<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED APRIL 29, 1995
COMMISSION FILE NUMBER 0-15487
XYLOGICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2669596
(State of Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification
Number)
53 Third Avenue, Burlington, Mass. 01803
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (617) 272-8140
None
(Former name, former address and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of April 29, 1995.
Common Stock, par value $.10 5,354,580
(Titles of each class) (Number of Shares)
<PAGE>
<PAGE>2
XYLOGICS, INC.
TABLE OF CONTENTS
Page
Part I - FINANCIAL INFORMATION (UNAUDITED):
Consolidated balance sheets at
April 29, 1995 and October 31, 1994 3
Consolidated statements of operations
for the three-and six-month periods ended
April 29, 1995 and April 30, 1994 4
Consolidated statements of cash flows
for the six-month periods ended
April 29, 1995 and April 30, 1994 6
Notes to consolidated financial
statements 8
Management's discussion and analysis
of financial condition and results
of operations 12
Part II - OTHER INFORMATION 19
<PAGE>3
<TABLE>
XYLOGICS, INC.
PART I - FINANCIAL INFORMATION - CONSOLIDATED BALANCE SHEETS
($000s)
<S> <C> <C>
ASSETS Apr 29, 1995 Oct 31, 1994
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 8,914 $10,834
Accounts Receivable 12,295 9,070
Refundable Income Taxes 333 608
Inventories 6,334 5,971
Prepaid Expenses 394 159
Prepaid Income Taxes 2,105 1,628
________ ________
Total Current Assets $30,375 $28,270
________ ________
Equipment and Improvements, at cost:
Equipment $14,330 $13,215
Furniture 481 550
Leasehold Improvements 611 694
________ ________
$15,422 $14,459
Less: Accumulated Depreciation
and Amortization (12,452) (11,932)
________ ________
$ 2,970 $ 2,527
________ ________
Other Assets, net $ 4,921 $ 4,250
________ ________
$38,266 $35,047
======== ========
<PAGE>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts Payable $ 4,562 $ 2,696
Accrued Expenses 6,923 4,699
________ ________
Total Current Liabilities $11,485 $ 7,395
________ ________
Deferred Income Taxes $ 2,893 $ 2,679
________ ________
Commitments - -
Stockholders' Investment:
Common Stock, $.10 Par Value -
Authorized -- 25,000,000 shares.
Issued -- 5,357,080 shares at
April 29, 1995 and 5,028,032 at
October 31, 1994 $ 536 $ 503
Additional Paid-in Capital 17,739 14,181
Retained Earnings 5,661 10,355
Cumulative Translation Adjustment 2 -
Treasury Stock - 2,500 shares
at April 29, 1995 and 4,776
shares at October 31, 1994 ( 50) ( 66)
________ ________
Total Stockholders' Investment $23,888 $24,973
________ ________
$38,266 $35,047
======== ========
See accompanying notes to the consolidated financial statements.
