal of Product Support entitles a client to unlimited access to the
Product Support Center. It also entitles the customer to receive any product
enhancements or "bug fixes" throughout that year.
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The Company provides end users with call costing rate tables under annual
subscriptions. These rate tables provide the end user with current telephone
tariffs to generate accurate call rating. The Company offers several rate table
options, based on the complexity of the customer's telecommunications
environment. The Company also offers enhancements to and support of its systems
after the first year of use.
C. Sales, Marketing and Distribution Methods
The Company markets its systems to end users primarily through its network of
authorized dealers. The Company sells to over 450 dealers including the RBOC's
(i.e., US West Information Systems and Bellsouth Communications Systems) and
several independent business telephone dealers. Most of the Company's dealer
agreements do not include commitments by such dealers to purchase a minimum
number of systems and typically may be canceled at any time with 30 days prior
written notice. Xiox's ability to effectively distribute its products depends in
part upon the financial and business condition of its distribution network. One
customer accounted for 12 percent of revenue during 1997 while no single
customer accounted for more than 10 percent of the Company's revenues in 1996.
During each of the years ended December 31, 1997 and 1996 the Company's export
sales were less than 2% of total sales.
The Company's marketing approach varies depending upon the type of system. A
description of each of these approaches is set forth below:
Xiox General Business Software, Xiox Call Analyzer, Xiox GBS for Windows, Xiox
Traffic Engineering Software, Xiox Facilities Management Software and Fort
Knox(R) Security Products
These systems are typically marketed to large corporations primarily through the
Company's direct sales force, RBOC's or business telephone dealers. In order for
dealers to effectively establish and support their customer base, the Company
must commit technical and sales personnel to training dealers with respect to
installation and application support.
Xiox Lodging Software, Telephone Call Detection Devices, Summa Prophet H, Summa
Pro and Summa Voice.
The Summa Suite family of products are targeted to both independent and
chain-affiliated properties in the lodging industry. Marketing of Xiox Lodging
Software is through the direct sales force, value-added dealers specializing in
Lodging, and OEM's with Lodging specific systems.
Xiox Prophet Call Accounting Systems. These hardware devices are marketed
exclusively through the Company's distributors and original equipment
manufacturers.
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D. Revenue Patterns
The Company's operating history has indicated a sales pattern reflective of both
the telecommunication and computer industries with sales generally weaker in the
first quarter of each calendar year than the last quarter of the previous year.
The year over year decreases in these quarters are attributable to a lower
number of North American Numbering Plan ("NANP") upgrades.
E. Industry and Competition
The telecommunications management systems industry has been characterized by
intense competition and rapid technological and marketing changes. Decisions of
the FCC and the divestiture by AT&T of the RBOC's significantly altered the
marketing and distribution of telecommunications equipment and systems. The
principal competitive factors in the market for telephone management and call
accounting software systems are customer service, dealer coverage, name
recognition, product performance, price and flexibility of product design. Many
of Xiox's competitors have significantly greater financial, marketing and
technical resources.
The actions of these companies may have a material adverse effect on the
Company. In order for Xiox to remain competitive, it must rapidly respond to
such changes, including the enhancement and upgrading of existing products and
the introduction of new products. There can be no assurance that the Company
will be able to respond to such changes.
Original Equipment Manufacturers. Currently, Xiox products compete with systems
offered by manufacturers of computerized telephone systems. The Company competes
with these companies on the basis that its products operate on standard personal
computers and are typically offered at lower prices, as many of these
competitive products require a significant hardware investment.
Independent Hardware and Software Developers. Xiox also competes directly or
through dealers with numerous independent hardware and software developers.
The Company believes it effectively competes with other companies on the basis
of price, performance and more sophisticated features. However, because the
market in which the Company competes is intensely competitive, there can be no
assurance that the Company will remain competitive in respect to some or all of
these factors.
F. Research and Development Expenses
Xiox is committed to the development of new products and to the continued
enhancement of its existing products. During 1997 significant enhancements were
made to the GBS for Windows software and Summa Pro and Prophet H hardware
products. In addition, new products released included FMS for Windows. During
1997 and 1996, research and development expenses were $1,020,145 and $733,952,
respectively.
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In 1997 Xiox began a large development effort on a new product line addressing
the combined telephony and data markets. During the fourth quarter of 1997 the
Company expended $446,242 on research and development. The Company expects the
quarterly research and development spending during 1998 to exceed this amount.
G. Patents, Copyrights, Trademarks and Licenses
The Company has filed for copyrights its computer programs and algorithms. The
Company has filed or received trademark protection for its service marks under
its Fort Knox(R) Family of products including Hacker Tracker(R), Hacker
Preventer(TM), Hacker Deadbolt(R), and Hacker Stopper(R). The Company also filed
for patents on: (1) an innovative technique used to automatically determine the
data transmission rate (baud rate) and characteristics from another device under
the RS-232C protocol; and (2) technology used by the Xiox Hacker Preventer(TM)
product to profile and react to a user's observed behavior. The Company has
received patents on: (1) an innovative answer detection technology; and (2) an
intelligent software application installation and configuration methodology that
includes a remote rate table delivery system.
Xiox resolved a patent interference proceeding declared by the U.S. Patent and
Trademark Office concerning patent claims which cover a technique for detecting
telephone toll fraud. The interference involved a patent application owned by
Xiox and a patent application and patent owned by Coral Systems, Inc. ("Coral").
In connection with the resolution of the interference Coral agreed to pay Xiox
$425,000, and Xiox granted Coral and Lightbridge, Inc., Coral's parent, a
nonexclusive, fully paid-up license to patents issuing on the Xiox patent
application.
H. Production and Backlog
The Company produces its products from a library of master diskettes upon
receipt of firm orders. Software orders are usually placed on an as needed basis
and are shipped by the Company shortly after receipt of an order. As a result,
the Company does not have a substantial backlog, and the Company's backlog at
any particular time is generally not indicative of its future level of sales.
The Company's hardware products are manufactured to Xiox specifications by
outside suppliers. These products are also available from alternate domestic
suppliers. The company defers substantial revenue from annual subscriptions for
its annual rate table and maintenance and support agreement subscriptions. This
deferred revenue is amortized over the life of the subscription.
I. Employees
The Company had 55 full-time employees as of December 31, 1997 and 56 total
employees.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 13,168 square feet of office space at 577
Airport Boulevard, Suite 700, Burlingame, California, 4,339 square feet of which
is subleased. The lease expires in July 31, 2000. In addition, the Company
leased 10,538 square feet of multi-use space at 150 Dow Court, Manchester, N. H.
under a five-year lease which expired December 31,1997. On July 1, 1997 Xiox
exercised its option to renew this lease for an additional five years to expire
December 31, 2002. On November 18, 1997 the Company negotiated to cancel this
lease effective February 1, 1998 and sign a seven-year lease for 19,069 square
feet at the same address which begins February 1, 1998 and expires January 31,
2005. The Company also leased a 734-square foot facility at 600 E. Baseline,
Suite B2, Tempe, Arizona under a one-year lease which expired January 1, 1997.
The Company relocated the Tempe facility in November, 1996 to a 692-square foot
facility at 8010 East McDowell Road, Scottsdale, Arizona under a three-year
lease which expires October 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
This information is set forth under the caption "Stock Trading Information" on
page 23 of the Company's 1997 Annual Report to Stockholders (the "Annual
Report") and is hereby incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information is set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 2 through 5
of the Annual Report and is hereby incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company and the independent auditors'
report appearing on pages 6 through 22 of the Annual Report are hereby
incorporated herein by reference.
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
The Annual Report, except for those portions which are expressly incorporated by
reference in this filing, is furnished for the information of the Securities and
Exchange Commission and is not to be deemed as filed as part of this Report on
Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to instruction E(3) to Form 10-KSB, the information required by Item 9
of Form 10-KSB with respect to the members of the Board of Directors and
Executive Officers of the Company is incorporated by reference to the
information contained in the sections captioned "Nominees", "Business Experience
of Directors", "Executive Officers" and "Compliance with Section 16(a) of the
Exchange Act" in the Company's definitive proxy statement for the 1998 annual
meeting of stockholders to be filed with the Securities Exchange Commission (the
"SEC").
ITEM 10. EXECUTIVE COMPENSATION
Pursuant to instruction E(3) to Form 10-KSB, the information required by Item 10
of Form 10-KSB with respect to executive compensation is incorporated by
reference to the information contained in the section captioned "Executive
Compensation" in the Company's definitive proxy statement for the 1998 annual
meeting of stockholders to be filed with the SEC.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to instruction E(3) to Form 10-KSB, the information required by Item 11
of Form 10-KSB with respect to security ownership of certain beneficial owners
and management is incorporated by reference to the information contained in the
sections captioned "Principal Stockholders" and "Security Ownership of
Management" in the Company's definitive proxy statement for the 1998 annual
meeting of stockholders to be filed with the SEC.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to instruction E(3) to Form 10-KSB, the information required by Item 12
of Form 10-KSB with respect to certain relationships and related transactions is
incorporated by reference to the information contained in the section captioned
"Certain Relationships and Related Transactions" in the Company's definitive
proxy statement for the 1998 annual meeting of stockholders to be filed with the
SEC.
15
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
<TABLE>
1. Financial Statements: The following Consolidated Financial
Statements of Xiox Corporation and Report of KPMG Peat Marwick LLP,
Independent Auditors, are incorporated by reference to pages 6 through 22
of the Registrant's Annual Report to Stockholders:
<CAPTION>
Page(s) in 1997
Annual Report
-------------
<S> <C>
Consolidated Balance Sheets as of 6
December 31, 1997 and 1996
Consolidated Statements of Operations 7
for the years ended December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity for 8
the years ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows 9-10
for the years ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements 11-21
Independent Auditors' Report 22
</TABLE>
16
<PAGE>
<TABLE>
2. Exhibits: The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedules are filed
as part of, or incorporated by reference into, this Report.
<CAPTION>
Number Description
- ------ -----------
<S> <C>
2.1(1) Proposed Agreement and Plan of Merger between the Company and Xiox Corporation, a Delaware
Corporation.
3.l(2) Certificate of Incorporation as filed with the Secretary of State of the State of Delaware.
3.2(2) Bylaws.
4.1(2) Certificate of Incorporation as filed with the Secretary of State of the State of Delaware and
Bylaws.
4.2(3) Common Stock Purchase Agreement dated June 30, 1997 between Company and Flanders Language
Valley C.V.A.
4.3(3) Investor Rights Agreement dated June 30, 1997 between Registrant and Flanders Language Valley
C.V.A.
10.02(4) Dealer Sales Agreement dated April 25, 1985 between Registrant and PacTel InfoSystems.
10.04(5) Xiox Corporation Restated 1984 Stock Option Plan.
10.05(13) Form of Notice of Grant and Stock Option Agreement to Restated 1984 Stock Option Plan.
10.06(5) Form of Stock Purchase Agreement.
10.07(5) Form of Automatic Option Agreement.
10.08(5) Form of Stock Purchase Agreement.
10.09(2) Lease Agreement between the Company and Bay Park Plaza dated March 20, 1987.
10.10(6) Amended Lease Agreement between the Company and Bay Park Plaza dated July 28, 1994.
17
<PAGE>
10.12(12) Sublease and Lease Agreement between the Company C. E. Heath Compensation and Liability Company
dated April 1, 1996.
10.13(2) Form of Director Indemnity Agreement.
10.14(7) Xiox Corporation 1994 Stock Plan.
10.15(7) Form Stock Option Agreement to 1994 Stock Plan.
10.16(11) Xiox Corporation 1994 Stock Plan, as amended.
10.25(8) Agreement for the Purchase and Sale of Stock of SFX, Inc. (formerly Summa Four Business
Products, Inc.) dated March 27, 1991.
10.26(9) Agreement for Business Combination by and among Xiox Corporation and Gemini Telemanagement
Systems (principal shareholders Richard Alter, Gregory Bell and Darrell Krulce) dated August
17, 1994.
10.27(10) Asset Purchase Agreement of Instor Systems Corporation dated October 12, 1994.
10.28* Lease Agreement between the Company and One Dow Court, Inc. dated November 18, 1997.
13.1* 1997 Annual Report to Stockholders.
21.1** Subsidiaries of the Company.
23.1* Consent of KPMG Peat Marwick LLP, Independent Auditors.
24.1 Power of Attorney (See Page 20).
27.1* Financial Data Schedule.
* Filed herewith.
** Listed under the caption "Principles of Consolidation" in the Company's 1997 Annual Report to
Stockholders, attached as Exhibit 13.1
(1) Incorporated by reference to Company's Report on Form 10-K for the year ended December 31,
1986.
(2) Incorporated by reference to Company's Report on Form 10-K for the year ended December 31,
1987.
18
<PAGE>
(3) Incorporated by reference to Company's Report on Form 8-K, as filed by Company on July 22, 1997
and October 8, 1997.
(4) Incorporated by reference to Company's Registration Statement on Form S-1.
