UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
F O R M 10-KSB/A
(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, 1998;
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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
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XIOX CORPORATION
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(Name of small business issuer as specified in its charter)
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)
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 ___
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. ___
Issuer's revenues for its most recent fiscal year were: $5,261,670.
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As of March 1, 1999, the aggregate market value of the voting common stock held
by non-affiliates (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) was approximately $14,035,003. On the same date, the aggregate market
value of the voting preferred stock held by non-affiliates (based upon a
one-to-one conversion of preferred stock to common stock) was approximately
$7,705,000.
As of March 1, 1999, the registrant's outstanding shares totaled 3,177,731 of
common stock and 1,877,989 of preferred stock.
Documents Incorporated By Reference
The following documents are incorporated by reference into the parts of Form
10-KSB/A indicated: (1) Xiox Annual Report to stockholders for the year ended
December 31, 1998 for Part II; (2) Proxy Statement dated April 14, 1999 for the
Annual Meeting of Stockholders to be held May 17, 1999 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 in this document as a
result of a number of factors, including but not limited to those discussed in
Item 1 of this report, "Description of Business," and Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
incorporated by reference to pages 2 through 8 of Xiox's 1998 Annual Report to
stockholders.
You can identify forward-looking statements by noting the use of terms such as
"believes," "expects," "plans," "estimates," and other similar words. Certain
risks, uncertainties, or assumptions that are difficult to predict may affect
such statements. The following risk factors and other cautionary statements
could cause our actual operating results to differ materially from those
expressed in any forward-looking statement. We caution you to keep in mind the
following risk factors and other cautionary statements and to refrain from
placing undue reliance on any forward-looking statements, which speak only as of
the date of this document.
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Table of Contents
Page
PART I
Item 1. Description of Business 4
A. The Company 4
B. Products 5
C. Sales, Marketing, and Distribution Methods 9
D. Revenue Patterns 10
E. Industry and Competition 10
F. Research and Development Expenses 11
G. Patents, Copyrights, Trademarks, and Licenses 11
H. Production and Backlog 12
I. Employees 12
Item 2. Description of Property 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 14
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
Item 9. Directors and Executive Officers of the Registrant 16
Item 10. Executive Compensation 16
Item 11. Security Ownership of Certain Beneficial Owners
and Management 16
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits, Financial Statements, and Reports on Form 8-K 17
Signatures 22
Exhibit Index 23
Exhibit 13.1, Xiox Corporation 1998 Annual Report
Exhibit 23.1, Consent of Independent Auditors
Exhibit 27.1, Financial Data Schedule
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The 10-KSB filed for FY1998 is amended to reflect the beneficial conversion
right of Series A Preferred Stock issued in 1998.
PART I
Item 1. Description of Business
A. The Company
Xiox Corporation was originally incorporated in California in September 1982,
and was subsequently reincorporated in Delaware in April 1987. Xiox became a
publicly held company in February 1986.
We design, develop, manufacture and sell software and hardware systems that
assist companies in managing their telecommunications expenses. These software
and hardware solutions can operate on personal computers, local area networks,
and Xiox hardware. Our systems efficiently provide information to facilitate
telephone expense control; client, department, or project billback; and fraud
control prevention. These systems can meet the simple needs of a 25-person
office or the complex needs of a multi-site Fortune 500 corporation. In
addition, we market a complete family of telephone and network security
products.
Since our incorporation, our product line has expanded from a single software
system to a full range of telecommunication systems, each of which has been
designed to address the needs of small or large businesses in many different
industries. In addition to our software and hardware-based systems, we also
provide call costing rate tables and system enhancements to end users under
subscription arrangements. We market our systems through a direct sales force,
dealers, subsidiaries of the regional bell operating companies, and original
equipment manufacturers.
Developments During 1998
In May 1998 we released GBS for Windows 1.04b. This upgrade enhanced the
application's ease of use and interface with certain telephone switches.
In July 1998 we signed a major distributor agreement with Lucent Technologies.
This agreement allows Lucent to market our products to hotels and motels
throughout the United States. The products enable businesses in the hospitality
industry to track their telecommunications expenses and render accurate billing
for their guests' telecommunications use. Lucent will market our products
primarily in conjunction with Lucent's GuestWorks(R) system, a communications
system designed specifically for the hospitality industry.
In August 1998 we released the Xiox Intelligent Buffer. The buffer incorporates
several patent pending features, such as "automatic baud rate detection" and
"automatic DTE/DCE detection." This buffer is designed to work with
software-based call accounting products in a direct connect or polling
environment.
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In September 1998 we introduced Xiox Traffic Operations Measurements ("TES-OM").
This product is designed to provide detailed analytical reports for Nortel
Meridian and SL-1 PBX systems. This application allows customers to analyze
calling pattern information, providing management information to assist them to
accurately staff attendant consoles, measure the hold times for customers
calling in, determine the number of disconnects, as well as identify system
performance and capacity for critical PBX resources (such as loops, junctors,
trunk groups, and attendants). The TES-OM reports are annotated with color
graphs and explanations. Conditions that exceed Northern Telecom Technical
Practices' recommendations are highlighted with an appropriate "Alert and
Suggestion" annotation.
In 1998, we received a total of approximately $9,300,000 (net issuance costs of
$224,717 as of December 31, 1998) from Intel Corporation, Flanders Language
Valley CVA, Zero State Capital, and other private investors for the purchase of
our Series A preferred stock. This occurred in closings on September 21, 1998,
and October 5, 1998. All together, 1,907,989 shares of our Series A preferred
stock were sold at a purchase price of $5.00 per share. The Series A Preferred
Stock is convertible into Common Stock on a 1:1 basis, subject to certain
antidilution provisions, on the date of issuance. The purchase price of the
Series A Preferred Stock was less than the prevailing market price of the
Company's common stock resulting in a benefical conversion right of $2,683,587,
which has been reflected in the accompanying statement of operations for the
year ending December 31, 1998 as an increase in net loss applicable to common
shareholders. The funds are being used on the development and marketing of a new
product line that addresses the combined telephony and data markets. We plan to
introduce the product in the second half of 1999.
B. Products
Our products are sold to the commercial and hospitality markets and are
comprised of three product categories:
* Call Accounting
* Traffic Engineering
* Facilities Management
These categories are often combined into an integrated package called a
Telecommunications Management System ("TMS"). These products are provided on
several platforms: on proprietary stand-alone hardware, personal computers,
local area networks, or as a service bureau offering. We have implemented TMS
for clients as a managed outsourcing project when customers are looking for an
alternative to running call accounting independently.
TMS or telemanagement products can be used in most industries. The primary
benefits that customers look for in 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.
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Xiox Commercial Industry Product Applications
Call Accounting Software
Call accounting software is used to collect data from telephone calls (generally
from the Private Branch Exchange or "PBX"), and to price calls by applying long
distance and local exchange carrier tariffs. Rated calls are placed into a
database and can be sorted, summed, and printed in a variety of report formats.
A call accounting system can generate savings ranging between 10 and 40 percent
of the total number of minutes used each month, compared to telecommunication
networks without call accounting. Savings are realized when call accounting
allows a company to increase the efficiency of its telecommunications network
and to reduce the minutes of usage. If each employee were to reduce phone usage
by five minutes per day, the savings for 100 employees at a cost of $0.12 per
minute, for example, 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 telephone system and personal
computer or local area network. Although we do not manufacture computers; we can
provide computers upon customer request.
Our call accounting systems do not require insertion of additional expansion
boards into a computer. An end user's computer does not need to be dedicated to
perform only call accounting functions under a Windows-based operating system
(Win95, Win98, NT3.5, and NT4.0 workstations). For additional data security, we
offer a call storage buffer. These external call storage devices are built to
our specifications and sold through our distribution channels as part of an
integrated system.
Our 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,
universities, 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 our tools and reports
are accessible with point and click functionality, including:
* macros for viewing information in colorful graphical formats,
* Intelligent Configuration(TM) (patented) for automatic and simple
installation,
* scheduled polling, processing, and reporting,
* intuitive management of multiple sites,
* rate table updates at a click of a button or automatically
scheduled.
By utilizing these tools, a GBS for Windows(TM) user can install the software
and create high impact graphical presentations within hours. In comparison,
other DOS-based and Windows(TM) competitive packages can take up to several days
to install, configure, and learn, with additional time needed to prepare the
first graph. Our current GBS for Windows(TM) is built upon its predecessor's
reputation for accuracy, flexibility, and quality of support.
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Customers with more than one location may elect to establish a central (host)
site that will poll remote sites over telephone lines. Our central polling
software works in conjunction with pollable call storage buffers to create a
networked telemanagement system.
Call Accounting Hardware
Our hardware-based call accounting systems, The Prophet Series, 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, processing, and rating are all performed within the device's
firmware. An external keypad is available for simplifying 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 our distribution channels.
An enhancement to the series includes the Prophet Writer(R) for Windows
software. When call records are downloaded to a customer-provided personal
computer, they may be stored to the computer's hard drive. Prophet Writer(R)
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 at a central site.