/TABLE
<PAGE>
<PAGE>4
<TABLE> XYLOGICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in $000s except per share data)
Three Months Ended Six Months Ended
<S> <C> <C> <C> <C>
4/29/95 4/30/94 4/29/95 4/30/94
Net Sales $15,513 $12,052 $30,058 $23,376
Cost of Goods Sold 8,003 6,261 15,574 12,038
________ ________ ________ ________
Gross Profit $ 7,510 $ 5,791 $14,484 $11,338
________ ________ ________ ________
Operating Expenses
Engineering, R&D $ 1,629 $ 1,449 $3,156 $ 2,850
Sales and Marketing 3,078 2,144 5,793 4,241
General
and Administrative 1,136 1,044 2,283 2,075
Write-off of
In-process R&D 6,741 - 6,741 -
Write-off of
Impaired Assets 921 - 921 -
________ ________ ________ ________
Total Expenses $13,505 $ 4,637 $18,894 $ 9,166
________ ________ ________ ________
Income (Loss)
from Operations ($5,995) $1,154 ($4,410) $ 2,172
Interest Income, Net 161 57 287 117
Foreign Exchange
Gain (Loss) (4) - (15) (9)
________ ________ ________ ________
Income (Loss)
Before Income Taxes ($5,838) $ 1,211 ($4,138) $ 2,280
Provision for Income Taxes 46 448 556 844
________ ________ ________ ________
Net Income (Loss) ($5,884) $ 763 ($4,694) $ 1,436
======== ======== ======== ========
Primary Earnings
(Loss) Per Share ($1.14) $.14 ($.93) $.27
======== ======== ======== ========
Fully Diluted Earnings
(Loss) Per Share ($1.14) $.14 ($.93) $.27
======== ======== ======== ========
<PAGE>5
Weighted Average Common Shares 5,148 - 5,074 -
Weighted Average Common
and Common Equivalent
Shares Outstanding
Primary 5,148 5,326 5,074 5,290
Fully Diluted 5,148 5,416 5,074 5,373
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>6
<TABLE>
XYLOGICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
($000s)
Six Months Ended
<S> <C> <C>
4/29/95 4/30/94
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($4,694) $ 1,436
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization 1,583 1,037
Deferred (prepaid) income taxes (263) 303
Changes in assets and liabilities,
excluding Scorpion Logic Ltd. Acquisition
Refundable income taxes 275 -
Accounts receivable (2,185) (1,071)
Inventories 150 (1,156)
Prepaid expenses (223) 7
Accounts payable 1,368 377
Accrued expenses 1,817 (405)
Accrued income taxes (13) 224
________ ________
Net cash provided by (used for)
operating activities ($2,185) $ 752
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements ($ 923) ($ 578)
Capitalization of software development costs (954) ( 722)
Decrease in other assets 6 197
Purchase of intangible assets - ( 5)
Investing activities related to Scorpion
Logic Ltd. Acquisition
Scorpion Logic NBV, less cash acquired (612) -
Purchase of intangible assets (1,700) -
Write-off of impaired assets 921 -
________ ________
Net cash used for investing activities ($3,262) ($1,108)
________ ________
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net of related expenses $ 785 $ 439
Issuance of common stock to acquire
Scorpion Logic Ltd. Acquisition 3,157 -
Purchase of treasury stock (335) (662)
Decrease in short-term debt, related to
Scorpion Logic Ltd. Acquisition (82) -
Cumulative Translation Adjustment 2 -
________ ________
Net cash provided by (used for)
financing activities $ 3,527 ($ 223)
<PAGE>7 ________ ________
DECREASE IN CASH AND CASH EQUIVALENTS ($ 1,920) ($ 579)
CASH AND CASH EQUIVALENTS, beginning of period $10,834 $ 9,033
________ ________
CASH AND CASH EQUIVALENTS, end of period $ 8,914 $ 8,454
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 262 $ 413
Cash paid for interest - -
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>8
XYLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned
subsidiaries. All material intercompany balances and transactions
have been eliminated. On April 20, 1995 the Company acquired
Scorpion Logic Limited and its wholly owned subsidiary, Infinite
Networks, Limited (Note 9). The accompanying balance sheet
includes the assets and liabilities of Scorpion Logic Limited at
April 29, 1995. This transaction was accounted for as a
purchase, and accordingly, the statement of operations includes
Scorpion Logic's results of operations from the date of
acquisition, April 20, 1995, through the quarter ending April 29,
1995. Based on unaudited data, the following table presents on a
pro forma basis selected financial information for the Company
and Scorpion Logic Ltd. assuming the companies had been combined
at the beginning of the period presented.
<TABLE>
Xylogics, Inc.