(5) Incorporated by reference to the Company's Registration Statement on Form S-8 (File No.
33-42433).
(6) Incorporated by reference to Company's Report on Form 10-KSB for the year ended December 31,
1995.
(7) Incorporated by reference to Company's Registration Statement on Form S-8 (File No. 33-88996)
filed on February 1, 1995.
(8) Incorporated by reference to Company's Form 8-K filed on March 27, 1991, as amended on June 7,
1991.
(9) Incorporated by reference to Company's Form 8-K filed on August 29, 1994, as amended on October
28, 1994.
(10) Incorporated by reference to Company's Form 8-K filed on December 15, 1994.
(11) Incorporated by reference to Company's Registration Statement on Form S-8, filed on June 20,
1997 (File No. 33-39703).
(12) Incorporated by reference to Company's Report on Form 10-K for the year ended December 31,
1996.
(13) Incorporated by reference to Company's Registration Statement on Form S-8 (File No. 33-37686).
</TABLE>
B. Reports on Form 8-K.
The Company filed the following reports on Form 8-K or 8-K/A during
the year ended December 31, 1997:
Exhibit 5.2.i Customer Agreement relating to the Company's sale of
certain assets of Gemini Telemanagement Systems, filed February 28, 1997 on Form
8-K/A Amendment #2.
Common Stock Purchase Agreement and Investor Rights Agreement dated
June 30, 1997 and filed July 22, 1997 on Form 8-K. Amended 8-K/A filed October
8, 1997.
19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Xiox Corporation
Date: By:
March 30, 1998 /s/ William H. Welling
--------------------------------------------
William H. Welling
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Melanie D. Reid and William H. Welling,
jointly and severally, his respective attorneys-in-fact, each with the power of
substitution, for each other in any and all capacities, to sign any amendments
to this Report on Form 10-KSB, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his respective substitute or substitutes, may do or cause
to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
March 30, 1998 /s/ William H. Welling
-------------------------------------------
William H. Welling
Chairman and Chief Executive Officer
(Principal Executive Officer) and Director
March 30, 1998 /s/ Mark A. Parrish, Jr.
-------------------------------------------
Mark A. Parrish, Jr.
Director
March 30, 1998 /s/ Atam Lalchandani
-------------------------------------------
Atam Lalchandani
Director and Assistant Corporate Secretary
20
<PAGE>
SIGNATURES (con't)
March 30, 1998 /s/ Bernard T. Marren
-------------------------------------------
Bernard T. Marren
Director
March 30, 1998 /s/ Robert K. McAfee
-------------------------------------------
Robert K. McAfee
Director
March 30, 1998 /s/ Philip Vermeulen
-------------------------------------------
Philip Vermeulen
Director
March 30, 1998 /s/ Melanie D. Reid
-------------------------------------------
Melanie D. Reid
Vice President of Finance/Chief Financial
Officer/Corporate Secretary
21
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Number Description
- ------ -----------
<S> <C>
2.1(1) Proposed Agreement and Plan of Merger between the Company and Xiox Corporation, a Delaware
Corporation.
3.l(2) Certificate of Incorporation as filed with the Secretary of State of the State of Delaware.
3.2(2) Bylaws.
4.1(2) Certificate of Incorporation as filed with the Secretary of State of the State of Delaware
and Bylaws.
4.2(3) Common Stock Purchase Agreement dated June 30, 1997 between Company and Flanders Language
Valley C.V.A.
4.3(3) Investor Rights Agreement dated June 30, 1997 between Registrant and Flanders Language
Valley C.V.A.
10.02(4) Dealer Sales Agreement dated April 25, 1985 between Registrant and PacTel InfoSystems.
10.04(5) Xiox Corporation Restated 1984 Stock Option Plan.
10.05(13) Form of Notice of Grant and Stock Option Agreement to Restated 1984 Stock Option Plan.
10.06(5) Form of Stock Purchase Agreement.
10.07(5) Form of Automatic Option Agreement.
10.08(5) Form of Stock Purchase Agreement.
10.09(2) Lease Agreement between the Company and Bay Park Plaza dated March 20, 1987.
10.10(6) Amended Lease Agreement between the Company and Bay Park Plaza dated July 28, 1994.
22
<PAGE>
10.12(12) Sublease and Lease Agreement between the Company C. E. Heath Compensation and Liability
Company dated April 1, 1996.
10.13(2) Form of Director Indemnity Agreement.
10.14(7) Xiox Corporation 1994 Stock Plan.
10.15(7) Form Stock Option Agreement to 1994 Stock Plan.
10.16(11) Xiox Corporation 1994 Stock Plan, as amended.
10.25(8) Agreement for the Purchase and Sale of Stock of SFX, Inc. (formerly Summa Four Business
Products, Inc.) dated March 27, 1991.
10.26(9) Agreement for Business Combination by and among Xiox Corporation and Gemini Telemanagement
Systems (principal shareholders Richard Alter, Gregory Bell and Darrell Krulce) dated August
17, 1994.
10.27(10) Asset Purchase Agreement of Instor Systems Corporation dated October 12, 1994.
10.28* Lease Agreement between the Company and One Dow Court, Inc. dated November 18, 1997.
13.1* 1997 Annual Report to Stockholders.
21.1** Subsidiaries of the Company.
23.1* Consent of KPMG Peat Marwick LLP, Independent Auditors.
24.1 Power of Attorney (See Page 20).
27.1* Financial Data Schedule.
<FN>
* Filed herewith.
** Listed under the caption "Principles of Consolidation" in the Company's
1997 Annual Report to Stockholders, attached as Exhibit 13.1
23
<PAGE>
(1) Incorporated by reference to Company's Report on Form 10-K for the year ended December 31, 1986.
(2) Incorporated by reference to Company's Report on Form 10-K for the year ended December 31, 1987.
(3) Incorporated by reference to Company's Report on Form 8-K, as filed by Company on July 22, 1997 and October 8,
1997.
(4) Incorporated by reference to Company's Registration Statement on Form S-1.
(5) Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 33-42433).
(6) Incorporated by reference to Company's Report on Form 10-KSB for the year ended December 31, 1995.
(7) Incorporated by reference to Company's Registration Statement on Form S-8 (File No. 33-88996) filed on
February 1, 1995.
(8) Incorporated by reference to Company's Form 8-K filed on March 27, 1991, as amended on June 7, 1991.
(9) Incorporated by reference to Company's Form 8-K filed on August 29, 1994, as amended on October 28, 1994.
(10) Incorporated by reference to Company's Form 8-K filed on December 15, 1994.
(11) Incorporated by reference to Company's Registration Statement on Form S-8, filed on June 20, 1997 (File No.
33-39703).
(12) Incorporated by reference to Company's Report on Form 10-K for the year ended December 31, 1996.
(13) Incorporated by reference to Company's Registration Statement on Form S-8 (File No. 33-37686)
</FN>
</TABLE>
24
12 December 1997
Mr. Robert Boyd, Vice President
Xiox Corporation
150 Dow Street
Manchester, New Hampshire 03101
Dear Bob,
We have finally been able to have the space Xiox is leasing reviewed by
our surveyor. She has advised me that, rather than the 19,737 square feet we
used in the lease, the correct figure is 19,069 square feet, a reduction of 668
square feet. During the first two years of the Lease, that works out to a
reduction of $3,173.00 per year. The amount is slightly higher each subsequent
year, depending on the inflation of the Index.
Assuming you agree with the square footage revision, and with the
recalculated table of rents below, please sign where indicated at the end of
this letter, denoting Xiox's acknowledgment of and agreement to this letter
acting as an amendment to the Lease, dated 18 November 1997, between our
companies. Please also initial the bottom of this page.
Other than changing the square footage leased in Paragraph 1. of the
Lease, replacing the amounts of the rent required to be paid under Paragraph 3.
of the Lease, reducing the deposit required by Paragraph 6. of the Lease to a
total of $15,096.31, of which $2,564.06 is acknowledged to be already on
deposit, and adjusting the percentage of the building occupied according to
Paragraphs 9. and 10. of the Lease to 5.9%, all other terms and conditions of
the Lease shall remain in effect.
Initial Lease Term: Annual Monthly
------ -------
02/01/98 - 01/31/99 $90,577.75 $7,548.15
02/01/99 - 01/31/2000 90,577.75 7,548.15
02/01/2000 - 01/31/01 90,577.75 plus COL adjustment.
02/01/01 - 01/31/02 90,577.75 plus COL adjustment.
02/01/02 - 01/31/03 90,577.75 plus COL adjustment.
02/01/03 - 01/31/04 90,577.75 plus COL adjustment.
02/01/04 - 01/31/05 90,577.75 plus COL adjustment.
XIOX______ ODC______
25
<PAGE>
Mr. Robert Boyd 12 December 1997 Page Two
Optional Lease Term: Annual Monthly
------ -------
02/01/05 - 01/31/06 76,276.00 plus COL adjustment.
02/01/06 - 01/31/07 76,276.00 plus COL adjustment.
02/01/07 - 01/31/08 76,276.00 plus COL adjustment.
02/01/08 - 01/31/09 76,276.00 plus COL adjustment.
02/01/09 - 01/31/10 76,276.00 plus COL adjustment.
02/01/10 - 01/31/11 76,276.00 plus COL adjustment.
02/01/11 - 01/31/12 76,276.00 plus COL adjustment.
Sincerely yours,
Ralph P. Sidore
Property Manager
For Xiox Corporation:
Acknowledged and Agreed:
- --------------------------------
Robert Boyd, Vice President Date
26
<PAGE>
LEASE AGREEMENT
LESSOR: ONE DOW COURT, INC.
LESSEE: XIOX CORPORATION
LOCATION: 19,737 SQUARE FEET, FIFTH FLOOR
15O DOW STREET, MANCHESTER, NEW HAMPSHIRE 03101
27
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Paragraph # and Title Page #
- ---------------------------
<S> <C>
1. DESCRIPTION OF LEASED PREMISES....................................................................................... 1
2. TERM.................................................................................................................. 1
3. RENT.................................................................................................................. 2
4. OPTION TO RENEW ...................................................................................................... 6
5. CONSTRUCTION ......................................................................................................... 6
6. SECURITY DEPOSIT ..................................................................................................... 8
7. REAL ESTATE TAXES .................................................................................................... 8
8. TAX INCREASES ........................................................................................................ 8
9. HEAT AND INSURANCE ................................................................................................... 9
10. WATER ................................................................................................................ 10
11. ELECTRICITY .......................................................................................................... 10
12. USE OF PREMISES ...................................................................................................... 10
13. CONDITION OF PREMISES ................................................................................................ 13
14. REPAIRS .............................................................................................................. 13
15. FIXTURES AND IMPROVEMENTS ............................................................................................ 14
16. MECHANICS' LIENS ..................................................................................................... 14
17. ALTERATIONS AND IMPROVEMENTS ......................................................................................... 15
18. RISK OF LOSS ......................................................................................................... 15
19. INDEMNITY ............................................................................................................ 15
20. DAMAGE OR DESTRUCTION ................................................................................................ 15
28
<PAGE>
21. CONDEMNATION ......................................................................................................... 16
22. INSURANCE ............................................................................................................ 17
23. ADDITIONAL INSURANCE ................................................................................................. 17
24. INSURANCE RIGHTS ..................................................................................................... 17
25. SUBLETTING AND ASSIGNMENT ............................................................................................ 18
26. PARKING .............................................................................................................. 18
27. SUBORDINATION ........................................................................................................ 19
28. QUIET POSSESSION ..................................................................................................... 19
29. ENTRY, INSPECTION AND MAINTENANCE .................................................................................... 19
30. AUTHORITY TO LEASE ................................................................................................... 20
31. DEFAULT .............................................................................................................. 20
32. INTEREST ON OVERDUE RENTAL PAYMENT ................................................................................... 21
33. REMEDIES ............................................................................................................. 21
34. REDELIVERY OF PREMISES ............................................................................................... 22
35. HOLDOVER ............................................................................................................. 22
36. WAIVER ............................................................................................................... 23
37. NOTICE ............................................................................................................... 23
38. SUCCESSORS AND ASSIGNS ............................................................................................... 23
39. BROKERAGE COMMISSION ................................................................................................. 24
40. INVALIDITY OF PARTICULAR PROVISIONS .................................................................................. 24
41. APPLICABLE LAW ....................................................................................................... 24
42. MARGINAL HEADINGS .................................................................................................... 25
43. MISCELLANEOUS ........................................................................................................ 25
</TABLE>
29
<PAGE>
LEASE
THIS LEASE is entered into this 18th day of November, 1997 by and between ONE
DOW COURT, INC., a New Hampshire corporation with an address of 160 Dow Street,
Manchester, New Hampshire 03101 (hereinafter called "LESSOR"), and XIOX
CORPORATION, a California corporation with an address of 577 Airport Boulevard,
Suite 700, Burlingame, California 94010, (hereinafter called "LESSEE").