Traffic Engineering for Windows Software
The Xiox Traffic Engineering for Windows Software ("XTES") is a Microsoft
Windows-based management tool used to reduce the cost per minute of
telecommunications. This is accomplished by analyzing trunk utilization and
identifying problems with automatic route selection programs (also called "least
call routing") in the PBX.
This product greatly simplifies the traffic engineering function. The "Alerts
and Suggestions" report identifies actions that should be considered to reduce
costs or eliminate blockage.
Our traffic engineering software works in conjunction with our call accounting
software databases or as a separate application to reduce the user's cost per
minute. Implementation of the software's suggestions can materially reduce most
companies' cost per minute.
The Xiox Traffic Operations Measurements product ("TES-OM") is a Microsoft
Windows-based analysis tool used to optimize performance and detect hardware and
configuration problems with Nortel Meridian PBX equipment. This software package
was designed specifically for Nortel Meridian-1 and SL-1 equipment to record
hourly traffic statistics reported by the PBX, properly interpret the data, and
provide a comprehensive set of illustrated color reports and historical
information.
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This product annotates reports with information identifying abnormal conditions
reported on the PBX that fall outside the recommendations provided by Nortel for
their customers. Customers may use this information to significantly reduce
their monthly service costs and/or greatly improve service performance on the
PBX.
Facilities Management Software
The Xiox Windows Facilities Management ("XFMS") is a Microsoft Windows-based
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 LAN-based, multi-user configuration 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.
Xiox Hospitality Industry Product Applications
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. In 1999 an enhanced version of this product
is being released to run on the Microsoft Windows operating systems WIN98 and
NT4.0.
Call Accounting Hardware
Xiox Summa Prophet H Series prices, marks up, and posts to the hotel's property
management system or provides easy-to-use guest billback capability for
properties without a property management system. 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.
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Xiox Summa Pro(R) 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 operate without
lengthy training, and it includes one-touch reporting and credit limit alarm.
The Summa Pro(R) 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 Summa Pro(R) is designed for the limited space in a front
desk environment.
Product Support and Subscription Services
We obtain and resell third-party hardware, primarily external buffers. In
addition, we provide an option for our customers and dealers for system
installation, training, and travel costs associated with familiarizing customers
with systems.
We renew product support subscriptions for customers on an annual basis. Renewal
entitles a client to unlimited access to our Product Support Center and receipt
of any product enhancements or "bug fixes" throughout the year.
We provide 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. We offer several rate table options, based on the
complexity of the customer's telecommunications environment. We also offer
enhancements to and support of systems after the first year of use.
C. Sales, Marketing, and Distribution Methods
We market our systems to end users primarily through our network of authorized
dealers. We sell to over 450 dealers, including the regional bell operating
companies (i.e., U.S. West Information Systems and Bell South Communications
Systems) and several independent business telephone dealers. Most of our 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. Our ability to effectively distribute our products depends in
part upon the financial and business condition of our distribution network. Two
customers each accounted for 11 percent of our revenue during 1998, versus one
customer that accounted for 12 percent of our revenue in 1997. During each of
the years ended December 31, 1998 and 1997, our export sales were less than two
percent of total sales.
Our marketing approach varies depending upon the type of system. A description
of each of these approaches is set forth below.
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Xiox GBS for Windows, Xiox Traffic Engineering for Windows Software, and Xiox
Facilities Management Software: These systems are typically marketed to large
corporations primarily through our sales force, regional bell operating
companies, or business telephone dealers. In order for dealers to effectively
establish and support their customer base, we must commit technical and sales
personnel to training dealers in installation and application support.
Xiox Lodging Software, Summa Prophet H, and Summa Pro(R): The Summa Suite family
of products is targeted to 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 specific systems.
Xiox Prophet Call Accounting Systems: These hardware devices are marketed
exclusively through our distributors and original equipment manufacturers.
D. Revenue Patterns
Our operating history indicates a sales pattern reflective of both the
telecommunication and computer industries, with sales generally weaker in the
first quarter of each calendar year in comparison to the last quarter of the
previous year.
E. Industry and Competition
The telecommunications systems industry has been characterized by intense
competition and rapid technological and marketing changes. The principal
competitive factors in the telephone management and call accounting software
systems market are customer service, dealer coverage, name recognition, product
performance, price, and flexibility of product design.
Most of our competitors have substantially greater financial, marketing, and
technology resources than we do, and that may harm our ability to compete
effectively with them. Based on industry sources, we believe that both Telco
Research and ISI-Infortext, which are privately held, have revenues that are at
least twice as large as our revenues. Nortel, a public company, reported 1998
revenues of approximately $18 billion (including the revenues of Bay Networks,
which Nortel acquired). In each case, we believe our competitors have marketing
and technological resources commensurate with their revenues. We cannot be
certain that we will be able to compete successfully against either current or
potential competitors or that competition will not have a material adverse
effect on our business, consolidated results of operations, and financial
condition.
If we do not keep pace with rapid technological change, we may not be able to
produce new products and remain competitive. The software industry is
characterized by rapid technological change, as well as changes in customer
requirements and preferences. In order to remain competitive in this industry,
we must quickly respond to such changes, including the enhancement and upgrading
of existing products and the introduction of new products. We believe that our
future results will depend largely upon our ability to offer products that
compete favorably with respect to price, reliability, performance, range of
useful features, continuing product enhancements, reputation, and training.
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Original Equipment Manufacturers. Currently, our products compete with systems
offered by manufacturers of computerized telephone systems. We compete on the
basis that our products operate on standard personal computers and are typically
offered at lower prices; many of our competitors' products require a significant
hardware investment.
Independent Hardware and Software Developers. Directly and through dealers, we
also compete with numerous independent hardware and software developers.
We believe that we effectively compete with other companies on the basis of
price, performance, and more sophisticated features. However, because the market
in which we compete is intensely competitive, we cannot be sure that we will
remain competitive in respect to some or all of these factors.
F. Research and Development Expenses
We are committed to the development of new products and the continued
enhancement of our existing products. During 1998 significant enhancements were
made to the GBS for Windows software. In addition, new products released
included Xiox Intelligent Buffer and Traffic Operations Measurements.
In 1998 we continued a large development effort on a new product line addressing
the combined telephony and data markets. During 1998 we expended $4,194,254 on
research and development versus $1,020,145 in 1997. We expect the spending
during 1999 to exceed this amount. We plan to introduce the product in the
second half of 1999.
G. Patents, Copyrights, Trademarks, and Licenses
We have filed for copyrights for our computer programs and algorithms. We have
secured trademark protection for our service marks under our Fort Knox(R) Family
of products, including Fort Knox(R), Hacker Tracker(R), Xiox Hacker Tracker(R),
Hacker Preventer(R), and Hacker Deadbolt(R). We also have trademark protection
for Prophet Writer(R), Summa Pro(R), Summa Suite(R), Summa Voice(R), and our
window and curtain graphic logo. Xiox(TM) is also our trademark. We 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 our Hacker Preventer(R)
product to profile and react to a user's observed behavior. We have 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.
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H. Production and Backlog
We produce our 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 us shortly after receipt of an order. As a result, we do not have a
substantial backlog, and our backlog at any particular time is generally not
indicative of our future level of sales. Our hardware products are manufactured
to our specifications by outside suppliers. These products are also available
from alternate domestic suppliers. We defer substantial revenue from annual
subscriptions for our annual rate table and maintenance and support agreement
subscriptions. This deferred revenue is amortized over the life of the
subscription.
I. Employees
We had 75 full-time employees as of December 31, 1998, and 77 total employees.
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Item 2. Description of Property
We lease approximately 13,168 square feet of office space at 577 Airport
Boulevard, Suite 700, Burlingame, California. The lease expires July 31, 2000.
In addition, we lease 19,069 square feet of multi-use space at 150 Dow Court,
Manchester, New Hampshire, under a seven-year lease that expires January 31,
2005. We also lease 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 28 of our 1998 Annual Report to stockholders 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 8
of the Annual Report and is hereby incorporated by reference.
Item 7. Financial Statements
The following Xiox financial statements and the independent auditors' report
appearing on pages 9 through 28 of the Annual Report are hereby incorporated
herein by reference.
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997
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/A.
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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 Xiox is incorporated by reference to the information
contained in the sections captioned "Nominees," "Business Experience of
Directors," "Executive Officers," and "Section 16(A) Beneficial Ownership
Reporting Compliance" in our definitive proxy statement for the 1999 annual
meeting of stockholders to be filed with the Securities and Exchange Commission.
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 our definitive proxy statement for the 1999 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
section captioned "Security Ownership of Certain Beneficial Owners and
Management" in our definitive proxy statement for the 1999 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 our definitive proxy
statement for the 1999 annual meeting of stockholders to be filed with the SEC.
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Item 13. Exhibits, Financial Statements, and Reports on Form 8-K
A. The following documents are filed as parts of this report.
1. Financial Statements: The following Consolidated Financial
Statements of Xiox Corporation and Report of KPMG LLP, independent
auditors, are incorporated by reference to pages 9 through 28 of the
registrant's Annual Report to stockholders.