Scorpion Logics, Limited
Infinite Networks, Limited
Pro Forma Condensed Statements of Operations
For the Six Months Ended
(in $000s except per share data)
<S> <C> <C>
April 29, 1995 April 30, 1994
(Unaudited)
Net Sales $32,438 $24,062
Net Loss ($4,237) ($5,706)
Net Loss Per Share ($.80) ($1.14)
Weighted Average 5,306 5,018
Shares Outstanding
</TABLE>
2. The consolidated financial statements as of April 29,
1995 and for the three-and six-month periods ended April 29, 1995
and April 30, 1994 are unaudited, but include all adjustments
(consisting of normal, recurring adjustments) that the Company
considers necessary for a fair presentation of such interim
financial statements. The results of operations for the three-
and six-month periods ended April 29, 1995 are not necessarily
indicative of the results for the entire year. The consolidated
financial statements and notes are presented as permitted by Form
10-Q and do not contain certain information included in the
Company's consolidated annual financial statements and notes.
3. Inventories are stated at the lower of cost (first-in,
first-out) or market and include materials, labor and
manufacturing overhead. Inventories consist of the following:
<PAGE>9
<TABLE>
<S> <C> <C>
4/29/95 10/31/94
($000's)
Purchase parts
and materials $2,427 $2,295
Work-in-process and
finished goods 3,907 3,676
$6,334 $5,971
</TABLE>
4. Net loss per share is based on the weighted average
number of shares of common stock outstanding during the period.
Common stock equivalents are not considered in the computation of
net loss per share, as the result would be antidilutive. Net
income per share is based on the weighted average number of
primary and fully diluted shares of common stock and common stock
equivalents (stock options) outstanding during the period.
5. On November 4, 1994, the Company declared a two-for-one
stock split of the Company's common stock effected as a 100%
stock dividend to shareholders of record on November 18, 1994.
The distribution of the dividend was completed on December 2,
1994. All share and per share amounts have been restated to
reflect the two-for-one stock split.
6. For the quarter ended April 29, 1995, the Company had
sales to three customers that each represented more than 10% of
the Company's total sales for the quarter. The Company had sales
to the first customer of approximately $2,212,000 (14% of net
sales) in the second quarter of 1995. During the same quarter of
1994, sales to this customer were $1,311,000 (11% of net sales).
Sales to a second customer for the second quarter of 1995 were
approximately $1,771,000 (11% of net sales). Sales to this same
customer in the second quarter in 1994 were $434,000 (4% of net
sales). Sales to a third customer for the second quarter of 1995
were approximately $1,672,000 (11% of net sales) as compared to
sales to this customer in the second quarter of 1994 of
$1,271,000 (11% of net sales).
For the first half of 1995, the Company had sales to two
customers that represented more than 10% of the Company's sales
for the first six months of 1995. Sales to the first customer
were $4,957,000 (17% of net sales) compared to sales for this
same customer in 1994 of $3,348,000 (14% of net sales). Sales to
a second customer for the first half of 1995 were $3,590,000 (12%
of net sales) compared to sales to this same customer in 1994 of
$2,787,000 (12% of net sales).
<PAGE>10
7. The Company capitalizes certain computer software
development costs in accordance with Statement of Financial
Accounting Standards No. 86 (SFAS No. 86). These costs are
amortized on a straight line basis over two years beginning at
the time of the initial shipment to customers of the related
products. Amortization expense recorded for the three-month
periods ending April 29, 1995 and April 30, 1994 was
approximately $343,000 and $173,000 respectively, and is
reflected in cost of goods sold. During the second quarter of
1995 and 1994, approximately $514,000 and $419,000, respectively,
of certain software development costs were capitalized in
accordance with SFAS No. 86. For the first six months of fiscal
1995 and 1994, amortization expenses were $630,000 and $313,000,
respectively. In addition, as a result of the acquisition of
Scorpion Logic, $58,000 of previously capitalized software
development cost was written-off as an impaired asset in the
second quarter of fiscal 1995. The unamortized balance of these
capitalized costs at April 29, 1995 and April 30, 1994 is
approximately $2,534,000 and $1,721,000 respectively, and is
included in other assets.
8. In July 1994, the Company completed payment for the
acquisition of certain Novell/IPX remote access and dial-up
routing technology, as well as the LANmodem product line from
Microtest, Inc. of Phoenix, Arizona. The fixed and variable
components of the acquisition price totaled $1,573,000. The
Company also paid Microtest approximately $600,000 for LANmodem
inventory in the first quarter of 1994.