1. DESCRIPTION OF LEASED PREMISES. The Leased Premises shall mean
approximately nineteen thousand seven hundred thirty seven (19,737) square
feet of floor space, identified as Space # 521A, on the fifth (5th) floor
of the building known and numbered as 150 Dow Street, Manchester, New
Hampshire (the "Building"), as more fully described (and outlined in red)
on the plans attached hereto as Exhibit A. The Building contains
approximately 325,000 square feet of floor space.
2. TERM.
a. The term of this Lease shall be for seven (7) years beginning 1
February 1998 and ending 31 January 2005. The Commencement Date of
this Lease is 1 February 1998. LESSEE may occupy the Leased Premises
earlier if LESSOR's work has been substantially completed and the
Manchester Building Department has approved or indicated approval for
such work to the extent applicable under existing code enforcement
procedures, and provided that the first month's rent has been paid.
b. As of the Commencement Date of this Lease, it is specifically agreed
that the prior Lease agreement, between LESSEE and LESSOR, dated 21
September 1992, as amended by LESSEE's exercise of the Right of First
Refusal for additional space which took effect on 16 April 1995, both
of which were extended for a new five (5) year term by a letter from
LESSEE to LESSOR dated 1 July 1997, is hereby terminated by mutual
agreement.
30
<PAGE>
c. In the event that LESSEE is unable to take possession of the Demised
Premises, as discussed in Paragraph 5.c. below, LESSEE is entitled to
remain in possession of the Leased Premises in which it is currently
located as a result of the previous Lease discussed in Paragraph 2.b.
above. If such an event occurs, all terms and conditions of the
previous Lease shall remain in effect, with the exception of those
requiring the payment of rent, until LESSEE's entitlement to those
Leased Premises is terminated. LESSEE's entitlement to those Leased
Premises shall terminate ten (10) days after the Manchester Building
Department has approved or indicated approval for such work to the
extent applicable under existing code enforcement procedures. In
addition, if LESSEE is unable to take possession of the Demised
Premises on or before the indicated Commencement Date of this Lease in
Paragraph 2.a. above, the Commencement Date shall change to the tenth
(10th) day after the Manchester Building Department has approved or
indicated approval for such work to the extent applicable under
existing code enforcement procedures.
3. RENT.
a. Rent is payable on the first of the month, according to the schedule
specified in Paragraph 3.c. below.
b. Cost of Living adjustments shall be determined by multiplying the
annual rental for the indicated base period by a fraction, the
numerator of which shall be the difference between the Index of the
"Consumer Price Index" for "Urban Wage Earners and Clerical Workers,
Boston, Mass." for November, 1998, and the Index for the month of
November immediately preceding the lease year for which the adjustment
is applicable; and the denominator of which shall be the Index for
November, 1998. The result of this calculation shall be added to the
rental amount specified for the prior year in Paragraph 3.c. below in
order to determine the correct rent for the indicated year. (As an
example of the above, if the index for November, 1998 is 150.0, and
the Index for November, 1999 is 156.0, then the difference between
them is 6.0, which is the numerator of the fraction discussed above.
The denominator of the fraction is, throughout the Lease contract, the
November, 1998 Index, which, in this example, is set at 150.0. In this
example only, the fraction divides out to create a 4% (.04) increase
in the rent for the Lease year beginning 1 February 2000. The 4% (.04)
increase would be multiplied by $93,750.75 to create an increase of
$3,750.03 for Lease Year #3. This would create annual rent of
$97,500.78 and monthly rent of $8,125.07 during the Lease year
beginning 1 February 2000.)
c. LESSEE shall pay, without set-off or deductions, as minimum rent for
the premises, at such place as LESSOR may direct, the following annual
and monthly charges:
31
<PAGE>
12-Month Monthly
Lease Year/Dates Annual Rate Rent
---------------- ----------- ----
#1 02/01/98-01/31/99 $93,750.75 $7,812.56
#2 02/01/99-01/31/2000 $93,750.75 $7,812.56
#3 02/01/2000-01/31/01 At an Annual Rate of $93,750.75 plus a
cost-of-living adjustment obtained by
multiplying $93,750.75 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for Lease Year #3 be
less than the annual rate for Lease Year #2.
#4 02/01/01-01/31/02 At an Annual Rate of $93,750.75 plus a
cost-of-living adjustment obtained by
multiplying $93,750.75 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for Lease Year #4 be
less than the annual rate for Lease Year #3.
#5 02/01/02-01/31/03 At an Annual Rate of $93,750.75 plus a
cost-of-living adjustment obtained by
multiplying $93,750.75 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for Lease Year #5 be
less than the annual rate for Lease Year #4.
#6 02/01/03-01/31/04 At an Annual Rate of $93,750.75 plus a
cost-of-living adjustment obtained by
multiplying $93,750.75 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for Lease Year #6 be
less than the annual rate for Lease Year #5.
#7 02/01/2004-01/31/05 At an Annual Rate of $93,750.75 plus a
cost-of-living adjustment obtained by
multiplying $93,750.75 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for Lease Year #7 be
less than the annual rate for Lease Year #6.
OPTIONAL LEASE TERM:
#8 02/01/05-01/31/06 At an Annual Rate of $78,948.00 plus a
cost-of-living adjustment obtained by
multiplying $78,948.00 by the Cost of Living
Adjustment set forth above.
32
<PAGE>
#9 02/01/06-01/31/07 At an Annual Rate of $78,948.00 plus a
cost-of-living adjustment obtained by
multiplying $78,948.00 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for Lease Year #9 be
less than the annual rate for Lease Year #8.
#10 02/01/07-01/31/08 At an Annual Rate of $78,948.00 plus a
cost-of-living adjustment obtained by
multiplying $78,948.00 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for LeaseYear #10 be
less than the annual rate for Lease Year #9.
#11 02/01/08-01/31/09 At an Annual Rate of $78,948.00 plus a
cost-of-living adjustment obtained by
multiplying $78,948.00 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for Lease Year #11 be
less than the annual rate for Lease Year
#10.
#12 02/01/09-01/31/10 At an Annual Rate of $78,948.00 plus a
cost-of-living adjustment obtained by
multiplying $78,948.00 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for Lease Year #12 be
less than the annual rate for Lease Year
#11.
#13 02/01/10-01/31/11 At an Annual Rate of $78,948.00 plus a
cost-of-living adjustment obtained by
multiplying $78,948.00 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for Lease Year #14 be
less than the annual rate for Lease Year
#12.
#14 02/01/11-01/31/12 At an Annual Rate of $78,948.00 plus a
cost-of-living adjustment obtained by
multiplying $78,948.00 by the Cost of Living
Adjustment set forth above. In no event
shall the Annual Rate for Lease Year #14 be
less than the annual rate for Lease Year
#13.
4. OPTION TO RENEW.
a. LESSEE shall have the option to renew this Lease for one (1)
additional term of seven (7) years, commencing with 1 February 2005
and ending on 31 January 2012, upon the same terms and conditions
(excluding this option to renew) except as provided herein. The annual
rent for each option year shall be as specified in Paragraph 3.c.
above.
b. LESSEE shall exercise the renewal option by giving written notice to
33
<PAGE>
LESSOR of its intention to do so on or before 1 August 2004. Should
LESSEE not give notice by this date of its intention to exercise the
renewal option, LESSOR may advertise the premises for rent and, during
normal business hours, may show the leasehold to prospective new
tenants.
CONSTRUCTION:
5. LESSOR shall make the premises ready for LESSEE's occupancy as follows:
a. At LESSOR's expense, the following work will be performed in the
Leased Premises:
The Leased Premises shall be fitted out in accordance with the
layout shown on the plan attached as Exhibit B.
b. All work performed by LESSOR under this agreement shall be performed,
in good and workmanlike fashion, using materials that meet LESSOR's
specifications and the requirements of the applicable Building and
Life Safety Codes, and are comparable to those presently used
throughout the premises.
c. The premises shall be conclusively deemed to be ready for LESSEE's
fit-up and/or occupancy when LESSOR's work has been substantially
completed and the Manchester Building Department has approved or
indicated approval for such work to the extent applicable under
existing code enforcement procedures. LESSOR shall notify LESSEE in
writing when LESSOR's work has been completed. If, for any month
beginning with February, 1998, LESSOR is unable to substantially
complete its work and to obtain Building Department approval on or
before the 5th day of the month, LESSEE shall not be obligated for any
of the rent specified for that month in Paragraph 3 above.
d. LESSEE shall be conclusively deemed to have agreed that LESSOR has
performed all of LESSOR's work, and any other work required to be
performed at the premises, unless, not later than forty-five (45) days
after the commencement date of the Lease LESSEE shall give LESSOR
written notice specifying in all respects what obligations have not
been performed by LESSOR. To the extent such notice contains items
which were to have been completed under the scheduled LESSOR's work,
LESSOR will promptly complete such work.
e. LESSOR will be expending very substantial sums to construct LESSEE s
Demised Premises and fit-up according to Exhibit B. The majority of
the expenditure will provide for the cost of LESSOR's preparation of
the Demised Premises for LESSEE's occupancy, plus the cost of the air
conditioning system plus underlayment and carpeting or tile for the
entire floor area. The balance, $107,300, is estimated to be the cost
of LESSEE's tenant-specific requirements as also laid out on Exhibit
B. LESSOR agrees to spend a total of $125,000, including the $107,300
indicated above, on LESSEE's
34
<PAGE>
requirements, plus additional construction or installation as
specified by LESSEE. Should LESSEE make adjustments to the
requirements of Exhibit B, LESSOR will make equitable adjustments to
the cost of LESSEE's fit-up. Any resulting reductions in the cost of
LESSEE's fit-up will be balanced with equal increases in the value of
additional construction or installation as specified by LESSEE. Any
resulting increases in the cost of LESSEE s fit-up will be balanced
with equal decreases in the value of additional construction or
installation as specified by LESSEE.
f. LESSEE agrees to repay LESSOR for the $125,000 cost of LESSEE's
fit-up, plus the additional construction and/or installation, as
outlined in e. above, by:
i. A payment of $50,000 at the time of the execution of this Lease.
ii. Fit-up repayment as additional rent in the amount of $3,460.87
per month, beginning with the month of March, 1998, and
concluding with the payment for the month of February, 2000. This
payment shall be due and payable at the same time and under the
same conditions as is provided for rent in Paragraph 3. above and
Paragraph 33. below.
6. SECURITY DEPOSIT. LESSEE shall deposit with LESSOR, no later than 1 January
1998, a security deposit of $15,625.13, $2,564.06 of which is acknowledged
by LESSOR to be already on deposit with LESSOR as a condition of the
execution of the previous Lease, discussed in Paragraph 2.b. above, to be
held as additional security for the timely completion of LESSEE's
obligations hereunder. LESSOR shall apply $7,812.56 of this deposit towards
the rent invoice for the month of February, 1998, subject to the provisions
of Paragraph 5.c. above. The remaining deposit sum may be mingled with
LESSOR's funds, and LESSOR shall not be required to pay interest thereon,
except to the extent required by law. LESSOR may use these funds in the
event that LESSEE defaults on any payments, to pay for unpaid rent or
additional rent, or to pay for necessary repairs of the Leased Premises
which are LESSEE's responsibility.
7. REAL ESTATE TAXES. Subject to the provisions of Paragraph 9. below, LESSOR
shall pay all real estate taxes assessed against the Leased Premises.
8. TAX INCREASES.
a. For purposes of determining LESSEE's proportionate share of tax
increases, the tax year starting 1 April 1998 and ending on 31 March
1999 shall be known as the "Real Estate Tax Base Year."
b. LESSEE shall pay to LESSOR on or before 1 December 1999 as additional
rent such an amount as will equal the increase, if any, over those
real estate taxes attributable to the Leased Premises for the "Real
Estate Tax Base Year." The share of the increase of taxes attributable
to the Leased Premises which
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LESSEE is required to pay shall be 6.1% of the increase of such taxes
which LESSOR is required to pay for the entire premises of which the
Leased Premises are part, including the building.
c. In the event that any remodeling or other changes are made in the
Leased Premises or elsewhere in the building which affect the amount
of taxes, the amounts payable by LESSEE pursuant to the preceding
paragraphs will be equitably adjusted upward, if the changes are made
in the Leased Premises, or downward if the changes are made elsewhere
in the building, to reflect such remodeling or changes.
d. LESSOR, upon receipt of each year's tax bill, shall also apportion
such tax increase on a 12-month basis, and LESSEE shall pay this
amount to LESSOR on a monthly basis beginning 1 January 2000.
e. When the actual tax bill is received for a tax year, LESSOR shall
adjust the amount due on the next monthly payment under this
provision, so that total payments during the 12-month period reflect
LESSEE's actual share of the actual tax increase. In the event that
the taxes decline from one year to the next, and LESSEE has overpaid
its share of the actual tax increase, if the overpayment is less than
one month's apportioned share of the newly calculated tax increase,
LESSOR shall apply the amount involved to the first month's payment
against the following year's tax increase. If the overpayment is more
than one month's apportioned share, the excess shall be allowed as a
credit against the next month's rent that shall become due.