Page(s) in 1998
Annual Report
---------------
Consolidated Balance Sheets as of 9
December 31, 1998 and 1997
Consolidated Statements of Operations 10
for the years ended December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for 11
the years ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows 12-13
for the years ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements 14-27
Independent Auditors' Report 28
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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.
Number Description
- ------ -----------
2.1(1) Proposed Agreement and Plan of Merger between Xiox Corporation,
a California corporation, 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.
3.3(14) Certificate of Amendment dated May 26, 1998.
3.4(14) Certificate of Designations, Preferences, and Other Rights of
the Series A Preferred.
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
Xiox 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.
4.4(15) Form of Common Stock Certificate.
4.5(14) Stock Purchase and Investor Rights Agreement dated September
21, 1998.
4.6(14) Right of First Refusal and Co-Sale Agreement dated September
21, 1998.
5.1(15) Opinion of Wilson Sonsini Goodrich & Rosati.
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.
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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 Xiox and Bay Park Plaza, dated March
20, 1987.
10.10(6) Amended Lease Agreement between Xiox and Bay Park Plaza, dated
July 28, 1994.
10.12(12) Sublease and Lease Agreement between Xiox and 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.
10.17(16) 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(17) Lease Agreement between Xiox and One Dow Court, Inc., dated
November 18, 1997.
13.1* 1998 Annual Report to stockholders.
21.1** Subsidiaries of Xiox.
23.1(15) Consent of KPMG LLP, Independent Auditors.
19
<PAGE>
24.1 Power of Attorney (see page 22).
27.1* Financial Data Schedule.
* Filed herewith.
** Listed under the caption "Principles of Consolidation" in Xiox's 1998
Annual Report to stockholders, attached as Exhibit 13.1.
(1) Incorporated by reference to Xiox's report on Form 10-K for the year
ended December 31, 1986.
(2) Incorporated by reference to Xiox's report on Form 10-K for the year
ended December 31, 1987.
(3) Incorporated by reference to Xiox's report on Form 8-K, as filed by
Xiox on July 22, 1997 and October 8, 1997.
(4) Incorporated by reference to Xiox's Registration Statement on Form
S-1.
(5) Incorporated by reference to Xiox's Registration Statement on Form
S-8 (File No. 33-42433).
(6) Incorporated by reference to Xiox's report on Form 10-KSB for the
year ended December 31, 1995.
(7) Incorporated by reference to Xiox's Registration Statement on Form
S-8 (File No. 33-88996) filed on February 1, 1995.
(8) Incorporated by reference to Xiox's Form 8-K filed on March 27, 1991,
as amended on June 7, 1991.
(9) Incorporated by reference to Xiox's Form 8-K filed on August 29,
1994, as amended on October 28, 1994.
(10) Incorporated by reference to Xiox's Form 8-K filed on December 15,
1994.
(11) Incorporated by reference to Xiox's Registration Statement on Form
S-8, filed on June 20, 1997 (File No. 333-29703).
(12) Incorporated by reference to Xiox's report on Form 10-K for the year
ended December 31, 1996.
(13) Incorporated by reference to Xiox's Registration Statement on Form
S-8 (File No. 33-37686).
20
<PAGE>
(14) Incorporated by reference to Xiox's Form 8-K filed September 24,
1998.
(15) Incorporated by reference to Xiox's Registration Statement on Form
S-3/A filed February 24, 1999 (File No. 333-68435).
(16) Incorporated by reference to Xiox's Registration Statement on Form
S-8, filed on June 18, 1998 (File No. 333-57149).
(17) Incorporated by reference to Xiox's Report on Form 10-K for the year
ended December 31, 1997.
B. Reports on Form 8-K:
Xiox filed the following reports on Form 8-K or 8-K/A during the year ended
December 31, 1998:
Resolution of a patent interference proceeding with Coral Systems filed
January 29, 1998, on Form 8-K.
Stock Purchase and Investor Rights Agreement with Intel Corporation,
Flanders Language Valley CVA, Zero Stage Capital, and other private
investors for the private placement of $9.5 million of Series A
Preferred Stock dated September 21, 1998, $3.1 million of which closed
on same date and filed September 24, 1998, on Form 8-K.
Stock Purchase and Investor Rights Agreement with Intel Corporation,
Flanders Language Valley CVA, Zero Stage Capital, and other private
investors for the private placement of $9.5 million of Series A
Preferred Stock dated October 5, 1998, $6.4 million of which closed on
same date and filed October 8, 1998, on Form 8-K.
21
<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:
February 22, 2000 /s/ William H. Welling
---------------------------------------------
William H. Welling
Chairman and Chief Executive Officer
In accordance with the Exchange Act and authority contained in the 10-KSB dated
March 31, 1999, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
February 22, 2000 /s/ William H. Welling
-------------------------------------------
William H. Welling
Chairman and Chief Executive Officer
(Principal Executive Officer) and Director
February 22, 2000 /s/ Melanie D. Johnson
-------------------------------------------
Melanie D. Johnson
Vice President of Finance/Chief Financial
Officer/Corporate Secretary
22
<PAGE>
EXHIBIT INDEX
Number Description
- ------ -----------
2.1(1) Proposed Agreement and Plan of Merger between Xiox Corporation,
a California corporation 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.
3.3(14) Certificate of Amendment dated May 26, 1998.
3.4(14) Certificate of Designations, Preferences, and Other Rights of
the Series A Preferred.
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
Xiox 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.
4.4(15) Form of Common Stock Certificate.
4.5(14) Stock Purchase and Investor Rights Agreement dated September
21, 1998.
4.6(14) Right of First Refusal and Co-Sale Agreement dated September
21, 1998.
5.1(15) Opinion of Wilson Sonsini Goodrich & Rosati.
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.
23
<PAGE>
10.07(5) Form of Automatic Option Agreement.
10.08(5) Form of Stock Purchase Agreement.
10.09(2) Lease Agreement between Xiox and Bay Park Plaza, dated March
20, 1987.
10.10(6) Amended Lease Agreement between Xiox and Bay Park Plaza, dated
July 28, 1994.
10.12(12) Sublease and Lease Agreement between Xiox and 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.
10.17(16) 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(17) Lease Agreement between Xiox and One Dow Court, Inc., dated
November 18, 1997.
13.1* 1998 Annual Report to stockholders.
21.1** Subsidiaries of Xiox.
23.1(15) Consent of KPMG LLP, Independent Auditors.
24.1 Power of Attorney (see page 22).
27.1* Financial Data Schedule.
24
<PAGE>
* Filed herewith.
** Listed under the caption "Principles of Consolidation" in the Xiox's
1998 Annual Report to stockholders, attached as Exhibit 13.1.
(1) Incorporated by reference to Xiox's report on Form 10-K for the year
ended December 31, 1986.
(2) Incorporated by reference to Xiox's report on Form 10-K for the year
ended December 31, 1987.
(3) Incorporated by reference to Xiox's report on Form 8-K, as filed by
Xiox on July 22, 1997 and October 8, 1997.
(4) Incorporated by reference to Xiox's Registration Statement on Form
S-1.
(5) Incorporated by reference to the Xiox's Registration Statement on
Form S-8 (File No. 33-42433).
(6) Incorporated by reference to Xiox's report on Form 10-KSB for the
year ended December 31, 1995.
(7) Incorporated by reference to Xiox's Registration Statement on Form
S-8 (File No. 33-88996) filed on February 1, 1995.
(8) Incorporated by reference to Xiox's Form 8-K filed on March 27, 1991,
as amended on June 7, 1991.
(9) Incorporated by reference to Xiox's Form 8-K filed on August 29,
1994, as amended on October 28, 1994.
(10) Incorporated by reference to Xiox's Form 8-K filed on December 15,
1994.
(11) Incorporated by reference to Xiox's Registration Statement on Form
S-8, filed on June 20, 1997 (File No. 333-29703).
(12) Incorporated by reference to Xiox's report on Form 10-K for the year
ended December 31, 1996.
(13) Incorporated by reference to Xiox's Registration Statement on Form
S-8 (File No. 33-37686)
(14) Incorporated by reference to Xiox's Form 8-K filed September 24,
1998.
25
<PAGE>
(15) Incorporated by reference to Xiox's Registration Statement on Form
S-3/A filed February 24, 1999 (File No. 333-68435).
(16) Incorporated by reference to Xiox's Registration Statement on Form
S-8, filed on June 18, 1998 (File No. 333-57149).
(17) Incorporated by reference to Xiox's Report on Form 10-K for the year
ended December 31, 1997.
26
Exhibit 13.1 of 10-KSB/A for December 31, 1998
XIOX CORPORATION
1998 ANNUAL REPORT
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Annual Report to Stockholders contains forward-looking
information that is based upon our current expectations.
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 5.
The following discussion and analysis should be read in
conjunction with our audited financial statements and
accompanying notes.
Results of
Operations
Revenues for the fiscal year ended December 31, 1998
increased by 4% or $200,780 to $5,261,670, in contrast to
revenues for fiscal year ended December 31, 1997 of
$5,060,890. The increase is attributable to increased demand
for call accounting products and related support renewals.