In the first quarter of 1995, the Company began amortizing
the Novell/IPX remote access and dial-up routing technology as a
result of initial shipments. The amortization expense for the
second quarter of fiscal 1995 was approximately $144,000 and
$287,000 for the first six months of 1995. This amortization
expense is reflected in engineering, research and development
expenses. As a result of the acquisition of Scorpion Logic, the
remaining balance of the Novell/IPX technology acquired from
Microtest was written off as an impaired asset in the amount of
$863,000 in the second quarter of 1995.
9. On April 20, 1995 the Company acquired all of the issued
capital stock of Scorpion Logic Limited, a developer of high-
speed, intelligent ISDN "on-demand" routing systems, and its
wholly owned subsidiary, Infinite Networks, Limited, each a
private company limited by shares and incorporated in England and
Wales. Scorpion Logic will be combined with Infinite Networks
and will become a separate business unit of Xylogics.
Scorpion Logic was acquired for a combination of 244,000 shares
of Xylogics common stock, par value $.10, and approximately
$4,800,000 in cash. The total cost of the acquisition includes
the purchase price of $9,263,000, and a charge to earnings for
<PAGE>11
$921,000 for Xylogics intangible assets impaired as a result of
the acquisition.
The acquisition was accounted for as a purchase in accordance
with Accounting Principles Board Opinion No. 16 (APB 16). The
purchase price exceeded the book value of the net assets of
Scorpion Logic by $8,441,000, which was allocated principally to
in-process research and development for $6,741,000 and was
charged to earnings in the second fiscal quarter ended April 29,
1995. The $6,741,000 represents the appraised value of in-
process research and development of primary rate ISDN technology
and other ISDN routing technology under development in which
technological feasibility has not been established. The balance
of the purchase price was allocated as follows:
<TABLE>
<S> <C>
Product Line $ 600,000
IPX Technology 400,000
Trademark and customer lists 300,000
Goodwill 400,000
----------
$1,700,000
==========
</TABLE>
The product line and IPX technology are being amortized, for
financial accounting purposes, over a two and three-year period,
respectively, commencing in the third fiscal quarter of 1995.
The trademark and customer lists and goodwill are being amortized
over a ten-year period commencing in the third fiscal quarter of
1995.
<PAGE>12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second Quarter of Fiscal 1995 Compared to Second Quarter of
Fiscal 1994
Net Sales: Net sales for the second quarter of 1995 increased by
$3,461,000 or 29% as compared to the second quarter of 1994. The
increase was attributable to the higher volume of products
shipped from its networking product line, and a slight increase
in sales of the Company's controller products. The Company
acquired Scorpion Logic Ltd. on April 20, 1995 and reported an
insignificant amount of revenue resulting from this acqusition in
its quarter ended April 29, 1995.
Net sales to resellers increased $1,800,000 or 36% and sales to
OEMs increased $1,661,000 or 24% in the second quarter of 1995 as
compared to the second quarter of 1994. The $1,800,000 growth in
sales to resellers consisted primarily of a $1,925,000 increase
in sales of networking products, reflecting a 40% growth over the
previous year, offset by a decrease of $125,000 in sales of the
controller product, reflecting a 66% decrease from the previous
year. The $1,661,000 increase in sales to OEMs consisted of a
$1,374,000 increase in sales of networking products, primarily
the Micro Annex hub boards, and a $287,000 increase in sales of
the controller product.
Networking revenue increased $3,299,000 or 32% in the second
quarter of 1995 from the second quarter of 1994. As a percentage
of total revenue, networking revenue increased from 85% in the
second quarter of 1994 to 87% in the second quarter of 1995.
Controller revenues increased $161,000 in the second quarter of
1995 compared to the second quarter of 1994. This increase was
due to an increase in sales of the newer generation Multibus II
product to our largest international OEM.