9. HEAT AND INSURANCE.
a. LESSOR shall supply and pay for heat for the Leased Premises during
the regular and usual heating season and provide usual fire and
liability insurance. LESSEE shall pay as additional rent 6.1% of any
increase in cost of heating (due to increase in the cost of fuel) and
insuring the building of which the Leased Premises are a part, over
and above the cost incurred by LESSOR to heat the Building for the
period beginning 1 October 1997 and 30 September 1998 and to insure
the building for the period beginning 1 February 1998 and ending 31
January 1999. Such payments of additional rent for heat and insurance
shall be due and payable within thirty (30) days of LESSOR's written
notification thereof.
b. For each year thereafter, LESSOR shall be entitled to bill LESSEE each
month thereafter for one-twelfth of the increased costs (an estimated
amount based on the prior year s actual cost,) as estimated increased
rent. LESSEE will pay this amount promptly. This amount will be
recalculated each year after the heat and insurance billings to LESSOR
for the year have been received by LESSOR and apportioned to LESSEE.
When the billings are received, LESSEE's share of the actual bill will
be compared to the total of the
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estimated increased rent paid during the preceding year and LESSOR
shall either bill LESSEE for the additional amount required or shall
credit LESSEE's account for the excess paid. If any excess paid is
greater than amount due as estimated increased rent for the period
beginning at that time, then LESSOR shall promptly pay the difference
to LESSEE.
10. WATER. LESSOR shall pay all water charges against the Leased Premises so
long as LESSEE does not make any unusual or unreasonable or excessive use
of water on the Leased Premises. LESSEE shall not use water for industrial
or process purposes unless such use is approved by LESSOR.
11. ELECTRICITY. LESSEE shall pay all charges for electricity used in the
Leased Premises. No later than the day LESSEE moves in and actually begins
to occupy the entire Leased Premises, or the Commencement Date indicated in
Paragraph 2.a. above, whichever occurs first, LESSEE shall have the
electrical meter put on LESSEE's account.
12. USE OF PREMISES. LESSEE shall use the Leased Premises only for the
following purposes:
a. Development, assembly, warehousing, distribution and marketing of
telecommunications management systems and related products.
b. No auction, fire, bankruptcy or going-out-of business or similar sales
may be conducted within the Leased Premises without the written
consent of LESSOR.
c. LESSEE shall conduct its business solely within the Leased Premises
and shall not use the sidewalks, parking areas, or other outside areas
adjacent to the Leased Premises for business purposes.
d. LESSEE shall not, without the prior written consent of LESSOR:
i. paint or place any signs on the premises or anywhere in or on the
building or grounds, or
ii. place any curtains, blinds, shades, awnings or aerials or
flagpoles or the like in the premises or anywhere in or on the
building visible from outside the premises. Landlord reserves the
right to disapprove of signs, curtains, blinds, shades or awnings
on wholly aesthetic grounds or to require LESSEE to install
blinds or shades of a uniform building standard as determined by
LESSOR at LESSEE's expense. LESSEE shall pay the expenses
involved in the erection of any sign or obtaining of any permit
required therefor.
iii. LESSEE warrants that it shall obtain all necessary permits prior
to erecting any such sign and LESSEE shall remove said sign and
repair any damages or discoloration at its sole cost on the
termination of this Lease.
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e. LESSEE will not use or store flammable materials on the Leased
Premises.
f. LESSEE shall be responsible for cleaning its premises and for
maintaining them in a clean and orderly fashion. LESSOR shall be
responsible for the cleaning of the common areas, including, but not
limited to, hallways, stairs, lobbies, landings, elevators, entry
ways, building exterior, access ways and parking areas.
g. All garbage and refuse generated by LESSEE shall be kept in covered
containers within the Leased Premises or in an area designated by
LESSOR, and shall be prepared for collection in a neat and reasonable
manner. LESSEE shall pay the cost of removal of any of LESSEE's refuse
or rubbish, which shall be in a manner approved by LESSOR and at
reasonable intervals.
h. The plumbing facilities shall not be used for any other purpose than
that for which they are constructed. No foreign substances of any kind
shall be thrown therein, and the expense of any breakage, stoppage, or
damage resulting from violation of this provision by LESSEE or any of
its agents, invitees or employees shall be borne by LESSEE.
i. LESSEE shall not deface, overload, injure or otherwise damage the
premises or emit odor(s), make excessive noise or vibration, or cool
or store food on the premises, excepting the routine storage of
employee lunches for consumption the same day.
j. LESSEE shall not release onto the Leased Premises or into the plumbing
facilities any hazardous materials, the release of which is prohibited
by any local, state or federal law, ordinance or regulation. Any
storage, handling, processing, use, release or discharge of hazardous
or controlled materials is totally the responsibility of LESSEE, who
hereby indemnifies and holds harmless LESSOR against any claims
arising out of such storage, handling, processing, use, release or
discharge by LESSEE.
k. LESSEE will not carry on any trade or occupation or make any use of
the premises which is improper, offensive, or is contrary to any law,
ordinance, order or regulation of any public authority or insurance
inspection or rating bureau or similar organization having
jurisdiction, or which might invalidate any insurance policy of
LESSEE's or LESSOR's or any other tenant. LESSEE will promptly comply
with any such law, ordinance, regulation or requirement, provided that
if LESSEE wishes to contest any such compliance, LESSEE shall post
such security with LESSOR as LESSOR shall deem adequate pending such
contest.
l. Except as provided in Paragraphs 15. and 17. below, LESSEE will not
drill or
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make holes in the stone or brickwork, except for minor work required
as part of its business, and the Leased Premises will not be
overloaded, damaged or defaced without the written consent of LESSOR,
such consent not to be unreasonably withheld. LESSEE shall be fully
responsible to LESSOR for any holes it makes in the stone or
brickwork.
m. LESSEE will observe and comply with, and will cause its employees and
agents to observe and comply with the restrictions herein. LESSEE is
responsible for monitoring and controlling the conduct of its
employees anywhere on LESSOR's premises.
n. LESSEE will not stack merchandise higher than eighteen inches (18")
below sprinklers.
o. LESSEE will not, in any way, use any space within the building that
may be vacant, except for the direct passage of personnel between the
Leased Premises and elevators or stairways leading out of the building
and direct passage of merchandise, supplies and equipment between the
freight elevators and the Leased Premises. This paragraph shall not be
construed to prevent the short-term (less than two hours) holding of
merchandise, supplies and equipment in the common dock area while it
is being on- or off-loaded from common carriers or LESSEE's owned or
leased vehicles.
13. CONDITION OF PREMISES. LESSEE is fully familiar with the physical condition
of the Leased Premises and the Building. LESSOR has made no representation
in connection with the condition of the Leased Premises or the Building.
LESSEE takes the Leased Premises and the Building in "as is" condition.
14. REPAIRS.
a. LESSOR shall at its own expense keep the interior common areas and the
exterior of the Leased Premises, including the roof, in tenantable
repair, order and condition, and shall be responsible for all
structural repairs. LESSEE shall, at its own expense, keep the
interior of the Leased Premises in tenantable repair, order and
condition, with the exception of damage or loss as a result of fire or
other casualty.
b. If the elevators or other building components that are of significant
benefit to LESSEE break down, LESSOR must repair them as soon as is
reasonably possible. In the event of major breakdowns or failures, the
repairs must be started, or the planning of the repairs actively
started, within five (5) business days after the breakdown or failure
occurs, and must be aggressively pursued, during normal business
hours, until completed and service or functionality to LESSEE is
restored.
c. If such breakdown or failure is lengthy, LESSEE agrees and LESSOR will
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work to coordinate the cooperation between LESSEE and other building
tenants to allow for periodic passage through LESSEE's leasehold or
other tenants leaseholds, as may be appropriate, to allow LESSEE and
the other tenants to conduct their businesses. In no case will the
failure or inability to repair or restore building components be
considered a breach of this Lease unless it shall continue for thirty
(30) or more consecutive days in the event of major repair
requirements or sixty (60) or more consecutive days in the event that
building components, such as an elevator, must be substantially
replaced.
15. FIXTURES AND IMPROVEMENTS. Any improvements or fixtures installed by LESSEE
which are affixed to the real estate by nails, screws, or some other
detachable means may be removed upon the termination of this Lease,
provided all damage or defacement of the premises caused by such removal is
repaired by LESSEE to the satisfaction of LESSOR. Any improvements or
fixtures not so removable, or which are not removed prior to the
termination of this Lease, shall become the property of LESSOR.
16. MECHANICS' LIENS. LESSEE agrees immediately to discharge (either by payment
or by filing of the necessary bond in the full amount of the lien, or
otherwise) any mechanics', materialmen's or other liens against the Leased
Premises and/or LESSOR'S interest therein, which liens may arise out of any
payment due for, or purported to be due for, any labor, services,
materials, supplies or equipment alleged to have been furnished to or for
LESSEE in, upon or about the Leased Premises. LESSEE agrees to give LESSOR
prompt notice of the filing of any such liens.
17. ALTERATIONS AND IMPROVEMENTS. LESSEE shall not, without the written consent
of LESSOR, make any alterations, or additions to or upon the Leased
Premises, except minor alterations which do not materially alter the design
or layout of the Leased Premises, or reduce the available usable space, or
weaken the structure of the premises or the building in which the premises
are located. Any alterations or additions shall be constructed in
accordance with all applicable laws and regulations, with the proper permit
and in a workmanlike manner.
18. RISK OF LOSS. All property of every kind on the Leased Premises shall be at
the sole risk of LESSEE and LESSOR shall not be liable to LESSEE or any
other person for any injury, loss, damage, or inconvenience occasioned by
any cause whatsoever to said property except the willful or negligent acts
or omissions of LESSOR.
19. INDEMNITY. LESSEE agrees to indemnify LESSOR against all injury, loss,
damage, liability, or expense arising out of any occurrence upon or about
the Leased Premises, except for damage, injury, loss or liability resulting
from the sole negligence of LESSOR, its agents or employees.
20. DAMAGE OR DESTRUCTION.
a. If, during the term of the Lease, the Leased Premises, or any part
thereof, shall
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be damaged or destroyed by fire, flood, war, or other casualty to an
extent that repair or restoration is reasonably estimated to exceed
One Hundred Thousand Dollars ($100,000.00) or if the repairs cannot be
completed within forty-five (45) days, then either party shall have
the right to terminate this Lease by giving written notice of its
intention to terminate to the other within forty-five (45) days after
such damage or destruction. If neither party so terminates, or if the
cost to repair such damage shall be less than One Hundred Thousand
Dollars ($100,000.00), then if the damage or destruction results from
a hazard covered by the standard fire and extended coverage insurance
policy (or such broader coverage as LESSOR actually carries), the
premises shall be repaired or restored as soon as reasonably possible
by LESSOR.
b. If the Leased Premises are rendered wholly or partially untenantable
by such damage, regardless of the cost to repair, the rent hereunder
shall abate until repair or restoration is completed or the Lease is
terminated.
c. LESSEE agrees that it shall keep its improvements, fixtures,
merchandise and equipment insured against loss or damage by fire with
the usual extended coverage endorsements. It is understood and agreed
that LESSEE assumes all risk of damage to its own property arising
from any cause whatsoever, including, without limitation, loss by
theft or otherwise. LESSEE agrees that it will furnish LESSOR with a
certification of the amount of insurance carried by LESSEE and an
itemization of all improvements made by LESSEE to the realty with the
costs thereof.
21. CONDEMNATION.
a. In the event that the land and/or Building of which the Leased
Premises are a part are wholly or partially taken for any public or
quasi-public use by any legally constituted authority, then LESSOR
shall have the right to terminate this Lease upon giving written
notice of its intention to do so to LESSEE within ninety (90) days of
the day of taking. Should LESSOR terminate the Lease under this
section, all the rent, including additional rent and charges, as
required to be paid by this Lease, shall be paid up to that date with
a proportionate refund by LESSOR of any rent paid in advance.
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b. In the event any portion of the land and/or Building of which the
Leased Premises are a part are taken by any such authority for any
such use, all compensation awarded or paid upon such a taking shall
belong to and be the property of LESSOR, and no legal or equitable
rights in or to any part of the award shall belong to or be paid to
LESSEE. LESSOR agrees to assist LESSEE in efforts to obtain damages
for LESSEE.
22. INSURANCE. LESSEE shall maintain and pay for liability insurance, for the
benefit of LESSEE and LESSOR, with LESSOR named either as a co-insured or
as an additional insured party on LESSEE'S insurance policy, covering the
Leased Premises, and any fixtures or appurtenances therein, in insurance
companies qualified to do business in New Hampshire, with coverage in
amounts not less than One Million Dollars ($1,000,000.00), with respect to
injury or damage to one person; Two Million Dollars ($2,000,000.00), with
respect to injury or damage by reason of one occurrence; and Two Hundred
Thousand Dollars ($200,000.00), with respect to damage to property. LESSEE
agrees to provide LESSOR with copies of all insurance policies.