Product costs and operating expenses increased 70% or
$3,821,835 to $9,295,209 in 1998, from $5,473,374 in 1997.
Comparisons of product costs and operating expenses as a
percentage of revenues are summarized as follows:
1998 1997
Revenues 100% 100%
Product costs 45% 41%
Research and development 80% 20%
Marketing and SG&A 52% 47%
Loss from operations (77%) (8%)
Product costs increased by 13% or $268,750 to $2,352,122 in
1998, versus product costs for 1997 of $2,083,372. As a
percentage of revenues, product costs increased in 1998 to
45% from 41% in 1997, primarily as a result of increases in
labor costs, inventory reserves for obsolescence, and
product support reserves.
Research and development expenses increased to 80% of
revenues in 1998 from 20% in 1997. This increase of
$3,174,109 or 311%, from $1,020,145 in 1997 to $4,194,254 in
1998, is due to a planned increase in spending associated
with new product development.
Marketing, sales, and general and administrative expense
increased from 47% of revenues in 1997 to 52% of revenues in
1998. This increase of $378,976 or 16%, from $2,369,857 in
1997 to $2,748,833 in 1998, is primarily due to increased
labor-related costs associated with new product planning,
business development, and administrative support.
We lost $4,033,539 from operations in 1998. These losses
were anticipated as we intentionally increased expenditures
related to new product planning and development.
Other income, net, decreased by $289,974 in 1998, primarily
due to income recognized in 1997 from the resolution of a
patent interference proceeding in the amount of $425,000.
That
2
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
difference was partially offset by an increase in investment
income of $121,202, from $451,451 in 1997 to $161,477 in
1998, due to a higher available balance of undeployed cash.
Liquidity
And
Capital
As of December 31, 1998, we had cash and cash equivalents of
$8,272,251 and net working capital of $7,814,364, compared
to cash and cash equivalents of $2,633,860 and net working
capital of $3,120,508 in 1997. During 1998 we expended
$1,270,596 for property, equipment, and software.
Our bank line of credit was renewed in May of 1998 at
$1,000,000, and management expects it to provide adequate
capital resources to conduct operations at the level
currently anticipated through May of 1999, when the bank
line expires. If needs require, we will seek additional
capital funding.
During 1998, we raised approximately $9.5 million through
the issuance of the Company's Series A Preferred Stock to
support development of our new product line addressing the
combined telecom and datacom markets. The Series A Preferred
Stock is convertible into Common Stock on a 1:1 basis,
subject to certain antidilution provisions, on the date of
issuance. The purchase price of the Series A Preferred Stock
was less than the prevailing market price of the Company's
common stock resulting in a beneficial conversion feature of
$2,683,587, which has been reflected in the accompanying
statement of operations for the year ending December 31,
1998 as an increase in net loss applicable to common
shareholders.
In connection with this new product line, we have committed
to fund Xiox Flanders N.V., our 94.9% owned subsidiary, with
approximately $1,700,000 in 1999.
Year 2000
Compliance
Definition. The Year 2000 issue is the result of computer
programs written using two digits rather than four to define
the applicable year. Computer programs and embedded systems
that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. If one of
our internal systems, or those of a customer, supplier, or
service provider, does not correctly recognize date
information when the year changes to 2000, there could be
system failures or malfunctions that result in an adverse
impact on our operations.
We have assessed the capability of our products sold to
customers and believe that for these products we have no
exposure to contingencies related to the Year 2000 issue
that would have a material adverse effect on our financial
position or results of operations. A list of Year 2000 ready
products has been posted on our web site and has been sent
to customers and distributors via Company newsletters.
Products. Our products receive data from other equipment
such as PC's and PBX's and can only properly handle Year
2000 dates if they receive Year 2000 compliant data. Some
systems we sell or have sold 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. If
the data received from PBX equipment or PC's that are not
Year 2000 compliant is incorrect, Xiox products could
generate erroneous information. If PC's on which Xiox
software operates are not Year 2000 compliant, Xiox products
could also generate erroneous information. We believe that
the likelihood of a material adverse impact due to problems
3
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
with products sold to customers is low. We expect that any
costs to be incurred to assure Year 2000 capability relating
to product released or in development will not have a
material adverse effect on our financial position, results
of operations, or cash flow.
Internal Systems. During 1998, we continued our efforts to
assess and remediate our computer systems,
telecommunications systems, software systems, and related
equipment to ensure each system will function properly as
the Year 2000 approaches. The Year 2000 program is being
conducted in four phases: (a) identification, (b)
assessment, (c) remediation, and (d) testing.
o The identification and assessment phases have been
completed. All systems acquired in the future will
be subject to assessment prior to purchase.
o The remediation phase is estimated at 75% complete
based on the systems requiring patches or upgrades.
The primary system requiring attention was our
Manufacturing and Financial Management System,
Macola. The upgrade to this system was completed in
the first quarter of 1999.
o The testing phase is currently in a preliminary
stage. Testing of systems and interfaces will occur
near the end of the remediation phase.
We currently believe our information systems will be Year
2000 compliant by the end of the second quarter of 1999.
However, we cannot be certain that our internal systems will
be Year 2000 compliant in a timely manner. The potential
risks include the inability to process and report financial
and other transactions in a timely and accurate manner. We
do not believe that this will have a material adverse effect
on the our business or consolidated financial statements.
External Suppliers. We have begun the process of seeking
confirmation on the Year 2000 compliance of our top
suppliers. We are sending a Year 2000 compliance survey to
those suppliers with sizeable volume and to our single
sources for components or services. We expect this process
to be completed by mid-1999.
We have been advised that the most critical systems,
services, and products supplied to us by external sources
are Year 2000 ready or are expected to be Year 2000 ready by
mid-1999.
We will be developing contingency plans for systems and
services provided by vendors that do not respond to our
requests or fail in their readiness efforts. However, we
cannot be certain that our external suppliers will be Year
2000 compliant in a timely manner. The potential risks
include the production of inaccurate rate tables and delays
in product deliveries. We do not believe that this will have
a material adverse effect on our business or consolidated
financial statements.
State of Readiness. As of this date, we have made
significant progress in identifying systems, completing
assessments, and implementing solutions for the high
priority internal systems so that our computer systems will
function properly with respect to dates in the year 2000 and
thereafter.
4
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
We are actively participating with customers and suppliers
to ensure progress is being made and that the dates forecast
are reasonable and attainable.
Costs. Other than time spent by our internal information
technology and other personnel, we have not incurred any
significant costs in identifying, assessing, and remediating
Year 2000 issues.
Because we are in a growth phase, systems improvement
initiatives are underway to improve our primary business
systems. We do not anticipate any significant costs related
to remediation efforts because planned systems improvements
will include Year 2000 readiness as a standard requirement.
This statement assumes that third party suppliers have
accurately assessed the compliance of their products and
that they will successfully correct any issues in
non-compliant products. Because of the complexity of
correcting the Year 2000 issue, actual costs may vary from
estimates.
Although the total cost to obtain Year 2000 compliance is
not known at this time, we currently expect the cost to be
less than $150,000. The actual cost, however, could exceed
this estimate. These costs are not expected to have a
material effect on our financial position, results of
operations, or cash flows.
Contingency Plans. Based upon the progress of our plan, we
expect that we will not experience a material disruption of
our operations as a result of the change to the new
millennium. However, we cannot be certain that the third
parties who have supplied technology used in our mission
critical systems will be successful in taking corrective
action in a timely manner.
We are developing contingency plans, intended to enable us
to continue operations, with respect to certain key
technology used in our mission critical systems.
Contingency plans include performing certain processes
manually, repairing systems, and changing suppliers if
necessary, although we cannot be certain that these
contingency plans will successfully avoid service disruption
in the operation of business as usual.
Certain Risk
Factors
Which May
Impact
Future
Operating
Results and
Market Price
of Stock
We operate in a rapidly changing environment that involves a
number of risks, some of which are beyond our control. The
following discussion highlights some of these risks and the
possible impact of these factors on future consolidated
results of operations and the market price of our stock.
The forward-looking statements included in Management's
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, we may from time to time make oral forward-looking
statements. Our 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 we
provide should be evaluated in the context of these factors.
5
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Differing sales cycles may cause our operating revenues to
fluctuate, which may lower our stock price. Our quarterly
revenues are likely to fluctuate significantly in the future
due to a number of factors that affect telecommunications
companies, many of which are outside our control. Factors
that could affect our revenue include:
o variations in the timing of orders and shipments of
our products;
o variations in the size of the orders for our products;
o new product introductions by our competitors;
o delays in introducing new products.
Our stock price may be volatile, and you may not be able to
sell the shares at or above the price you paid to purchase
them. The trading price of our common stock may be highly
volatile and could fluctuate in response to a variety of
factors that affect telecommunications companies, including
the following:
o actual or anticipated variations in quarterly operating
results;
o announcements of technological innovations;
o new products or services offered by us or by our
competitors;
o additions or departures of key personnel;
o changes in financial estimates by securities analysts;
o conditions or trends in the telecommunications industry;
o changes in the economic performance and/or market
valuations of the telecommunications industry;
o changes in the economic performance and/or market
valuations of other companies in the telecommunications
industry;
o volatility generally associated with technology stocks;
and
o other broader market trends unrelated to our operating
performance.