Revenue grew in both the domestic and international markets. Net
domestic sales in the second quarter of 1995 increased $1,449,000
or 17% from the second quarter of 1994. Domestic sales
represented 63% of total revenue as compared with 69% a year ago.
The increase in domestic revenue was attributable to a 24%
increase in networking revenue offset by a 33% decrease in
controller sales. The domestic OEM channel grew 11% primarily due
to shipments of custom hub boards. The domestic reseller channel
grew 28% primarily due to sales of the new Remote Annex product
line and an increase in sales of the Micro Annex. International
sales represented 37% of total revenue as compared to 31% a year
ago. The increase in international revenue was attributable to an
increase in the networking sales of the new Remote Annex product
line and an increase in controller revenues of the newer
<PAGE>13
generation Multibus II product to our largest OEM. The
international reseller channel grew 48% and the international OEM
channel grew 62%.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new
product introductions. The Company's future success depends upon
its ability to enhance its existing products and to introduce new
products and features to meet and adapt to changing customer
requirements and emerging technologies. The Company will be
required, therefore, to invest significant amounts in marketing
and research and development. Because of these and other
factors, including those discussed below, there can be no
assurance that the Company will be able to continue its growth in
revenues and sustain its profitability on a quarterly or annual
basis.
The Company does not require resellers to carry inventory. The
only exception is Westcon, Inc., a two-tier distributor who
carries inventory for its own resellers. Therefore, the
Company's ability to fill orders within a seven day period is
critical to the Company's overall success. The Company's OEM
customers do carry inventory; however, just-in-time inventory
procurement and management practices are generally applied, and
our customers, both OEMs and resellers, are demanding shorter
lead-times to obtain product. This adds a significant element of
risk, as the Company is required to anticipate what products will
be required for sale before any firm orders or forecasts are
received from the customer. In addition, over one half of each
quarter's revenue is typically booked in the second half of each
fiscal quarter and is shipped in the last month of the quarter.
These factors require the Company to carry more inventory and
raise the risk that the Company will not properly forecast the
mix or timing of when actual sales are made. This trend is
expected to continue over the foreseeable future. Westcon is also
able to do stock rotation on up to 15% of its purchases over the
last 90 days. The inventory exchanged by Westcon is unused and
will be resold to other customers.
Gross Profit: Gross profit as a percentage of sales was 48% in
the second quarter of 1995 and 1994. Gross profit as a percentage
of sales remained the same due to the fact that the impact of
higher networking volumes manufactured and shipped was offset by
higher obsolescence provisions for older generation products and
higher FASB 86 software amortization. Gross profit margins on
networking products increased slightly to 49% in the second
quarter of 1995 as compared to 48% in the same quarter of 1994,
as a result of higher margins achieved in the reseller channel
and shipments of the new Remote Annex product line which yields
higher margins. Gross profit margins on the controller product
line declined to 44% in the second quarter of 1995 from 46% for
the same quarter of 1994 due to a change in product mix toward
newer, lower margin products.
<PAGE>14
Operating Expenses:
Engineering, research and development expenses were $1,629,000
during the second quarter of fiscal 1995, reflecting an increase
of $180,000 or 12% over the same period in fiscal 1994. As a
percent of revenue, these expenses decreased from 12% in the
second quarter of 1994 to 10.5% in the second quarter of 1995.
Most of the growth in expenses was due to an increase in the
labor force and software consulting for our networking product
line. Partial funding is provided by several of the Company's
OEMs to cover some of the networking development costs. The 1995
and 1994 second quarter expenses do not include the
capitalization of $514,000 and $419,000, respectively,
capitalized pursuant to Statement of Financial Accounting
Standards No. 86 (SFAS No. 86). Engineering, research and
development expenses also exclude $343,000 and $173,000 of
amortization expense of previously capitalized expenses pursuant
to SFAS No. 86 which appears in cost of sales.