23. ADDITIONAL INSURANCE. LESSEE will not do anything on the said premises to
make void or voidable any insurance upon the said premises or building or
render necessary any increased or extra premium for the said insurance. In
the event of improper maintenance or any other conduct or other activities
on the part of LESSEE, the insurance premiums are increased, LESSEE will
pay the additional cost thereof, and in the event the conduct of LESSEE'S
business results in an increase in insurance premiums to be paid by LESSOR,
LESSEE shall pay to LESSOR the amount of such increase.
24. INSURANCE RIGHTS. Each of LESSOR and LESSEE hereby releases the other (and
each person and legal entity claiming through each of them) from any and
all liability or responsibility to the other (and each person and legal
entity claiming through the other) by way of subrogation or otherwise for
any loss or damage to property caused by fire or any of the extended
coverage causalities, by sprinkler leakage or otherwise, even if such fire
or other casualty or such leakage shall have been caused by the fault or
negligence of the other party, or anyone for whom such party may be
responsible. Each of LESSOR and LESSEE agrees that any insurance policies
maintained by them will include such a clause or endorsement so long as the
same shall be obtainable without extra cost, or if extra cost shall be
charged therefor, so long as the other party pays such extra cost. If extra
costs shall be chargeable therefor, each party shall advise the other party
thereof and of the amount of the extra cost, and the other party, at its
election may pay the same but shall not be obligated to do so.
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25. SUBLETTING AND ASSIGNMENT. LESSEE shall not assign this Lease or sublet the
whole or any portion of the Leased Premises without the consent of LESSOR,
in writing, first obtained, which consent can be withheld by LESSOR in its
sole discretion.
a. Without any limitation of the foregoing, LESSOR reserves the right to
withhold its consent if the business of the proposed LESSEE is not, in
LESSOR'S sole discretion, compatible with the other tenants or is in
conflict with other Lease provisions.
b. Further, if, for any proposed assignment or sublease, LESSEE receives
rent or other consideration either initially or over the term of the
assignment or sublease, in excess of the rent called for hereunder, or
in case of the sublease of a portion of the premises, in excess of
such rent fairly allocable to such portion, after appropriate
adjustments to assure that all other payments called for hereunder are
taken into account, LESSEE shall pay to LESSOR as additional rent
hereunder the excess of each such payment of rent or other
consideration received by LESSEE promptly after its receipt.
c. LESSEE agrees to remain primarily and directly liable on all LESSEE
obligations hereunder, notwithstanding any assignment or sublease, or
any indulgences, waivers, or extensions of time granted by LESSOR to
any assignee, or failure to take action against any assignee, hereby
waiving notice of any default by any assignee, and agrees that LESSOR
may, at its option, proceed against LESSEE without having taken action
against or joined any action against any assignee, except that LESSEE
shall have the benefit of indulgences, waivers and extension of time
granted to any assignee.
d. This Lease may be assigned at any time by LESSOR.
26. PARKING.
a. Permanent parking for employees of LESSEE shall be limited to ten (10)
assigned parking spaces, located immediately adjacent to the 150 Dow
Street building, and thirty (30) assigned parking spaces located in
the parking lot east of LESSOR's building at 79-89 Dow Street.
b. LESSEE shall be entitled to additional parking, as required, in the
lot located between Gold's Gym and Sanel Auto Parts on Dow Street.
c. LESSEE'S parking rights are subject to LESSOR'S reasonable rules and
regulations.
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27. SUBORDINATION. This Lease is made subject to the lien of any mortgage now
affecting the Leased Premises. LESSEE agrees that it will from time to
time, at the request of LESSOR, subordinate this Lease to any mortgage,
deed of trust, assignment by LESSOR, or any other security indenture which
may hereafter be placed upon the Leased Premises and to any renewal,
modification, replacement or extension of such mortgage, deed of trust,
assignment or security indenture, and to any and all advances made or to be
made thereunder, provided that, however, any such holder of any such
mortgage, deed of trust, or any security indenture shall agree to recognize
LESSEE'S rights under this Lease, if Lease is not in default under its
obligations.
28. QUIET POSSESSION. LESSOR covenants and warrants that LESSOR has full right
and lawful authority to enter into this Lease for the full term hereof, and
for all extensions herein provided, and that LESSOR is lawfully seized of
the entire premises hereby leased and has good title thereto free and clear
of all tenancies, liens and encumbrances. LESSOR further covenants and
warrants that if LESSEE shall discharge the obligations herein set forth to
be performed by LESSEE, then LESSEE shall have and enjoy, during the term
and any renewal or extension hereof, the quiet and undisturbed possession
of the Demised Premises for the uses herein described, together with all
appurtenances thereto.
29. ENTRY, INSPECTION AND MAINTENANCE. LESSEE shall allow LESSOR or its agents
during the term, at reasonable times, to enter and view the Leased
Premises, and to make repairs and alterations if it should elect to do so;
and LESSOR shall have the right to transmit through the Leased Premises to
and from other parts of the Building, or to and from any adjoining
building, any agency for light, heat, power, or water used in buildings of
similar class, and for that purpose to carry through the premises wires,
pipes, and other means for so doing, without damaging or substantially
altering LESSEE'S normal use of the Leased Premises. LESSEE also agrees to
allow LESSOR or its agents to show the Leased Premises and Building to
others, such as potential new tenants, insurance company inspectors or
investigators, building and/or life-safety code review inspectors,
investigators or enforcement personnel, government agency personnel or
those with other not-unreasonable purposes, at reasonable times, provided,
however, that showing the Leased Premises to potential new tenants shall
occur only with twenty four (24) hours advance notice to LESSEE.
30. AUTHORITY TO LEASE. LESSOR covenants and warrants that LESSOR has full
right and lawful authority to enter into this Lease for the full term
hereof, and for all extensions herein provided, and that LESSOR is lawfully
seized of the entire premises hereby leased and has good title thereto free
and clear of all tenancies, liens and encumbrances.
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31. DEFAULT. Each of the following shall be an Event of Default:
a. If LESSEE shall fail to make payment of rent or other payments
required of LESSEE, when such payments are due, and if LESSEE shall
fail to cure such failure within ten (10) business days after written
notice of default; or
b. If LESSEE shall fail to perform or observe any of the agreements,
covenants or conditions contained herein and if LESSEE shall fail to
cure such failure within thirty (30) days after receipt of notice from
LESSOR of such failure; or
c. If the leasehold interest of LESSEE shall be taken on execution or by
other process of law which would permit a third party to have
possession of the Leased Premises; or
d. If LESSEE shall be judicially declared bankrupt or insolvent according
to law; or
e. If any assignment shall be made of the property of LESSEE for the
benefit of creditors; or
f. If a receiver, guardian, conservator, trustee in involuntary
bankruptcy or other similar officer shall be appointed to take charge
of all or any substantial part of LESSEE'S property by a court of
competent jurisdiction; or
g. If a petition shall be filed for the reorganization of LESSEE under
any provisions of the Bankruptcy Act now or hereafter enacted and such
proceeding is not dismissed within sixty (60) days after it is begun;
or
h. If LESSEE shall file a petition for such reorganization, or for
arrangements under any provisions of the Bankruptcy Act now or
hereafter enacted providing a plan for a debtor to settle, satisfy or
extend the time for the payments of debts, then, and in any of the
said cases (notwithstanding any consent in a former instance), LESSOR
lawfully may, immediately, or at any time thereafter, and without
demand or notice, enter into and upon the Leased premises or any part
thereof and repossess the same as of its former estate and expel
LESSEE and those claiming through or under it and remove its effects
(forcibly, if necessary) without being deemed guilty of any manner of
trespass and without prejudice to any remedy which might otherwise be
used for arrears of rent or preceding breach of covenant.
32. INTEREST ON OVERDUE RENTAL PAYMENT. LESSEE agrees to pay LESSOR, in
addition to any other amounts called for herein, interest at the rate of
one and one-half percent (1-1/2%) per month on any rental or other payment
from the date due hereunder until the date actually received by LESSOR;
provided, however, that no interest will be charged on any payments which
are not more than ten (10) days late.
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33. REMEDIES. Upon the occurrence of an Event of Default hereunder, LESSOR may
at its option, without notice, either in its own name or as agent of
LESSEE, re-let the Leased Premises, or any part thereof, on such terms and
for such rent as it may deem expedient or proper, and such re-letting shall
not operate as a waiver of any right whatever, which LESSOR would otherwise
have to hold LESSEE responsible for the rent previously stated; and in case
said premises, or any part thereof shall be re-let as aforesaid, LESSOR
shall collect the rent therefor from the person or person to whom the same
shall be re-let, and after paying the expenses of such re-letting, and
collection, apply what remains from the amount received by it against the
amount due or to become due from LESSEE under this Lease; and LESSEE shall
pay and discharge all costs, including reasonable attorney's fees and
expenses, that shall arise from enforcing covenants, and agreements of this
Lease; nevertheless, LESSOR retains the option of recovering as damages a
sum, which at the time of termination would represent the difference
between the rental value of the Leased Premises and the rent and other
payments herein required for the residue of the term, and LESSEE agrees to
indemnify LESSOR against any loss of rent and other payments which LESSOR
may suffer or incur by reason of such termination during the residue of the
said term. No partial payment of rent or any other payments required under
this Lease shall be deemed to be in full satisfaction of the amount due
unless agreed to in writing by LESSOR.
34. REDELIVERY OF PREMISES. LESSEE shall quietly and peaceably surrender to
LESSOR, at the expiration or sooner termination of this Lease, the Leased
Premises, and all erections and additions made upon or to the same, and
shall leave the Leased Premises in good repair, order and condition in all
respects, reasonable use and wear and damage of fire and other casualty not
caused by the neglect, default or misuse by LESSEE, only, excepted. Such
delivery shall include all keys to the Leased Premises and failure to
deliver such keys shall make LESSEE responsible for the expense of lock
changes.
35. HOLDOVER. If LESSEE holds over or remains in the possession or occupancy of
the Leased Premises after the expiration of the term of this Lease, or
after any sooner termination thereof, without any written Lease of the said
premises having been made and entered into between LESSOR and LESSEE, such
holding over or continued possession or occupancy shall, if the rent is
paid by LESSEE and accepted by LESSOR for or during any period of time it
so holds over or remains in possession or occupancy, create only a tenancy
from month to month at the last monthly rental and upon the terms herein
specified which may at any time be terminated by either LESSOR or LESSEE
giving to the other party thirty (30) days' notice of such intention to
terminate the same.
36. WAIVER. LESSEE covenants with LESSOR that the failure of LESSOR to insist
in any one or more instances upon the strict and literal performance of any
of the covenants, terms or conditions of this Lease, or to exercise any
right of LESSOR herein contained, shall not be construed as a waiver or a
relinquishment for the future, of such covenant, term, condition or right,
but the same shall continue and remain in
46
<PAGE>
full force and effect. The receipt by LESSOR of rent, with knowledge of the
breach of any covenant, term or condition hereof, shall not be deemed to be
a waiver of such breach, and no waiver by LESSOR of any covenant, term,
condition of provision of this Lease, or of the breach there, shall be
deemed to have been made by LESSOR, unless expressly acknowledged in
writing by LESSOR over its signature.
37. NOTICE. All notices hereunder by LESSOR to LESSEE shall be given in hand or
by registered or certified mail, addressed to LESSEE at the Leased Premises
or to such other address as LESSEE may from time to time give to LESSOR for
this purpose, and all notices by LESSEE to LESSOR shall be given in hand or
by registered or certified mail, addressed to 160 Dow Street, Post Office
Box 353, Manchester, New Hampshire 03105-0353, or to such other address as
LESSOR may from time to time give in writing to LESSEE for this purpose.
38. SUCCESSORS AND ASSIGNS. The respective successors and assigns of LESSOR and
LESSEE, subject to the foregoing provisions as to transfers, insolvency or
by operation of law or legal process, shall bear the burdens and enjoy the
benefits of all of the covenants, terms, conditions, privileges and
agreements wherever applicable, contained in or acquired by the provision
of this Lease, as if such successors and assigns had been specifically
mentioned in each and every case where LESSOR or LESSEE is mentioned, and
shall be deemed to be included in each and every one of such covenants ,
conditions, privileges and agreements, with the exceptions aforesaid. Each
LESSOR hereunder shall be liable for the obligations of LESSOR hereunder
only during such time as LESSOR shall be LESSOR and with respect to items
occurring during such period of ownership.
39. BROKERAGE COMMISSION. LESSEE and LESSOR both represent that they have dealt
with no brokers in connection with the consummation of this Lease.
40. INVALIDITY OF PARTICULAR PROVISIONS. If any term or provision of this
Lease, or the application thereof to any person or circumstance shall, to
any extent, be invalid or unenforceable, the remainder of this Lease, or
the application of such term or provision to persons or circumstances other
than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term and provision of this Lease shall be valid
and be enforced to the fullest extent permitted by law.