In addition, our stock is commonly described as "thinly
traded stock" because our average daily trading volume
(approximately 2,000 shares) is very low in comparison to
other publicly traded companies. The price of a thinly
traded stock like ours may fluctuate sharply whenever the
volume of trades exceeds the average volume. The dollar
amount of the trades that would trigger those fluctuations
is low in comparison to the dollar amount that would trigger
similar fluctuations in the stock price of companies with a
higher average trading volume.
If we do not keep pace with rapid technological change, we
may not be able to produce new products and remain
competitive. The software industry is characterized by rapid
technological change, as well as changes in customer
requirements and preferences. In order to remain competitive
in this industry, we must quickly respond to such changes,
including the enhancement and upgrading of existing products
and the introduction of new products. We believe that our
future results will depend largely upon our ability to offer
products that compete favorably with respect to price,
reliability, performance, range of useful features,
continuing product enhancements, reputation, and training.
6
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Most of our competitors have substantially greater
financial, marketing, and technology resources than we do,
and that may harm our ability to compete effectively with
them. Based on industry sources, we believe that both Telco
Research and ISI-Infortext, which are privately held, have
revenues that are at least twice as large as our revenues.
Nortel, a public company, reported 1998 revenues of
approximately $18 billion (including the revenues of Bay
Networks, which Nortel acquired). In each case, we believe
our competitors have marketing and technological resources
commensurate with their revenues. We cannot be certain that
we will be able to compete successfully against either
current or potential competitors or that competition will
not have a material adverse effect on our business,
consolidated results of operations, and financial condition.
If we lose the business of either of our largest customers,
our revenues may decrease and our business may suffer. Two
of our customers accounted for 22% of our revenue during
1998 and 20% of revenue in 1997. The loss or serious
reduction in business from either customer could have a
material adverse effect on our business, consolidated
results of operations, and financial condition in future
periods.
If we lose our ability to sell our products through our
network of dealers, our revenues may decrease and our
business may suffer. We sell our products primarily through
our network of authorized dealers. Like other companies that
sell products through a network of authorized dealers, our
ability to effectively distribute our products depends in
part upon the financial and business condition of our
distribution network, which is outside of our control. The
loss of or a significant reduction in business with any one
of our major dealers could have a material adverse effect on
our business, consolidated results of operations, and
financial condition in future periods.
If we do not increase our sales, our revenues may decrease
and our business may suffer. Our future success, like the
success of other telecommunications companies, will depend
on deriving a substantial portion of our revenues from sales
of call accounting products to new customers as well as
updates and rate table renewals to existing customers. As a
result, any factor adversely affecting these sales,
including market acceptance, product performance and
reliability, reputation, price competition and competing
products, as well as general economic and market conditions,
could have a material adverse effect on our business,
consolidated results of operations, and financial condition.
If our software products contain errors or defects, our
revenues may decrease and our business may suffer. The
software products we offer, like many software products, are
internally complex and, despite extensive testing and
quality control, may contain errors or defects ("bugs"),
especially when first introduced. Defects or errors could
result in corrective releases to our software products,
damage to our reputation, loss of revenues, an increase in
product returns, claims for damages, or lack of market
acceptance of our products, any of which could have a
material and adverse effect on our business, consolidated
results of operations, and financial condition.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
If we encounter delays or difficulties in developing our
products, our revenue may decrease and our business may
suffer. Delays or difficulties in the execution of product
development may occur within any telecommunications company,
including Xiox. These delays or difficulties may result in
the cancellation of planned development projects and could
have a material and adverse effect on our business,
consolidated results of operations, and financial condition.
If we do not receive additional funding for our new product
line, our business may be adversely affected. In 1997, we
began a significant development effort in a new product line
addressing the combined telephony and data markets. Although
we received in 1997 and 1998 approximately $12.5 million in
funding for this development effort, we will require
additional funding before the new product line returns a
profit. The additional funding will be used for marketing,
continued engineering, sales, working capital, and to fund
research and development activities. We cannot be certain
that we will be able to obtain the additional required
funding, or that the new product line will become
profitable. Moreover, the introduction of the new product
line may result in a new group of competitors.
8
<PAGE>
<TABLE>
XIOX CORPORATION and SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 8,272,251 $ 2,633,860
Accounts receivable, net of allowance for 714,200 884,612
Doubtful accounts of $ 142,669 in 1998
and $ 141,556 in 1997
Other receivables 9,585 433,190
Inventories 433,149 474,865
Prepaid expenses & other assets 96,413 158,311
------------ ------------
Total current assets 9,525,598 4,584,838
Property, equipment and software, net 1,445,977 474,965
Notes receivable 100,000 100,000
Deposits & other assets 336,645 494,397
------------ ------------
Total Assets $ 11,408,220 $ 5,654,200
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 325,198 202,648
Accrued expenses 312,248 175,962
Accrued compensation 158,870 118,252
Purchase deposits 42,382 51,231
Deferred revenue 872,536 916,237
------------ ------------
Total current liabilities 1,711,234 1,464,330
Notes payable 42,473 --
Commitments and contingencies
Minority interest 117,883 127,776
Stockholders' equity:
Preferred stock, $0.01 par value; 2,000,000 shares
authorized; 1,877,989 issued and outstanding as of
December 31, 1998, none issued and outstanding as of
December 31, 1997 18,780 --
Common stock, $.01 par, 10,000,000 shares
Authorized, 3,177,387 and 2,932,934 issued and
outstanding in 1998 and 1997, respectively 31,774 29,329
Additional paid-in capital 17,489,554 8,266,576
Note receivable from shareholder -- (15,938)
Deferred compensation (8,265) --
Warrants for common stock 108,275 --
Accumulated other comprehensive loss (17,644) (13,175)
Accumulated deficit (8,085,844) (4,204,698)
------------ ------------
Total stockholders' equity 9,536,630 4,062,094
------------ ------------
Total Liabilities and Stockholders' Equity $ 11,408,220 $ 5,654,200
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
9
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998 and 1997
1998 1997
(As Restated)
----------- -------------
Revenues $ 5,261,670 $ 5,060,890
----------- -------------
Product costs 2,352,122 2,083,372
Research & development 4,194,254 1,020,145
Marketing, sales, general and administrative 2,748,833 2,369,857
----------- -------------
9,295,209 5,473,374
----------- -------------
Loss from operations (4,033,539) (412,484)
Other income, net 161,477 451,451
----------- -------------
(Loss) income before income taxes (3,872,062) 38,967
Income tax provision 9,084 10,774
----------- -------------
Net (loss) income $(3,881,146) $ 28,193
Preferred stock beneficial conversion rights 2,683,587 --
----------- -------------
Net (loss) income applicable to common
shareholders $(6,564,733) $ 28,193
=========== =============
Per Share Information
Basic net (loss) income per common share $ (2.12) $ 0.01
=========== =============
Number of shares used in basic per share
Computation 3,099,813 2,652,089
=========== =============
Diluted net (loss) income per common share $ (2.12) $ 0.01
=========== =============
Number of shares used in diluted per share
Computation 3,099,813 2,837,804
=========== =============
See accompanying notes to consolidated financial statements.