Sales and marketing expenses were $3,078,000 during the second
quarter of 1995, reflecting an increase of $934,000 or 44% over
the same period in 1994. As a percent of revenue, these expenses
increased from 18% in the second quarter of 1994 to 20% in the
second quarter of 1995. The growth in spending was primarily
attributable to an increase in the labor force and increased
sales promotional activities.
General and administrative expenses were $1,136,000 during the
second quarter of 1995, reflecting an increase of $92,000 or 9%
from the same period in 1994. As a percentage of sales, the
expenses decreased from 9% in the second quarter of 1994 to 7% in
the same quarter of 1995. The increase in spending was primarily
due to payroll related expenses.
Write-off of in-process research and development was $6,741,000
representing the appraised value of in-process research and
development of primary rate ISDN technology and other ISDN
routing technology under development in which technological
feasibility has not been established.
Write-off of impaired assets represents Xylogics intangible
assets impaired as a result of the acquisition. These assets
were reflected as other assets on Xylogics balance sheet prior to
the acquisition.
The Company reported a net loss for the second quarter of fiscal
1995, of $5,885,000 or $1.14 per share based on 5,148,000
weighted average shares outstanding. The loss reflects pretax
charges of $6,741,000 for acquired in-process research and
development as a result of the Scorpion Logic Ltd. acquisition,
and 921,000 for the write-off of Xylogics intangible assets,
impaired as a result of this acquisition (see note 9).
<PAGE>15
The Company has targeted the networking market as the focus of
its development efforts and has carefully restricted any
resources which are devoted to the controller business. As a
result, the controller products continue to generate a greater
share of the Company's income than might normally be expected.
Interest Income: Net interest income was $161,000 in the second
quarter of 1995 as compared to $57,000 during the same period in
fiscal 1994. Higher cash balances and higher interest rates led
to the increase in interest income.
Foreign Exchange and Translation Gain (Loss): The Company
incurred an insignificant foreign exchange loss of $4,000 in the
second quarter of 1995. There was no foreign exchange loss in
the second quarter of 1994. The Company records currency gains
or losses when translating the financial statements of the
Company's foreign subsidiaries in accordance with Statement of
Financial Accounting Standards No. 52 (SFAS No. 52).
Income Taxes: The provision for income taxes for the second
quarter ended April 29, 1995 takes into effect the fact that
$5,992,000 of the $6,741,000 write-off of in-process research and
development is not tax deductible. Therefore, the Company
provided income taxes at a 30% rate based on pretax income of
$153,000 (adjusted for the non-deductible write-off). The
Company's effective federal and state income tax rate during the
second quarter ended April 29, 1994 was 37%.
First Six Months of Fiscal 1995 Compared to the First Six Months
of Fiscal 1994
Net Sales: Net sales for the six months ended April 29, 1995
increased $6,682,000 or 29% as compared to the first six months
of 1994. The increase was attributable to a higher volume of
products shipped from the networking product line, offset
slightly by a decline in sales of the Company's controller
products.
In the first six months of 1995, net domestic sales increased
$2,939,000 or 19% and international sales increased $3,743,000 or
48% as compared to the first six months of 1994. Domestic sales
represented 62% of total revenue as compared to 67% a year ago.
The increase in domestic revenue was attributable to an increase
of $3,686,000 or 27% in networking revenues offset by a $747,000
or 40% decrease in controller revenues. The domestic OEM and
reseller channel grew 5% and 45% respectively, as compared to the
first six months of 1994. International sales represented 38% of
total revenue as compared to 33% a year ago. The increase in
international sales was attributable to an increase of $2,940,000
or 51% in networking revenues and an increase of $803,000 or 41%
in controller revenues. The international reseller and OEM
<PAGE>16
channels grew 56% and 42%, respectively, in the first six months
of 1995 as compared to the same period in 1994.
Net sales to resellers and OEMs increased $4,406,000 or 49% and
$2,276,000 or 16%, respectively, from the first six months of
1994. The $4,406,000 growth in sales to resellers consisted of a
$4,571,000 increase in sales of networking products partially
offset by a decrease of $164,000 in sales of controller products.