41. APPLICABLE LAW. This Lease shall be governed by the laws of the State of
New Hampshire.
a. In the event of default on the part of LESSEE under the terms of this
Lease, LESSOR shall be entitled to choose the forum LESSOR deems
appropriate for purposes of enforcing its rights under this agreement
and collecting any sums due LESSOR hereunder. Specifically, LESSOR
shall be able to, at LESSOR's option, pursue collection and
enforcement in the appropriate District or Superior Court, or LESSOR
shall be entitled to pursue binding arbitration at LESSOR's sole
determination.
47
<PAGE>
b. If LESSOR decides to submit any dispute between the parties pertaining
to this Lease to binding arbitration, LESSOR shall still be entitled
to prejudgment attachment remedies in District or Superior Court for
purposes of securing any future judgment obtained through the
arbitration process. Such arbitration proceedings shall take place in
Manchester, New Hampshire. LESSOR shall, in the first instance, have
the right to select an arbitrator from the American Arbitration
Association, with said arbitration to be governed under the rules of
the American Arbitration Association. Arbitration proceedings,
including the selection of an arbitrator, shall be conducted pursuant
to the rules, regulations and procedures in effect as promulgated by
the American Arbitration Association.
c. LESSOR shall be entitled to all reasonable fees and costs incurred by
LESSOR, related to the enforcement and/or collection under the terms
of this Lease, regardless of whether or not suit is commenced or
arbitration is instituted, including, but not limited to, reasonable
attorney's fees.
d. In the event that LESSEE initiates an action against LESSOR, whether
by suit or by arbitration, LESSEE shall be required to bring such
action in the appropriate forum in New Hampshire.
42. MARGINAL HEADINGS. The marginal notes used as headings for the various
articles of this Lease, and any Table of Contents or Index which may be
attached to this Lease, are used only as a matter of convenience for
reference, and are not to be construed as part of this Lease or to be used
in determining the intent of the parties to this Lease.
43. MISCELLANEOUS. This Lease is to be construed as a New Hampshire Lease; is
to take effect as a sealed instrument; sets forth the entire agreement
between the parties; is binding upon and inures to the benefit of the
parties hereto and their respective heirs, devisees, executors,
administrators, successors and assigns, and may be cancelled, modified, or
amended only by written instrument signed by both LESSOR and LESSEE.
48
<PAGE>
IN WITNESS WHEREOF, LESSOR has signed and sealed this instrument, and LESSEE
has caused this instrument to be signed and sealed on the day and year first
above written.
In the Presence Of: ONE DOW COURT, INC.
_______________________ By: ________________________________
Title: _____________________________
XIOX CORPORATION
_______________________ By: ________________________________
Title: _____________________________
49
Exhibit 13.1 of 10-KSB for December 31, 1997
XIOX CORPORATION
1997 ANNUAL REPORT
1
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Annual Report to Shareholders contains forward-looking
information which is based upon current expectations of the
Company. Actual results could differ materially for the
reasons noted and due to other risks, including but not
limited to those discussed under "Certain Risk Factors Which
May Impact Future Operating Results and Market Price of
Stock" commencing on page 4.
The following discussion and analysis should be read in
conjunction with the Company's audited financial statements
and the notes thereto included herein.
Results of Revenues for the fiscal year ended December 31, 1997
Operations decreased by 7% or $399,783 to $5,060,890 in contrast to
revenues for the fiscal year ended December 31, 1996 of
$5,460,673. The decrease is attributable to lower than
expected demand for call accounting and voice mail products.
Product costs and operating expenses increased 2% or $113,625
to $5,473,375 in 1997 from $5,359,750 in 1996. Product costs
and operating expense comparisons, as a percentage of
revenues are summarized as follows:
1997 1996 1995
Revenues 100% 100% 100%
Product Costs 41% 45% 52%
Research and development 20% 13% 17%
Marketing and SG&A 47% 40% 51%
(Loss)Income from operations (8%) 2% (20%)
Product costs decreased by 14% or $345,968 to $2,083,372 in
1997 versus product costs for 1996 of $2,429,340. As a
percentage of revenues, product costs decreased in 1997 to
41% from 45% primarily as a result of a shift in sales to
products with lower costs in 1997 as compared to 1996. In
1996, product costs decreased by 30% or $1,061,121 to
$2,429,340 in 1996 versus product costs for 1995 of
$3,490,461. As a percentage of revenues, product costs
decreased in 1996 to 45% from 52% as a result of
discontinuance of certain products and reductions in overall
discretionary costs.
Research and development expenses increased to 20% of
revenues in 1997, an increase of $286,193 or 39% from 1996 to
1997 due to a planned increase in spending associated with
new product development. In 1996, research and development
expenses decreased to 13% of revenues, a decrease of $396,843
or 35% from 1995 to 1996 due to the efforts of the Company to
manage expenses and reduce discretionary spending.
Marketing, sales and general and administrative expense
increased from 40% to 47% of revenues in 1997, an increase of
$173,399 or 8%, primarily due to increased labor related
costs associated with new product planning, business
development and administrative support offset by lower sales
expenses due to lower sales volume. Marketing, sales and
general and administrative expense decreased from 51% to 40%
of revenues in 1996, a decrease of $1,250,707 or 36% due to
the Company's efforts to reduce expenses to more closely
align with its current business needs.
2
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Other income, net increased by $448,759 in 1997 primarily due
to income recognized from the resolution of a patent
interference proceeding in the amount of $425,000 and an
increase in investment income of $31,259, from $14,320 in
1996 to $45,579 in 1997.
The Company lost $412,484 from operations in 1997. Following
five (5) profitable quarters, from June 30, 1996 through June
30, 1997, the Company recorded operating losses in the
quarters ending September 30, 1997 and December 31, 1997.
These losses were anticipated as the Company increased
expenditures related to new product planning and development.
Liquidity As of December 31, 1997, Xiox had cash and cash equivalents
And of $2,633,860 and net working capital of $3,120,508 compared
Capital to cash and cash equivalents of $291,488 and net working
capital of $693,485 in 1996. During 1997 the Company expended
$237,953 for capital equipment and software.
The Company's bank line of credit was renewed in May of 1997
at $1,000,000 and is expected by management to provide
adequate capital resources to conduct operations at the level
currently anticipated through May of 1998 when the bank line
expires. In addition, if working capital needs require, the
Company may need to seek additional capital funding.
The Company is exploring raising additional funds to support
development of a new product line addressing the combined
telecom and datacom markets. In connection with this new
product line, the Company has committed to fund Xiox Flanders
N.V., a 94.9% owned subsidiary, with approximately $550,000
in 1998.
Year 2000 The Year 2000 Issue is the result of computer programs being
Compliance written using two digits rather than four to define the
applicable year. Computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900
rather than the Year 2000. If the Company's internal systems
do not correctly recognize date information when the year
changes to 2000, there could be an adverse impact on the
Company's operations. The Company is in the process of
completing an assessment and plans to modify or replace
significant portions of its internal software so that its
computer systems will function properly with respect to dates
in the Year 2000 and thereafter. The Company has also
assessed the capability of its products sold to customers and
believes that it has no exposure to contingencies related to
the Year 2000 Issues for the products it has sold. The
Company's products receive data from other equipment such as
PC's and PBX's and can only properly handle year 2000 dates
if it receives Year 2000 compliant data. Some systems sold by
the Company with computer BIOS manufactured prior to 1996
will need to have the internal clock reset or the BIOS
modified in order to ensure proper performance.
Management believes that the likelihood of a material adverse
impact due to problems with internal systems or products sold
to customers is remote and expects that any costs to be
incurred to assure Year 2000 capability will not have a
material adverse effect on the Company's financial position
or results of operations. However, there may be contingencies
related to Year 2000 Issues which are unknown to Management
at this time which may have material adverse effect on the
Company. There can be no assurance that another Company's
failure to ensure Year 2000 capability would not have an
adverse effect on the Company.
3
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Certain Risk Xiox operates in a rapidly changing environment that involves
Factors a number of risks, some of which are beyond the Company's
Which May control. The following discussion highlights some of these
Impact risks and the possible impact of these factors on future
Future consolidated results of operations and the market price of
Operating the Company's stock.
Results and
Market Price The forward-looking statements included in Management's
of Stock Discussion and Analysis of Financial Condition and Results of
Operations, which reflect management's best judgment based on
factors known, involve risks and uncertainties. In addition,
the Company may from time to time make oral forward-looking
statements. The Company's actual results could differ
materially from those anticipated in these forward-looking
statements as a result of a number of factors, including but
not limited to those discussed below. Forward-looking
information provided by Xiox should be evaluated in the
context of these factors.
Fluctuations in Quarterly Operating Results
The Company typically experiences weaker sales in the first
quarter of each calendar year compared to sales for the last
quarter of the previous year.
Shortfalls in the Company's revenues or earnings from levels
expected by securities analysts could have an immediate and
significant adverse effect on the trading price of the
Company's common stock. Moreover, the Company's stock price
is subject to the volatility generally associated with
technology stocks and may also be affected by broader market
trends unrelated to performance.
Competition
The market for the Company's software products is competitive
and is characterized by change in technology and user needs
and the introduction of new products. In order for the
Company to remain competitive, it must rapidly respond to
such changes, including the enhancement and upgrading of
existing products and the introduction of new products. Most
of the Company's competitors and many potential competitors
have substantially greater financial, marketing and
technology resources than the Company. The Company's major
competitors are Telco Research, ISI-Infortext and Nortel
(MAT). There can be no assurance that the Company will be
able to compete successfully against either current or
potential competitors or that competition will not have a
material adverse effect on the Company's business and
consolidated results of operations and financial condition.
Product Concentration
Xiox derives a substantial portion of its revenues from sales
of new call accounting products, updates and rate table
renewals. As such, any factor adversely affecting sales of
new call accounting products, updates and rate table
renewals, including such factors as market acceptance,
product performance and reliability, reputation, price
competition and the availability of third-party applications,
could have a material adverse effect on the Company's
business, consolidated results of operations and financial
condition.
4
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
Certain Risk Product Development and Introduction
Factors
Which May The software products offered by the Company are internally
Impact complex and, despite extensive testing and quality control,
Future may contain errors or defects ("bugs"), especially when first
Operating introduced. Defects or errors could result in corrective
Results and releases to the Company's software products, damage to the
Market Price Company's reputation, loss of revenues, an increase in
of Stock, product returns, or lack of market acceptance of its
Continued products, any of which could have a material and adverse
effect on the Company's business and consolidated results of
operations.
The software industry is characterized by rapid technological
change as well as changes in customer requirements and
preferences. The Company believes that its future results
will depend largely upon its ability to offer products that
compete favorably with respect to price, reliability,
performance, range of useful features, continuing product
enhancements, reputation and training. Delays or
difficulties, including the discovery of product defects, may
result in the delay or cancellation of planned development
projects and could have a material and adverse effect on the
Company's business and consolidated results of operations. In
addition, increased competition in the market for call
accounting products could also have a negative impact on the
Company's business and consolidated results of operations.
In 1997, the Company began a large development effort in a
new product line addressing the combined telephony and data
markets. The Company will require additional funding to
complete this new product development effort. No assurances
can be made that the Company will be able to obtain the
additional required funding.
Dependence on Distribution Channels
The Company sells its products primarily through its network
of authorized dealers. Xiox's ability to effectively
distribute its products depends in part upon the financial
and business condition of its distribution network. One
customer accounted for 12% of revenue during 1997 while no
single customer accounted for more than 10% of the Company's
revenues in 1996. The loss of or a significant reduction in
business with any one of the Company's major dealers could
have a material adverse effect on the Company's business and
consolidated results of operations in future periods.
5
<PAGE>
<TABLE>
XIOX CORPORATION and SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,633,860 291,488
Accounts receivable, net of allowance
for doubtful accounts of $141,556 in 1997
and $192,072 in 1996 884,612 1,062,045
Other receivables 433,190 66,412
Inventories 474,865 433,769
Prepaid expenses and other assets 158,311 69,470
----------- -----------
Total current assets 4,584,838 1,923,184
Property and equipment, net 432,292 358,118
Purchased software, net 42,673 52,930
Notes receivable 100,000 131,138
Deposits and other assets 494,397 20,319
----------- -----------
$ 5,654,200 2,485,689
----------- -----------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 202,648 140,627
Accrued expenses 175,962 212,081
Accrued compensation 118,252 114,380
Purchase deposits 51,231 41,025
Deferred revenue 916,237 721,586
----------- -----------
Total current liabilities 1,464,330 1,229,699
Commitments and contingencies
Minority interest 127,776 --
Stockholders' equity:
Preferred stock, $0.01 par value;
1,000,000 shares authorized;
None issued and outstanding in 1997 and 1996 -- --
Common stock, $0.01 par value;
10,000,000 shares authorized;
2,932,934 and 2,372,384 shares issued and
outstanding in 1997 and 1996, respectively 29,329 23,724
Additional paid-in capital 8,266,576 5,492,345
Note receivable from stockholder (15,938) (27,188)
Cumulative translation adjustments (13,175) --
Accumulated deficit (4,204,698) (4,232,891)
----------- -----------
Total stockholders' equity 4,062,094 1,255,990
----------- -----------
$ 5,654,200 2,485,689
=========== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997 and 1996
1997 1996
----------- -----------
Revenues $ 5,060,890 5,460,673
----------- -----------
Product costs 2,083,372 2,429,340
Research and development 1,020,145 733,952
Marketing, sales, general and administrative 2,369,857 2,196,458
----------- -----------
5,473,374 5,359,750
----------- -----------
(Loss) income from operations (412,484) 100,923
Other income, net 451,451 2,692
----------- -----------
Income before income taxes 38,967 103,615
Income taxes 10,774 11,305
----------- -----------
Net income $ 28,193 92,310
=========== ===========
Per Share Information:
Basic net income per share $ 0.01 0.04
=========== ===========
Number of shares used in
basic per share computation 2,652,089 2,370,030
=========== ===========
Diluted net income per share $ 0.01 0.04
=========== ===========
Number of shares used in
diluted per share computation 2,837,804 2,378,645
=========== ===========
See accompanying notes to consolidated financial statements.