10
<PAGE>
<TABLE>
XIOX CORPORATION and SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, and 1997
<CAPTION>
Note
Receivable Warrants For
Preferred Stock Common Stock Paid-in From Deferred Common
Shares Amount Shares Amount Capital Shareholder Compensation Stock
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,1996 - - 2,372,384 23,724 5,492,345 (27,188) - -
Comprehensive income
Net Income - - - - - - - -
Other comprehensive
loss, net of tax
Foreign currency
translation
adjustments - - - - - - - -
Comprehensive income
Common shares issued - - 574,400 5,744 2,817,911 - -
Common shares repurchased - - (15,000) (150) (46,725) - - -
Stock options exercised - - 1,150 11 3,045 - - -
Note receivable payment - - - - - 11,250 - -
-------------------------------------------------------------------------------------------------
December 31,1997 - - 2,932,934 29,329 8,266,576 (15,938) - -
Comprehensive loss
Net loss - - - - - - - -
Other comprehensive
loss, net of tax
Foreign currency
translation
adjustments - - - - - - - -
Comprehensive loss
Common shares issued - - 211,297 2,113 (2,113) - - -
Series A Preferred shares
issued, net of issuance
costs 1,907,989 19,080 - - 9,315,228 - - -
Stock options issued - - - - 12,798 - (10,665)
Amortization of deferred
compensation - - - - - - 2,400 -
Stock options exercised - - 3,156 32 5,340 - - -
Note receivable payment - - - - - 15,938 - -
Stock warrants issued - - - - (108,275) - - 108,275
Conversion of Series A
Preferred Stock to Common
Stock (30,000) (300) 30,000 300 - - - -
-------------------------------------------------------------------------------------------------
December 31,1998 1,877,989 18,780 3,177,387 31,774 17,489,554 - (8,265) 108,275
-------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive Accumulated
Income (Loss) Losses Deficit Total
--------------------------------------------------------
<S> <C> <C> <C> <C>
December 31,1996 - - (4,232,891) 1,255,990
Comprehensive income
Net Income 28,193 - 28,193 28,193
Other comprehensive
loss, net of tax
Foreign currency
translation
adjustments (13,175) (13,175) - (13,175)
==============
Comprehensive income 15,018
==============
Common shares issued - - - 2,823,655
Common shares repurchased - - - (46,875)
Stock options exercised - - - 3,056
Note receivable payment - - - 11,250
--------------------------------------------------------
December 31,1997 - (13,175) (4,204,698) 4,062,094
Comprehensive loss
Net loss (3,881,146) - (3,881,146) (3,881,146)
Other comprehensive
loss, net of tax
Foreign currency
translation
adjustments (4,469) (4,469) - (4,469)
==============
Comprehensive loss (3,885,615)
==============
Common shares issued - - - -
Series A Preferred shares
issued, net of issuance
costs - - - 9,334,308
Stock options issued - - - 2,133
Amortization of deferred
compensation - - - 2,400
Stock options exercised - - - 5,372
Note receivable payment - - - 15,938
Stock warrants issued - - - -
Conversion of Series A
Preferred Stock to Common
Stock - - - -
--------------------------------------------------------
December 31,1998 - (17,644) (8,085,844) 9,536,630
--------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
XIOX CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997
<CAPTION>
1998 1997
(As Restated)
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net (Loss) income $(3,881,146) 28,193
Adjustments to reconcile net (Loss) income
To Cash used in operations:
Depreciation and amortization 305,169 174,036
Gain on settlement of other receivables -- (15,737)
Minority interest in net loss (19,114) --
Change in operating assets and liabilities:
Accounts receivable, net 170,411 177,433
Other receivables 395,626 (366,778)
Inventories 41,716 (41,096)
Prepaid expense, deposits and other assets 240,393 (562,919)
Accounts payable and accrued expenses 295,236 29,774
Purchase deposits (8,850) 10,206
Deferred revenue (43,701) 194,651
----------- -----------
Net cash used in operating activities (2,504,260) (372,237)
----------- -----------
Cash flows from investing activities -
Acquisition of property, equipment and software (1,270,596) (237,953)
Cash flows from financing activities:
Proceeds from borrowings 42,473 --
Proceeds from stock issued to minority interest -- 127,776
Proceeds from sale of common stock 5,372 2,837,961
Proceeds from sale of preferred stock and warrants for
common stock 9,334,308 --
Repayment of stockholder note 15,938 --
----------- -----------
Net cash provided by financing activities 9,398,091 2,965,737
----------- -----------
Effect of exchange rate changes on cash 15,156 (13,175)
----------- -----------
</TABLE>
(continued)
12
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Years ended December 31, 1998 and 1997
1998 1997
(As Restated)
---------- ----------
Net increase (decrease) in cash and cash equivalents 5,638,391 2,342,372
Beginning cash and cash equivalents 2,633,860 291,488
---------- ----------
Ending cash and cash equivalents $8,272,251 $2,633,860
========== ==========
Supplemental Cash Flow Information:
Interest paid
$ 5,542 $ --
========== ==========
Income taxes $ 3,601 $ 13,294
========== ==========
Noncash financing activities:
Additional shares issued in connection
With the Flanders Language Valley Stock $ 2,113 $ --
========== ==========
Common stock received in settlement
of outstanding claims $ -- $ 46,875
========== ==========
Beneficial conversion rights in connection
with Series A preferred stock $2,683,587 $ --
========== ==========
See accompanying notes to consolidated financial statements.
13
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Summary of
Significant
Accounting
Policies
Xiox Corporation ("Xiox" or "the Company") is a Delaware
corporation engaged in developing, producing, and marketing
telephone management and call accounting systems. The
Company manufactures and sells products primarily through
distributors 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 and Deferred Revenue
Effective January 1, 1998, the Company adopted Statement of
Position (SOP) 97-2, "Software Revenue Recognition." Under
SOP 97-2, revenue from product sales is recognized when
evidence of the arrangement exists, delivery has occurred,
the fee is fixed or determinable, and collection is
probable. The Company provides reserves for estimated
returns of product sales and accrues for the estimated
costs of providing customer support when deemed necessary.
Under SOP 97-2, the Company is required to defer revenue
related to customer support and rate tariff table
subscriptions and to recognize this revenue ratably over
the period of the agreements. Support 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.
Prior to 1998, the Company recognized revenue in accordance
with SOP 91-1. Under SOP 91-1, revenue was recognized upon
shipment of the product provided there were no remaining
significant obligations and collection was probable.
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 of
high-quality money market instruments, commercial paper,
and certificates of deposit in the amounts of $8,272,251
and $2,633,860 as of December 31, 1998 and 1997,
respectively.
Inventories
Inventories are stated at the lower of first-in, first-out
cost or market.
Property, Equipment and Software
Property, equipment, and software are stated at cost.
Depreciation is computed using the straight line method
over the estimated useful lives of the assets, generally
three
14
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
to five years. Leasehold improvements are depreciated using
the straight line method over the shorter of the term of
the lease or economic useful life of the improvement.
Fair Value of Financial Instruments
The fair value of the Company's cash equivalents, accounts
receivable, notes receivable, accounts payable, and notes
payable approximate their respective carrying amounts.
Software Capitalization
In accordance with the Statement of Financial Accounting
Standards (SFAS) No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise
Marketed," the Company capitalizes its internal software
development costs after technological feasibility has been
established. Technological feasibility, in the Company's
circumstances, occurs when a working model is completed.
The Company believes its process for developing software is
essentially completed concurrent with the establishment of
technological feasibility, and, accordingly, no research
and development costs have been capitalized.
Purchased software with a benefit extending beyond one year
is capitalized. Purchased software is stated at cost and
amortized using the straight line method over the period of
benefit, generally three years.
Income taxes
Income taxes are accounted for using 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."
15
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Net Income (Loss) Per Share
Basic net income (loss) per common share is computed using
the weighted average number of shares of common stock
outstanding. Diluted net income (loss) per common share is
computed using the weighted-average number of shares of
common stock outstanding and, when dilutive, common share
equivalents using the treasury stock method.
<TABLE>
Net income applicable to common shareholders used to
calculate basic net income (loss) per common share was
identical to net income used to calculate diluted per share
for both years presented. Following is a reconciliation of
the shares used to calculate basic net income (loss) per
common share and diluted net income (loss) per common share
for 1998 and 1997.
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Weighted-average common shares used in
basic per share calculation 3,099,813 2,652,089
Incremental shares - stock options -- 79,778
Contingent shares - common stock issued in March
1998 pursuant to a 1997 agreement
(See Stockholders' Equity footnote) -- 105,937
-------------- -------------
Shares used in diluted per-share computations 3,099,813 2,837,804
============== =============
</TABLE>
Excluded from the computation of diluted loss per share for
1998 are warrants to acquire 50,000 shares of common stock,
1,877,989 shares of preferred stock which are generally
convertible to common stock on a one-to-one basis, 540,579
shares of stock options outstanding, and 211,297 contingent
shares outstanding January 1, 1998, through March 24, 1998,
because their effect would be anti-dilutive. Excluded from
the computation of diluted income per share for 1997 are
103,400 stock options at an exercise price greater than the
Company's average stock price as of December 31, 1997.
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. Revenues
and 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.
16
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Impairment of Long-Lived Assets
The Company reviews property and equipment for impairment
whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of property and equipment is measured by
comparison of its carrying amount to future net cash flows
the property and equipment are expected to generate. If
such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the
carrying amount of the property and equipment, if any,
exceeds its fair market value. To date, no adjustments to
the carrying value of the Company's long-lived assets have
been required.
Recently Adopted Accounting Standards
During 1998, the Company adopted the provisions of SFAS
No.131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS No. 131 establishes standards
for the manner in which public companies report information
about operating segments in annual and interim financial
statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 required entities to capitalize
certain costs related to internal-use software once certain
criteria have been met. The Company will be required to
adopt SOP 98-1 for the year ending December 31, 1999. The
Company expects that the adoption of SOP 98-1 will not have
a material impact on the Company's financial position,
results of operations, or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-5 requires all
start-up costs that were capitalized in the past to be
charged immediately to expense when SOP 98-5 is adopted.
The Company will be required to adopt SOP 98-5 for the year
ending December 31, 1999. The Company expects that the
adoption of SOP 98-5 will not have a material impact on its
financial position, results of operations, or cash flows.
In December 1998, the AICPA issued SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions." SOP 98-9 establishes the method of
recognizing revenue for certain multiple-element software
arrangements. The Company will be required to adopt SOP
98-9 for transactions entered into beginning January 1,
2000. The Company expects that the adoption of SOP 98-9
will not have a material impact on the Company's financial
position, results of operations, or cash flows.