The $2,276,000 growth in sales to OEMs consisted of a $2,055,000
increase in sales of networking products coupled with an increase
of $221,000 in sales of controller products.
Networking revenue increased $6,626,000 or 34% in the first six
months of 1995 from the first six months of 1994. As a percentage
of total revenue, networking increased from 84% in the first six
months of 1994 to 87% in the first six months of 1995. These
increases were achieved through incremental sales of the Annex
family of terminal and communication servers through both the
domestic and international OEM and reseller channels. Controller
revenues increased $56,000 in the first six months of 1995 as
compared to the first six months of 1994. A significant increase
in international sales of a custom developed Multibus II was
sufficient to offset declines across the rest of the controller
product lines.
Gross Profit: Gross profit as a percentage of sales was 48.2% in
the first six months of 1995 as compared to 48.5% in the first
six months of 1994. Gross profit was unfavorably impacted by
higher product start-up expenses, increased FASB 86 amortization,
and increased obsolescence provisions for older networking
products, partially offset by higher volumes manufactured and
shipped. Gross profit margins on networking products remained the
same at 49% in the first six months of 1995 as compared to the
first six months of 1994. Gross profit margins on the controller
product line declined to 44% in the first six months of 1995 from
47% for the same quarter of 1994 due to a change in product mix
toward newer, lower margin products and due to increased
obsolescence provisions.
Operating Expenses:
Engineering, research and development expenses were $3,156,000
during the first six months of fiscal 1995, reflecting an
increase of $306,000 or 11% over the same period in 1994. As a
percent of revenue, engineering expenses decreased from 12.2% in
the first six months of 1994 to 10.5% in the first six months of
1995. The increase in spending was primarily due to an expanding
labor force and additional software consultants to support
continued development efforts within the Company's networking
product line. Partial funding is provided by several of the
Company's OEMs to cover networking development costs. Offsetting
the increase in spending is the capitalization of software
<PAGE>17
development costs, which totaled $954,000 and $723,000 in the
first six months of fiscal 1995 and 1994, respectively,
capitalized pursuant to Statement of Financial Accounting
Standards No. 86 (SFAS No. 86). Engineering, research and
development expenses also exclude amortization expense of
$630,000 and $313,000 in the first six months of fiscal 1995 and
1994, respectively. Amortization of previously capitalized
engineering expenses are included in cost of sales.
Sales and marketing expenses were $5,793,000 during the first six
months of fiscal 1995, reflecting an increase of $1,552,000 or
37% over the same period in fiscal 1994. The increase was due to
an increase in sales and marketing labor expenses and increased
sales promotional activities.
General and administrative expenses were $2,283,000, reflecting
an increase of $208,000 or 10% over the same period in fiscal
1994. As a percentage of revenue, these expenses decreased from
9% in the first six months of 1994 to 8% in the first six months
of 1995. The increase in spending was primarily due to payroll
related expenses and an enhanced investor relations program.
The Company has targeted the networking market as the focus of
its development efforts and has carefully restricted any
resources which are devoted to the controller business. As a
result, the controller products continue to generate a greater
share of the Company's income than would be expected from the
amount of revenue realized.
Interest Income: Net interest income was $287,000 in the first
six months of fiscal 1995 as compared to $117,000 during the same
period of fiscal 1994. The increase of $170,000 or 145% was due
to higher interest rates in fiscal 1995 as compared to fiscal
1994, coupled with higher invested cash balances in fiscal 1995
as compared to fiscal 1994.
Foreign Exchange and Translation Gain (Loss): The Company
incurred a foreign exchange loss of $15,000 in the first six
months of 1995 as compared to a $9,000 loss in the same period of
fiscal 1994. The Company records foreign currency gains and
losses when translating the financial statements of the Company's
foreign subsidiaries in accordance with Statement of Financial
Accounting Standards No. 52 (SFAS No. 52).