7
<PAGE>
<TABLE>
XIOX CORPORATION and SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, and 1996
<CAPTION>
Common Stock Note Receivable Cumulative
----------------------- Paid-in From Translation Accumulated
Shares Amount Capital Shareholder Adjustments Deficit Total
--------- ---------- --------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 2,357,784 $ 23,578 5,465,140 -- -- (4,325,201) 1,163,517
Stock options exercised 14,600 146 27,205 (27,188) -- -- 163
Net income -- -- -- -- -- 92,310 92,310
--------- ---------- --------- ------- ------- ---------- ---------
Balances, December 31, 1996 2,372,384 23,724 5,492,345 (27,188) -- (4,232,891) 1,255,990
Common shares issued 574,400 5,744 2,817,911 -- -- -- 2,823,655
Common shares repurchased (15,000) (150) (46,725) -- -- -- (46,875)
Stock options exercised 1,150 11 3,045 -- -- -- 3,056
Note receivable payment -- -- -- 11,250 -- -- 11,250
Translation Adjustment -- -- -- -- (13,175) -- (13,175)
Net income -- -- -- -- -- 28,193 28,193
--------- ---------- --------- ------- ------- ---------- ---------
Balances, December 31, 1997 2,932,934 $ 29,329 8,266,576 (15,938) (13,175) (4,204,698) 4,062,094
--------- ---------- --------- ------- ------- ---------- ---------
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
8
<PAGE>
<TABLE>
XIOX CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 28,193 92,310
Adjustments to reconcile net income to net
Cash (used in) provided by operating activities:
Depreciation and amortization 174,036 228,662
Gain on settlement of other receivables (15,737)
Change in operating assets and liabilities:
Accounts receivable, net 177,433 (112,266)
Other receivables (366,778) (37,407)
Inventories (41,096) (85,539)
Prepaid expenses, deposits
and others assets (562,919) 6,338
Accounts payable and accrued expenses 29,774 178,754
Purchase deposits 10,206 (190,241)
Deferred revenue 194,651 34,272
----------- -----------
Net cash (used in) provided by operating activities (372,237) 114,883
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (201,747) (56,633)
Acquisition of software (36,206) (11,090)
----------- -----------
Net cash used in investing activities (237,953) (67,723)
----------- -----------
Cash flows from financing activities:
Bank line of credit repayments -- (100,000)
Proceeds from stock issued to minority interest 127,776 --
Proceeds from sale of common stock 2,837,961 163
----------- -----------
Net cash provided by (used in) financing activities 2,965,737 (99,837)
----------- -----------
Effect of exchange rate changes on cash (13,175) --
----------- -----------
<FN>
(continued)
</FN>
</TABLE>
9
<PAGE>
<TABLE>
XIOX CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Years ended December 31, 1997 and 1996
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents 2,342,372 (52,677)
Beginning cash and cash equivalents 291,488 344,165
---------- ----------
Ending cash and cash equivalents $2,633,860 $ 291,488
========== ==========
Supplemental Cash Flow Information:
Interest paid $ -- 6,392
========== ==========
Income taxes $ 13,294 2,806
========== ==========
Noncash financing activities:
Common stock issued upon exercise of
stock options in exchange for note
receivable from shareholder $ -- 27,188
========== ==========
Common stock received in settlement
of outstanding claims $ 46,875 --
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
10
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Summary of Xiox Corporation (the Company) is a Delaware corporation
Significant engaged in developing, producing, and marketing telephone
Accounting management and call accounting systems. The Company
Policies manufactures and sells its products primarily through
distributors to companies located in the United States.
Principles of Consolidation
The consolidated financial statements of Xiox Corporation
include the accounts of its subsidiaries. All significant
intercompany balances and transactions have been eliminated
in consolidation.
Revenue Recognition
Software License and Hardware. Revenue is recognized when a
product is shipped or upon customer acceptance as stipulated
in the sales agreements. Payments received from customers
prior to shipment are recorded as purchase deposits. Payments
received and due from customers after shipment but prior to
acceptance, when applicable, are recorded as deferred
revenue.
Maintenance and Rate Tariff Table Subscriptions. Maintenance
service and rate tariff table subscriptions entitle a
customer to receive future releases and enhancements of the
related software products and/or to receive the current local
and long distance provider tariff rates for their call
accounting systems for the subscription period. Maintenance
and rate table subscription revenues are recognized ratably
over the period of the maintenance and subscription
agreements in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 91-1,
"Software Revenue Recognition."
Cash and cash equivalents
Cash and cash equivalents include cash on hand or held in
banks, amounts due from banks, and short-term investments
with remaining maturities of less than three months at date
of purchase. Cash equivalents consist primarily high quality
money market instruments, commercial paper and certificates
of deposit in the amounts of $2,278,616 and $85,098 as of
December 31, 1997 and 1996, respectively.
Inventories
Inventories are stated at the lower of first-in, first-out
cost or market.
Property and equipment
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years.
Financial Instruments
Cash equivalents, accounts receivable and accounts payable
are recorded at fair value which approximates cost as of
December 31, 1997 and 1996.
11
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Summary of Software capitalization
Significant
Accounting Internal software development costs, which consist of
Policies, software updates, are expensed in the year of development.
Continued Software updates are a result of internal software
development and are released annually for software products.
Management believes that the benefit of these updates does
not extend beyond one year.
Purchased software with a benefit extending beyond one year
is capitalized. Purchased software is stated at cost.
Amortization is computed on the straight-line basis over the
period of benefit, generally three years.
Income taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
Stock-based Compensation
The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with
Accounting Principles Board (APB) No. 25, "Accounting for
Stock Issued to Employees." In 1996, the Company adopted the
disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," which require the disclosure of
pro forma net income and earnings per share as if the Company
adopted the fair value-based method in measuring compensation
expense as of the beginning of 1995.
Earnings per Share
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, effective for periods ending after December 15, 1997.
The Company has adopted the new standard for the year-end and
has restated prior period amounts to conform to the new
presentation. SFAS No. 128 requires the presentation of basic
and diluted earnings per share. Basic earnings per share is
calculated by dividing net income or loss by weighted average
common shares outstanding during the period. Diluted earnings
per share reflects the net incremental shares that would be
issued if outstanding stock options were exercised.
In the case of a net loss, it is assumed that no incremental
shares would be issued because they would be antidilutive. In
addition, certain options are considered antidilutive because
the options' exercise price was above the average market
price during the period. Antidilutive shares are not included
in the computation of diluted earnings per share, in
accordance with SFAS No. 128.
12
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
Summary of The shares used in per share computations for the fiscal years
Significant ended December 31, 1997 and 1996 are as follows:
Accounting
Policies,
Continued
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Weighted average common shares outstanding-basic 2,652,089 2,370,030
Incremental Shares - stock options 79,778 8,615
Contingent Shares 105,937
--------- ---------
Shares used in diluted per share computations 2,837,804 2,378,645
--------- ---------
</TABLE>
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary
is the local currency of the country in which it is located.
Assets and liabilities are translated at the current exchange
rate at the balance sheet date. Expenses are translated using
the average exchange rate during the period.
Use of Estimates
The preparation of the consolidated 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 consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from such estimates.
Impairment of Long-Lived Assets
In March 1995, SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, was issued. This Statement requires that long-lived
assets be evaluated for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset
may not be recoverable. Assets to be disposed of are reported
at the lower of the carrying amount or the fair value less
costs to sell. The Company adopted SFAS No. 121 on January 1,
1996. The adoption of SFAS No. 121 did not have a material
impact on the Company's consolidated results of operations.
13
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Summary of Recently Adopted Accounting Standards
Significant
Accounting In October 1997, the AICPA issued SOP 97-2, Software Revenue
Policies, Recognition, which supersedes SOP 91-1. The Company will be
Continued required to adopt SOP 97-2 for software transactions entered
into beginning January 1, 1998, and retroactive application
to years prior to adoption is prohibited. SOP 97-2 generally
requires revenue earned on software arrangements involving
multiple elements (i.e., software products,
upgrades/enhancements, post-contract customer support,
installation, training, etc.) to be allocated to each element
based on the relative fair values of the elements. The fair
value of an element must be based on evidence which is
specific to the vendor. The revenue allocated to software
products (including specified upgrades/enhancements)
generally is recognized upon shipment of the products. The
revenue allocated to post-contract customer support generally
is recognized ratably over the term of the support and
revenue allocated to services as they are performed. If a
vendor does not have evidence of the fair value for all
elements in a multiple-element arrangement, all revenue from
the arrangement is deferred until such evidence exists or
until all elements are delivered. The Company's management
anticipates that the adoption of SOP 97-2 will not have a
material impact on the Company's consolidated results of
operation.
Other Other receivables as of December 31 consisted of the
Receivables following:
1997 1996
-------- ------
Patent interference settlement $425,000 --
Insurance claims -- 63,106
Other 8,190 3,306
-------- ------
$433,190 66,412
======== ======
Inventories Inventories consist primarily of purchased hardware products
(finished goods). Major classes of inventories as of December
31 consisted of the following:
1997 1996
-------- --------
Purchased parts and components $142,866 85,359
Work in process 52,225 18,749
Finished goods 279,774 329,661
-------- --------
$474,865 433,769
======== ========
14
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Property Property and equipment as of December 31 consisted of the
and following:
Equipment
1997 1996
----------- -----------
Office equipment $ 1,277,951 1,075,298
Furniture and fixtures 304,732 305,638
----------- -----------
1,582,683 1,380,936
Less accumulated depreciation (1,150,391) (1,022,818)
----------- -----------
$ 432,292 358,118
=========== ===========
Purchased Purchased software as of December 31 consisted of the
Software following:
1997 1996
--------- ---------
Purchased software $ 236,243 200,037
Less accumulated amortization (193,570) (147,107)
--------- ---------
$ 42,673 52,930
========= =========
Deposits and Deposits and other assets as of December 31 consisted of the
Other Assets following:
1997 1996
-------- ------
Prepaid royalties payments 295,427 --
Other prepaids 198,970 20,319
-------- ------
$494,397 20,319
======== ======
Deposits and other assets include prepaid royalty payments,
which the Company amortizes based on the number of units
sold.
Bank Line The Company maintains a $1,000,000 line of credit
of credit collateralized by eligible accounts receivable. The line
bears interest at prime plus 1.25% (9.75% as of December 31,
1997) and expires in May 1998. No amounts were outstanding
under the line as of December 31, 1997.
15
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Lease Future minimum lease payments and related sublease rental
Committments receivables with respect to noncancelable operating leases in
excess of one year are as follows:
Rental Receivable
Year ended December 31: Rental Payments under Sublease
----------------------- --------------- --------------
1998 $ 359,135 30,236
1999 361,305 --
2000 244,512 --
2001 90,578 --
2002 90,578 --
2003 90,578 --
2004 90,578 --
2005 7,548 --
----------- ------
$ 1,334,812 30,236
=========== ======
Total rent expense incurred on the Company's operating leases
was approximately $221,260, net of sublease income of
$97,579, for the year ended December 31, 1997, and $211,610,
net of sublease income of $84,474 for the year ended December
31, 1996. Future lease obligations are subject to cost of
living adjustments beginning February 1, 2000.
Taxes The provision for income taxes in 1997 and 1996 consisted
entirely of current state income taxes.