17
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Other
Receivables
Other receivables as of December 31 consisted of the
following:
1998 1997
--------- -------
Patent interference settlement $ -- 425,000
Other 9,585 8,190
--------- -------
$ 9,585 433,190
========= ========
Inventories
Inventories consist primarily of purchased hardware
products (finished goods). Major classes of inventories as
of December 31 consisted of the following:
1998 1997
--------- -------
Purchased parts and components $ 103,102 142,866
Work in process 45,315 52,225
Finished goods 284,732 279,774
--------- -------
$ 433,149 474,865
========= =======
Property
And
Equipment
Property and equipment as of December 31 consisted of the
following:
1998 1997
---------- ----------
Office equipment $2,001,233 1,277,951
Furniture and fixtures 381,978 304,732
Leasehold improvements 292,569 --
Purchased software 414,867 236,243
---------- ----------
3,090,647 1,818,926
Less accumulated depreciation (1,644,670) (1,343,961)
---------- ----------
$1,445,977 474,965
========== ==========
18
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Deposits and
Other Assets
Deposits and other assets as of December 31 consisted of
the following:
1998 1997
--------- --------
Prepaid royalty payments $ 317,009 295,427
Other 19,636 198,970
--------- --------
$ 336,645 494,397
========= ========
Deposits and other assets include prepaid royalty
payments, which the Company amortizes based on the
number of units sold.
Bank Line
of Credit
The Company maintains a $1,000,000 line of credit
collateralized by eligible accounts receivable. The line
bears interest at prime plus 1.00% (8.75% as of December
31, 1998) and expires in May 1999. No amounts were
outstanding under the line as of December 31, 1998.
Lease
Commitments
Future minimum lease payments in excess of one year are as
follows:
Year ended December 31: Rental Payments
------------------------------------ ---------------
1999 $ 361,305
2000 244,512
2001 90,578
2002 90,578
2003 90,578
2004 90,578
Thereafter 98,126
----------------
$ 975,677
================
Total rent expense incurred on the Company's operating
leases was approximately $255,738, net of sublease income
of $110,145, for the year ended December 31, 1998, and
$221,260, net of sublease income of $97,579 for the year
ended December 31, 1997. Future lease obligations are
subject to cost-of-living adjustments beginning February 1,
2000.
19
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
Taxes
The provision for income taxes in 1998 and 1997 consisted
entirely of current state income taxes.
<TABLE>
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:
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Tax provision expense (benefit) $(1,316,501) 13,249
Net operating losses and
temporary differences for
which no benefit was realized 1,683,769 --
State income taxes, net of
Federal income tax benefit (105,774) 3,134
Research and development tax credits (169,759) --
Other, net (82,651) (5,609)
------------ ---------
Provision for income taxes $ 9,084 10,774
============ =========
</TABLE>
<TABLE>
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and
liabilities as of December 31, 1998 and 1997, are as
follows:
<CAPTION>
Deferred tax assets: 1998 1997
----------- -----------
<S> <C> <C>
Reserves and accruals $ 492,935 $ 472,991
Capitalized research and development costs 215,514 329,753
Net operating loss carry-forwards 2,356,630 751,856
Research tax credits and other 384,753 211,463
----------- -----------
Total gross deferred tax asset 3,449,832 1,766,063
Less valuation allowance (3,449,832) (1,766,063)
----------- -----------
Net deferred tax asset $ -- $ --
----------- -----------
</TABLE>
Federal and California tax laws impose substantial
restrictions on the utilization of net operating loss
carryforwards in the event of an "ownership change" for tax
purposes, as defined in Section 382 on the Internal Revenue
Code. The Company has not yet determined if an ownership
change has occurred. If such ownership change has occurred,
utilization of the net operating losses will be subject to
annual limitation in future years.
20
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended December 31, 1998 and 1997, the Company
has federal net operating losses of $6,000,000 and
$2,000,000, respectively, which will expire during the
years 2000 through 2018. For the years ended December 31,
1998 and 1997, the Company has California net operating
losses of $2,000,000 and $100,000, respectively, which will
expire in the years 2002 and 2003. The Company also has
available federal research tax credit carryforwards of
$340,000 and $230,000 as of December 31, 1998 and 1997. If
not utilized the federal credits will expire from the years
2005 through 2018. The Company also has available
California research tax credit carryovers of $90,000 and
$75,000 as of December 31, 1998 and 1997, respectively.
Stockholders'
Equity
During September, 1998, the Company entered into a Stock
Purchase and Investor Rights Agreement (the "Agreement")
with Intel Corporation ("Intel"), Flanders Language Valley
CVA, Zero Stage Capital and other private investors for the
private placement of 1,907,989 shares of the Company's
convertible Series A Preferred Stock (the "Series A
Preferred") at a purchase price of $5.00 per share.
Pursuant to this agreement, the Company received a total of
$9,334,308, net of issuance costs of $224,717, as of
December 31, 1998. In connection with this financing, the
Company issued warrants for 50,000 shares of common stock
at an exercise price of $6.31.
The Series A Preferred bears non-cumulative dividends at an
annual rate of 6% payable if and when declared by the
Company. The Series A Preferred Stock is convertible into
Common Stock on a 1:1 basis, subject to certain
antidilution provisions, on the date of issuance. The
purchase price of the Series A Preferred Stock was less
than the prevailing market price of the Company's common
stock resulting in a beneficial conversion feature of
$2,683,587, which has been reflected in the accompanying
statement of operations for the year ending December 31,
1998 as an increase in net loss applicable to common
shareholders.
In the event of a liquidation, dissolution or winding up of
the Company, the holders of the Series A Preferred will
receive, prior to any distribution to the holders of the
common stock, a liquidation preference entitling them to
receive an amount equal to the purchase price of the Series
A Preferred plus any declared but unpaid dividends.
Each share of the Series A Preferred has the number of
votes equal to the number of shares of common stock then
issuable upon its conversion into common stock. Although
the holders of the Series A Preferred will generally vote
together with the common stock and not as a separate
series, the consent of the holders of two thirds of the
outstanding shares of Series A Preferred is required to:
(1) alter or change any of the powers, preferences,
privileges, or rights of the Series A Preferred Stock; (2)
create any new class or series of shares having preferences
prior to the Series A Preferred Stock in any manner,
including, without limitation, as to dividends or
liquidation; (3) take any action that reclassifies any
outstanding shares into shares having preferences prior to
the Series A Preferred Stock in any manner, including,
without limitation, as to dividends or liquidation; or (4)
alter or change the Company's Certificate of Incorporation
in a manner that adversely affected the rights of the
Series A Preferred Stock.
The Company has certain rights, beginning one year after
the first closing, to redeem shares of the Series A
Preferred upon a registered public offering with gross
21
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
proceeds in excess of $15 million or when the closing
common stock price exceeds $15 per share for 15 consecutive
business days.
The holders of the Series A Preferred have been granted
certain registration rights and information rights,
including the right to be notified in advance of certain
corporate events. In addition, Intel and Zero Stage Capital
each have the right to appoint an observer to attend
meetings of the Board of Directors of the Company, and
committees thereof, subject to certain conditions.
Each holder of Series A Preferred has certain rights to
maintain its percentage ownership interest of the Company's
outstanding voting securities (on an as-converted basis).
During the first year following the closing, the Company
will not, without the prior written consent of the holders
of 66-2/3% of the outstanding shares of Series A Preferred
Stock, enter into any acquisitions in which the aggregate
consideration paid is more than 20% of the Company's voting
securities. In addition, Intel has certain additional
rights during the first two years following the closing.
On March 25, 1998, the Company issued to Flanders Language
Valley 211,297 shares of the Company's common stock as an
adjustment to a June 30, 1997 common stock purchase
agreement with Flanders Language Valley, in which Flanders
Language Valley invested $2,872,00 for the purchase of
574,400 shares of the Company's common stock. No further
adjustments will be made under this agreement.
Xiox Flanders N.V. ("Xiox Flanders") was incorporated in
Belgium pursuant to the agreement and is owned 94.9% by
Xiox and 5.1% by Flanders. The Company has committed to
fund Xiox Flanders with approximately $1,700,000 in 1999.
The actual amount of funding the Company will provide in
1999 will depend on the business needs of Xiox Flanders and
can be modified by a vote of the Board of Directors.
During 1997, the Company granted options to acquire 5,000
shares of the Company's common stock to a non-employee. The
options were valued using the Black-Scholes option-pricing
model, which resulted in deferred compensation of $12,798.
The deferred compensation expense is being amortized
ratably over the vesting period.