Income Taxes: The provision for income taxes for six month
period ended April 29, 1995 takes into effect the fact that
$5,992,000 of the $6,741,000 write off of in-process research and
development is not tax deductible. Therefore, the Company
provided income taxes at a 30% rate based on pretax income of
$1,854,000 (adjusted for the non-deductible write-off). The
Company's effective federal and state income tax rate during the
second quarter ended April 29, 1994 was 37%.
<PAGE>18
Liquidity and Capital Resources:
At April 29, 1995, the Company had cash and cash equivalents of
approximately $8,914,000 which represents a decrease of
$1,919,000 from October 31, 1994. On April 20, 1995 the Company
acquired Scorpion Logic Limited for approximately $4,800,000 in
cash and 244,000 shares of Xylogics common stock (see note 10).
Accounts receivable increased, reflecting the higher volume of
revenue shipments in the second quarter ending April 29, 1995.
Inventories increased $363,000 in the first six months of 1995,
in order to accommodate the lack of visibility in customer orders
due to the increase in business from the reseller channel. The
Company's resellers do not carry inventory and require rapid
turn-around of orders. Our OEM customers are also continuing to
strive to carry lower inventory balances.
The Company expended $923,000 for the purchase of equipment and
capitalized $954,000 of software development costs in the first
six months ending April 29, 1995. The Company repurchased
treasury shares for $335,000.
Working capital was $18,890,000 at April 29, 1995 as compared to
$16,668,000 at October 31, 1994. The current ratio was 2.6-1.0 at
April 29, 1995 as compared to 3.6-1.0 at October 31, 1994.
The Company believes that the available cash balances, together
with cash from operations, will be sufficient to meet the
Company's cash requirements through its fiscal year ending
October 31, 1995.
<PAGE>19
XYLOGICS, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on
April 7, 1995, the following proposals were adopted by
the vote specified below:
<TABLE>
<S> <C> <C> <C> <C>
Against Broker
Proposal For Withhold Abstain Non-votes
1. Election of Directors
o Bruce J. Bergman 3,765,487 309,235 - -
o Bruce E. Elmblad 3,769,087 305,635 - -
o Gerald A. Lodge 3,768,887 305,835 - -
o Frank J. Pipp 3,765,587 309,135 - -
o Bruce I. Sachs 3,766,087 308,635 - -
2. Ratification and
Approval of Amendment
to Company's 1992
Stock Option Plan
to Increase Number
of Shares Issuable 1,587,616 1,119,397 60,269 1,307,440
3. Ratification and
Approval of Amend-
ment of the Company's
1992 Stock Option
Plan to limit the
maximum number of
shares 3,901,278 26,565 53,255 93,624
<PAGE>20
Against Broker
Proposal For Withhold Abstain Non-votes
4. Ratification and
Approval of Amend-
ment to the Company's
1992 Stock Option
Plan governing
additional option
grants to non-
employee Directors 1,682,696 1,012,489 72,097 1,307,440
5. Ratification of Arthur
Andersen LLP as the
Company's Independent
Auditors 4,011,693 9,660 53,369 -
</TABLE>
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
<PAGE>21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Xylogics, Inc.
(Registrant)
Date:_______________________ Maurice L. Castonguay
Vice President Finance,
Treasurer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> APR-29-1995
<CASH> 8,914
<SECURITIES> 0
<RECEIVABLES> 12,295
<ALLOWANCES> 0
<INVENTORY> 6,334
<CURRENT-ASSETS> 30,375
<PP&E> 15,422
<DEPRECIATION> 12,452
<TOTAL-ASSETS> 38,266
<CURRENT-LIABILITIES> 11,487
<BONDS> 0
<COMMON> 536
0
0
<OTHER-SE> 23,352
<TOTAL-LIABILITY-AND-EQUITY> 38,266
<SALES> 30,058
<TOTAL-REVENUES> 30,058
<CGS> 15,574
<TOTAL-COSTS> 18,894
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 21
<INTEREST-EXPENSE> (293)
<INCOME-PRETAX> (4,138)
<INCOME-TAX> 556
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,694)
<EPS-PRIMARY> (.93)
<EPS-DILUTED> (.93)
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