The provision for income taxes differs from the amounts
computed by applying the U.S. Federal tax rate of 34% to the
Company's income before income taxes as a result of the
following:
1997 1996
-------- ------
Computed tax expense $ 13,249 35,229
State income taxes, net of
Federal income tax benefit 3,134 7,461
Other, net (5,609) (31,385)
-------- ------
Provision for income taxes $ 10,774 11,305
======== ======
16
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
Taxes, The tax effect of temporary differences that give rise to
Continued significant portions of the deferred tax assets and
liabilities as of December 31, 1997 and 1996, are as follows:
<CAPTION>
Deferred tax assets: 1997 1996
----------- -----------
<S> <C> <C>
Reserves and accruals for financial
reporting purposes not taken for tax purposes $ 495,883 $ 457,376
Research and development costs
principally due to capitalization and
amortization for tax reporting purposes 329,753 511,477
Net operating loss carryforwards 751,856 646,426
Research and development and investment tax
credit carryforwards 211,463 111,512
----------- -----------
Total gross deferred tax asset 1,788,955 1,726,791
Less valuation allowance (1,766,063) (1,696,695)
----------- -----------
Deferred tax asset, net of allowance 22,892 30,096
----------- -----------
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation (22,892) (30,096)
----------- -----------
Total gross deferred tax liability (22,892) (30,096)
----------- -----------
Net deferred tax asset $ -- --
----------- -----------
</TABLE>
As of December 31, 1997, the Company has federal and state
net operating loss carryforwards of approximately $2,200,000
and $40,000, respectively, expiring during the years 2000
through 2009. As of December 31, 1997, the Company has
research and development tax credits and investment tax
credits of approximately $170,000, which expire during the
years 2005 through 2010. Under IRS Section 382, the Company's
future utilization of its net operating loss carryforwards
and certain of its general business tax credits for federal
and state tax reporting purposes is limited to approximately
$94,000 per year for operating losses generated prior to a
change in ownership in the year ended December 31, 1989.
17
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Shareholders In the third quarter of 1997, the Company and Flanders
Equity Language Valley ("Flanders") were parties to an agreement
providing for the purchase by Flanders of an aggregate of
574,400 shares of the Company's common stock for an aggregate
purchase price of $2,872,000 subject to adjustment. On March
25, 1998, the Company issued an additional 211,297 shares of
the Company's Common Stock as an adjustment under this
agreement.
Xiox Flanders N.V. ("Xiox Flanders") was incorporated in
Belgium pursuant to this agreement and is owned 94.9% by the
Company and 5.1% by Flanders. The Company has committed to
fund Xiox Flanders with approximately $550,000 in 1998 and
approximately $1,222,000 in 1999. The actual amount of
funding provided by the Company will depend on the business
needs of Xiox Flanders and can be modified by a vote of the
Board of Directors.
<TABLE>
Employee The Company has 1994 and 1984 incentive stock option plans
Stock that provide for granting of stock options with exercise
Options prices equal to the fair value of the underlying common
stock at the date of grant. There are 350,000 shares of
common stock currently reserved for issuance under the 1994
plan of which 274,900 have been granted. During 1994, the
1984 Stock Option Plan terminated. Under the plans, incentive
options are to be granted to officers and employees, while
non-qualified options are to be granted to non-employees. All
options under these plans vest at a rate determined by the
Board of Directors beginning from the date of grant and
expiring up to ten years from the date of grant. A summary of
transactions relating to outstanding stock options is as
follows:
<CAPTION>
Shares Options Exercise
Available Outstanding Price
--------- ----------- -----
<S> <C> <C> <C>
Outstanding
as of December 31, 1995 91,200 227,482 $1.13 - 5.50
======== ========
Options granted (166,400) 166,400 2.44 - 3.56
Options exercised -- (14,600) 1.63 - 1.88
Options canceled 97,021 (137,803) 1.44 - 5.50
-------- --------
Outstanding
as of December 31, 1996 21,821 241,479 1.13 - 5.50
======== ========
Additional shares reserved 150,000 --
Options granted (108,300) 108,300 3.19 - 4.75
Options exercised -- (1,150) 2.63 - 2.88
Options canceled 11,429 (11,429) 2.88 - 3.44
-------- --------
Outstanding
as of December 31, 1997 74,950 337,200 1.13 - 5.50
======== ========
</TABLE>
18
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Employee Certain options may be exercised immediately upon grant but
Stock are subject to the Xiox Corporation Stock Purchase Agreement,
Options, which restricts transfers of the shares until the shares are
Continued fully vested. Under the terms of this agreement, the Company
may repurchase at the option price any or all of the unvested
shares purchased if the employee terminates his employment
with the Company prior to vesting. The Company also has the
right of first refusal in the event of any proposed
disposition of the purchased shares. As of December 31, 1997,
no outstanding stock was subject to the Stock Purchase
Agreement.
<TABLE>
Pursuant to SFAS No. 123, Accounting for Stock-Based
Compensation, the Company is required to disclose the effects
on the net income and income per share data as if the Company
had elected to use the fair value approach to account for its
employee stock-based compensation plans. Had compensation
cost for the Company's plans been determined consistent with
the fair value approach, the Company's net income and income
per share for the years ended December 31, 1997 and 1996,
would have been as follows:
<CAPTION>
Year ended Year ended
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Net income (loss):
As reported $ 28,193 $ 92,310
Pro forma $ (62,570) $ 51,764
Basic net income (loss) per share:
As reported $ 0.01 $ 0.04
Pro forma $ (0.02) $ 0.02
Diluted net income (loss) per share:
As reported $ 0.01 $ 0.04
Pro forma $ (0.02) $ 0.02
</TABLE>
The effect of applying SFAS No, 123 for disclosing
compensation costs may not be representative of the effects
on reported results for future years because pro forma
results reflect compensation costs only for stock options
granted in 1995 through 1997, and does not consider
compensation costs for stock options granted prior to January
1, 1995.
The fair value of options granted was estimated on the date
of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in
1997 and 1996:
1997 1996
---- ----
Risk-free interest rate 6.1% 6.4%
Expected life 5 Years 5 Years
Expected volatility 54% 60%
Dividends None None
19
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
Employee A summary of the status of the Company's stock option during
Stock the years then ended is presented below:
Options,
Continued
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 241,479 $ 2.97 227,482 $ 3.28
Granted 108,300 4.53 73,000 3.24
Granted under Stock Repricing -- -- 93,400 3.44
Exercised (1,150) 2.66 (14,600) 1.87
Forfeited (11,429) 3.18 (44,403) 3.54
Forfeited under Stock Repricing -- (93,400) 4.32
------- -------
Outstanding at end of
year 337,200 $ 3.45 241,479 $ 2.97
======= =======
Options exercisable at year end 136,094 $ 2.65 79,208 $ 1.64
------- -------
Weighted-average fair value of options granted during the
period at exercise price equal to market price at grant
date $ 2.65 $ 1.49
</TABLE>
The following table summarizes information about stock
options outstanding as of December 31 1997:
<TABLE>
1997 Options Outstanding
<CAPTION>
Weighted-average remaining Weighted-average
Range of Exercise Prices: contractual life exercise price
------------------------- ---------------- --------------
<S> <C> <C>
$1.13 - 1.65 2.7 years $ 1.43
1.65 - 2.20 3.0 1.76
2.20 - 2.75 8.2 2.48
2.75 - 3.30 8.5 3.07
3.30 - 3.85 8.6 3.41
3.85 - 4.95 9.6 4.72
4.95 - 5.50 7.4 5.50
</TABLE>
20
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Transactions In 1991, the Company loaned $100,000 to an employee in return
with Related for a promissory note secured by a second deed of trust. The
Parties promissory note bears a stated interest rate of 9% with a due
date as amended of 2001.
In 1994, the Company paid certain unscheduled liabilities in
conjunction with the purchase of certain assets for Instor
Systems Corporation, a related party, in return for a $31,138
promissory note at 9% annual interest, which was repaid
during 1997.
Employee The Company has adopted the Xiox Corporation Employee Profit
Benefit Sharing Plan (the Plan). The Plan covers all regular
Plans full-time employees excluding officers, who have been
employed by the Company continuously for a period of three
months (six months if hired after June 30, 1997) during the
plan year prior to the period of determination and are
employees through the date of distribution. Distributions are
determined based on certain arithmetic formulas included in
the plan document and are ultimately at the discretion of the
Board of Directors. The Company did not make any significant
distributions under the Plan during 1997 or 1996.
The Company sponsors a defined contribution plan covering
substantially all of its employees. Under the plan, employees
may elect to contribute up to 20% of their salary not to
exceed an annual maximum of approximately $9,500. As the
Company has no current plans to participate in a matching
contribution program, no such contributions were accrued or
expensed during 1997 and 1996.
Major The Company sells directly to end-users, original equipment
Customers manufacturers (OEMs), and through telephone dealer
arrangements. The Company conducts its business within one
industry segment. No single customer accounted for more than
10% of revenues during 1996. In 1997, one customer accounted
for 12% of the revenue and 19% of accounts receivable as of
December 31, 1997. Approximately 30% of the Company's sales
are to the hospitality industry and, accordingly, these sales
may be subject to economic change affecting this industry.
The Company provides for allowances on accounts receivable,
and credit losses to date have not been significant.
21
<PAGE>
Independent The Board of Directors
Auditors' Xiox Corporation and Subsidiaries:
Report
We have audited the accompanying consolidated balance sheets
of Xiox Corporation and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Xiox Corporation and subsidiaries
as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
February 13, 1998
22
<PAGE>
Stock The Company's common stock is traded on the over-the-counter
Trading market on NASDAQ under the symbol XIOX. Xiox completed its
Information initial public offering on February 14, 1986. The quarterly
high and low bid prices over the past two years were as
follows:
High Low
---- ---
Fiscal 1997
Fourth Quarter 5 4
Third Quarter 5 3 3/4
Second Quarter 5 1/4 3
First Quarter 3 1/4 2 3/4
Fiscal 1996
Fourth Quarter 3 1/2 3
Third Quarter 3 5/8 3 1/8
Second Quarter 4 2
First Quarter 2 1/2 2 1/4
Bid Price Quotations are as reported by the National
Association of Security Dealers, Inc. All bid prices reflect
interdealer prices, without retail markup, markdown, or
commission and may not represent actual transactions.
As of December 31, 1997, there were approximately 50
shareholders of record of common stock of the Company. The
Company has never paid dividends and has no present plans to
do so. On March 23, 1998, the closing bid price was $5.25 per
share.
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DIRECTORS AND OFFICERS CORPORATE OFFICES
Atam Lalchandani, Director and Assistant 577 Airport Boulevard, Suite 700
Corporate Secretary Burlingame, CA 94010
Consultant
Xiox - New Hampshire Office
Robert K. McAfee, Director 150 Dow Street
Consultant Manchester, NH 03101
Bernard T. Marren, Director Xiox - Arizona Office
Private Investor 8010 East McDowell Road
Suite 118
Mark A. Parrish, Jr., Director Scottsdale, AZ 85257
Consultant
Xiox Flanders N.V.
Philip Vermeulen, Director Industrielaan 31
CEO Flanders Language Valley Management N.V. 8900 Ieper
BELGIUM
William H. Welling, Director
Chairman and Chief Executive Officer
Wayne F. Benoit LEGAL COUNSEL
Vice President of Business Development
Wilson, Sonsini, Goodrich & Rosati
Robert W. Boyd 650 Page Mill Road
Vice President of Operations Palo Alto, CA 94304
Anthony DiIulio
Vice President of Sales & Marketing
TRANSFER AGENT
Melanie D. Reid
Vice President of Finance, Chief Financial Chase Mellon Shareholder Service
Officer and Corporate Secretary Los Angeles, CA
David Y. Schlossman FORM 10-KSB
Vice President of Product Marketing
Stockholders will be provided without
charge, a copy of the Company's Form 10-KSB
Annual Report for 1997 upon written request
to:
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP Xiox Corporation
500 E. Middlefield Rd. 577 Airport Boulevard, Suite 700
Mountain View, CA 94043 Burlingame, CA 94010
Visit our Web Site at:
http://www.xiox.com
</TABLE>
24
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Xiox Corporation:
We consent to the incorporation by reference in the registration statements
(Nos. 33-4989, 33-16019, 33-37686, 33-42433, 33-88996 and 33-39703) on Form S-8
of Xiox Corporation of our report dated February 13, 1998, relating to the
consolidated balance sheets of Xiox Corporation and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended, which report is
incorporated by reference in the December 31, 1997, annual report on Form 10-KSB
of Xiox Corporation.
/s/ KPMG Peat Marwick LLP
-------------------------------
KPMG Peat Marwick LLP
March 27, 1998
Mountain View, California
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED
FROM the Company's Consolidated
Balance Sheets and Statements of
Operations AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCES TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000782995
<NAME> Xiox Corporation
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> $2,663,860
<SECURITIES> $0
<RECEIVABLES> $1,026,168
<ALLOWANCES> $(141,556)
<INVENTORY> $474,865
<CURRENT-ASSETS> $4,584,838
<PP&E> $1,818,926
<DEPRECIATION> $(1,343,960)
<TOTAL-ASSETS> $5,654,200
<CURRENT-LIABILITIES> $1,464,330
<BONDS> 0
0
0
<COMMON> $29,329
<OTHER-SE> $4,032,765
<TOTAL-LIABILITY-AND-EQUITY> $5,654,200
<SALES> $5,060,890
<TOTAL-REVENUES> $5,060,890
<CGS> $2,083,372
<TOTAL-COSTS> $5,473,374
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> $38,967
<INCOME-TAX> $(10,774)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $28,193
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