Employee
Stock
Options
The Company has adopted the 1994 and 1984 incentive stock
option plans that provide for granting of stock options
with exercise prices equal to the fair value of the
underlying common stock options at the date of grant. There
are 625,000 shares of common stock currently reserved for
issuance under the 1994 plan, of which 481,585 have been
granted and are outstanding as of December 31, 1998. 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
22
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
date of grant. A summary of transactions relating to
outstanding stock options is as follows:
Weighted
Average
Shares Options Exercise
Available Outstanding Price
--------- ----------- --------
Outstanding
as of December 31, 1996 21,821 241,479 $ 2.97
======== =======
Additional shares reserved 150,000 --
Options granted (108,300) 108,300 4.53
Options exercised -- (1,150) 2.66
Options canceled 11,429 (11,429) 3.18
-------- -------
Outstanding
as of December 31, 1997 74,950 337,200 3.45
======== =======
Additional shares reserved 275,000 --
Options granted (240,900) 240,900 6.43
Options exercised -- (3,156) 1.70
Options canceled 34,365 (34,365) 5.29
-------- -------
Outstanding
as of December 31, 1998 143,415 540,579 4.67
======== =======
Exercisable at
December 31, 1998 213,608 $ 3.08
Weighted-average fair value of
options granted during the
period at exercise price equal
to market price at grant date $ 3.11
Certain options may be exercised immediately upon grant but
are subject to the Xiox Corporation Stock Purchase
Agreement, which restricts transfers of the shares until
the shares are 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 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, 1998, no outstanding stock was subject
to the Stock Purchase Agreement.
23
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
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 common share data
as if the Company has elected to use the fair value
approach to account for the Company's 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, 1998 and 1997, would have been
as follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net (loss) income available to common
shareholder:
As reported $ (6,564,733) $ 28,193
Pro forma (6,784,671) (62,570)
Basic net (loss) income available per
common share:
As reported (2.12) 0.01
Pro forma (2.19) (0.02)
Diluted net (loss) income available per
common share:
As reported (2.12) 0.01
Pro forma (2.19) (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 1998. SFAS No. 123 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 1998 and 1997:
1998 1997
---- ----
Risk-free interest rate 5.1% 6.1%
Expected life 5 Years 5 Years
Expected volatility 47% 54%
Dividends None None
24
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
The following table summarizes information about stock
options outstanding as of December 31, 1998:
1998 Options Outstanding
<CAPTION>
Weighted-average remaining Weighted-average
Range of Exercise Prices: contractual life exercise price
------------------------- -------------------------- ----------------
<S> <C> <C> <C> <C>
$1.13 - 1.58 1.8 years $1.41
1.58 - 2.36 2.2 1.74
2.36 - 3.15 6.9 2.59
3.15 - 3.94 7.7 3.41
3.94 - 4.73 7.9 4.48
4.73 - 5.51 8.7 4.79
5.51 - 6.30 9.5 6.05
6.31 - 7.09 4.4 6.60
7.09 - 7.88 9.9 7.88
</TABLE>
Segment and
Geographic
Information
During 1998, the Company adopted the provisions of SFAS No.
131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS No. 131 establishes standards
for the reporting by public business enterprises of
information about operating segments, products and
services, geographic areas, and major customers. The
Company has two segments, telephone management products and
the development of a new product line that addresses the
combined telecom and datacom markets. Although the new
product line did not generated any revenue during 1998,
revenue is expected in the second half of 1999 concurrent
with product release. The two segments have been aggregated
because their long-term economic characteristics will be
similar. The nature of the product, the production process,
type of customer, and methods of distribution will also be
similar. Additionally, there were no unallocated corporate
expenses in 1998 and 1997.
The revenues for Xiox products are as follows:
1998 1997
----------- ---------
Telephone management products $ 3,224,959 3,191,008
Service and support 2,036,711 1,869,882
----------- ---------
Total revenue $ 5,261,670 5,060,890
=========== =========
25
<PAGE>
XIOX CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's assets are primarily located in the United
States and are not allocated to any specific segment. The
Company does not measure the performance of its segments
based on any asset-based metrics; therefore, segment
information is not provided for assets.
The Company has not separately reported segment information
on a geographic basis, as international sales have not been
material for 1998 and 1997.
The Company sells directly to end users, original equipment
manufacturers, and through telephone dealer arrangements.
In 1997, two customers accounted for 20% of the revenue and
27% of accounts receivable as of December 31, 1997. In
1998, the same two customers accounted for 22% of the
revenue and 44% of accounts receivable as of December 31,
1998.
Transactions
with Related
Parties
In 1991, the Company loaned $100,000 to an employee in
return for a promissory note secured by a second deed of
trust. The 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
Benefit
Plans
The Company has adopted the Xiox Corporation Employee
Profit Sharing Plan ("Plan"). The Plan covers all regular,
full-time employees, excluding officers, who have been
employed by Xiox 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 who 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
1998 or 1997.
The Company sponsors a defined contribution plan covering
substantially all of the Company's employees. Under the
plan, employees may elect to contribute up to 20% of their
salaries, not to exceed an annual maximum of $10,000 in
1998. As the Company has no current plans to participate in
a matching contribution program, no Company contributions
were accrued or expensed during 1998 and 1997.
26
<PAGE>
Restatement
The Company's consolidated financial statement as of
December 31, 1998 have been restated to give effect to a
beneficial conversion right issued in connection with the
Company's Series A Preferred Stock offering. The effect of
the restatement is as follows:
For the year ended As previously
December 31, 1998 reported As restated
---------------------------- ------------- -------------
Preferred Stock benefical
Coversion right $ -- $ 2,683,587
Net (loss) income applicable
to Common shareholders $ (3,881,146) (6,564,773)
Basic net (loss) income per
Common share (1.21) (2.12)
Basic net (loss) income per
Common share (1.21) (2.12)
27
<PAGE>
Independent
Auditors'
Report
The Board of Directors
Xiox Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets
of Xiox Corporation and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of
operations (as restated), stockholders' equity, and cash
flows (as restated) 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, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The Company restated its financial statements as described
in the last Note to the consolidated financial statements.
KPMG LLP
Mountain View, California
February 19, 1999, except as to the last note to the
consolidated financial statements, which is as of February
11, 2000.
28
<PAGE>
Stock
Trading
Information
The Company's common stock is traded on the
over-the-counter market on NASDAQ under the symbol XIOX.
The Company completed its 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 1998
Fourth Quarter 8.62 6.25
Third Quarter 7.75 5.25
Second Quarter 6.00 5.25
First Quarter 5.50 4.25
Fiscal 1997
Fourth Quarter 5.00 4.00
Third Quarter 5.00 3.75
Second Quarter 5.25 3.00
First Quarter 3.25 2.75
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, 1998, there were approximately 60
stockholders of record and 300 beneficial stockholders of
common stock of Xiox. The Company has never paid dividends
and has no present plans to do so. On March 25, 1999, the
closing bid price was $14.00 per share.
29
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS CORPORATE OFFICES
<S> <C>
Atam Lalchandani, Director and 577 Airport Boulevard, Suite 700
Assistant 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 Patteelstraat 24
CEO Flanders Language Valley Management N.V. 8900 Ieper
Belgium
William H. Welling, Director
Chairman and Chief Executive Officer
LEGAL COUNSEL
Wayne F. Benoit
Vice President of Business Development Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Robert W. Boyd Palo Alto, CA 94304
Vice President of Operations
Anthony DiIulio TRANSFER AGENT
Vice President of Sales
Chase Mellon Shareholder Services
Melanie D. Johnson Los Angeles, CA
Vice President of Finance, Chief Financial
Officer, and Corporate Secretary Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
David Y. Schlossman Palo Alto, CA 94304
Vice President of Product Marketing
Allan W. White FORM 10-KSB
Vice President of Marketing Stockholders will be provided, without
charge, a copy of Xiox's Form
10-KSB Annual Report for 1998 upon
written request to:
Xiox Corporation
577 Airport Boulevard, Suite 700
INDEPENDENT ACCOUNTANTS Burlingame, CA 94010
KPMG LLP
500 E. Middlefield Rd. Visit our Web Site at:
Mountain View, CA 94043 http://www.xiox.com
</TABLE>
30
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, 333-29703, and 333-57149)
on Form S-8 and No. 333-68435 on Form S-3 of Xiox Corporation of our report
dated February 19, 1999, relating to the consolidated balance sheets of Xiox
Corporation and subsidiaries as of December 31, 1998 and 1997, 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, 1998, annual report on Form 10-KSB/A of Xiox Corporation.
/s/ KPMG LLP
-----------------------------
KPMG LLP
Mountain View, California
February 18, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM the Company's
Condensed 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,272,251
<SECURITIES> 0
<RECEIVABLES> 856,869
<ALLOWANCES> 142,669
<INVENTORY> 433,149
<CURRENT-ASSETS> 9,525,598
<PP&E> 3,090,647
<DEPRECIATION> 1,644,670
<TOTAL-ASSETS> 11,408,220
<CURRENT-LIABILITIES> 1,711,234
<BONDS> 0
0
18,780
<COMMON> 31,774
<OTHER-SE> 9,486,076
<TOTAL-LIABILITY-AND-EQUITY> 11,408,220
<SALES> 5,261,670
<TOTAL-REVENUES> 5,261,670
<CGS> 2,352,122
<TOTAL-COSTS> 9,295,209
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,542
<INCOME-PRETAX> (3,872,062)
<INCOME-TAX> 9,084
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,881,146)
<EPS-BASIC> (2.12)
<EPS-DILUTED> (2.12)
</TABLE>
