SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 1-11236
XEROGRAPHIC LASER IMAGES CORPORATION
(Name of Small Business Issuer in Its charter)
Delaware 51-0319174
- ---------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
101 Billerica Avenue, 5 Billerica Park
North Billerica, MA 01862
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(Address of principal executive offices) (Zip Code)
(508) 670-5999
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(Registrant's telephone number, including area code)
Securities registered under Section 12 (b) of the Exchange Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Each Class
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrants
Series A Convertible Preferred Stock, $.01 par value
Class A Redeemable Common Stock Purchase Warrants
Check whether the issuer: (1) has 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 requirement for the past 90
days. (1) Yes X No (2) 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 [ ]
The issuer's revenues for its fiscal year ended December 31, 1996 were
$898,618.
As of March 12, 1997, 1,778,646 shares of Common Stock, $.01 par value
per share, and 315,238 shares of Series A Preferred Stock, $.01 par value per
share, were outstanding. The aggregate market value, held by non-affiliates, of
shares of the Common and Series A Convertible Preferred Stock, based upon the
average of the bid and ask prices for such stock on that date, were
approximately $83,830 and $3,102 respectively.
ITEM 1. DESCRIPTION OF BUSINESS
General
Founded in 1989, Xerographic Laser Images Corporation ("XLI" or the "Company")
designs, develops and markets high-performance hardware and software products
primarily for the desktop image processing market. XLI's mission is to be a
leading provider of high technology products for printers, digital copiers,
scanners, multi-function devices, and fax systems.
XLI's proprietary precision dot positioning technology enables high-quality
text, line-art graphics and photographic images to be generated at low costs and
high speeds using standard and inexpensive printing devices.
The Company's technology is used in the following applications:
o High quality text and line art edge enhancement
o Life-like photographs with gray scale rendition
o Digital copier functions o Hi-Definition Fax
o High Quality Color Images on inexpensive color laser printers
o Product solutions for both laser and inkjet print engines
o High performance image enhancement and modulation for demand
printing applications
o Application Specific Integrated Circuits (ASIC) and Core Modules
to meet customer requirements and costs
PRODUCTS
The Company provides its proprietary precision dot positioning technology in the
form of Application Specific Integrated Circuits ("ASICs") and VHDL Core Modules
(design modules that can be used by Company's customers to develop their own
ASICs that incorporate multiple applications, including the Company's). These
ASICs are incorporated by the Company's customers into controller boards that
are imbedded into the printing device as an integral component.
ASIC & VHDL Developments
The Company's initial ASIC co-developed with Samsung Electronics as part of a
1995 development agreement, was completed in early 1996. This ASIC is
appropriate for both printer and multi-function
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applications. As part of it's agreement with Samsung, XLI retained the right to
sell this ASIC in the market. A second agreement has been reached with Samsung
to develop the next generation ASIC using the latest XLI enhancement technology.
The first ASIC using this latest XLI technology is expected to be available for
sale in the second or third quarter of 1997.
The Company entered into two licensing and royalty agreements with Pipeline
Associates, Inc. in 1996. The first agreement allows Pipeline to incorporate XLI
enhancement technology into certain Pipeline product offerings. The second
agreement is a co-development agreement for a new "Superchip" for anticipated
release in 1997. Both Pipeline and XLI will have the right to market this ASIC
with XLI receiving royalty payments on Pipeline sales.
In late 1996, XLI and Xionics Document Technologies, Inc., entered into a
licensing and royalty agreement pursuant to which Xionics may incorporate XLI
technology into certain Xionics product offerings. Xionics is a controller
design supplier to the OEM printer market. Also in late 1996 XLI reached a
licensing and royalty agreement with a Japanese printer manufacturer to supply
the Company's technology in the form of VHDL for incorporation into a custom
ASIC.
The licensing of XLI enhancement technology in the form of ASICs and VHDL core
modules is expected to be the major development and sales focus for the Company
for the foreseeable future.
Laserpix and Photojet Boards
The Company's Laserpix and Photojet board products are sold primarily through
Value Added Resellers (VARs) in specialty medical and scientific imaging
markets. The Company's fingerprinting products consist of an XLI Laserpix board
with special features. As resolutions of standard laser printers have improved,
the revenue from this market segment has been gradually becoming a smaller
portion of the total XLI business. There are no new product introductions
planned for the board business as the Company continues to focus its attention
on the mass market OEM printer enhancement market.
Flat Panel Display Scaling/Enhancement
XLI reached an agreement with Samsung Electronics in late 1996 to use the XLI
technology to improve the scaling/enhancement of flat panel stand-alone
displays. There can be no assurance that the Company will be able to
successfully apply its technology to flat panel displays.
PRODUCT DEVELOPMENT
Through development partnerships with companies in the Far East and in the
United States, XLI is developing a series of ASICs for the OEM
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printer and printer controller market. These new ASICs are being designed to
incorporate a digital precision modulator that requires no external components
or high speed clocks. The edge enhancement (including fax enhancement which was
added this past year) and modulator technology is expected to form the
foundation for other chip offerings in the next few years.
COMPETITION
XLI's primary competitors in providing printing enhancement solutions have been
DP-Tek Development Corp., LLC and Destiny Technology Corporation. The Company's
most significant competitor had been DP-Tek. Dp-Tek offered both ASIC's and
Virtual Hardware Design Language (VHDL) core technology to original equipment
manufacturers ("OEMs"). In July 1996, Hewlett Packard acquired DP-Tek and it is
anticipated that Hewlett Packard will not renew the DP-Tek licenses with OEMs,
as such licenses expire. The DP-Tek OEMs are now looking for alternative
enhancement technology (either purchased or internally developed) which presents
a wider market opportunity for XLI and other technology providers.
The Company's focus is on providing leading edge image enhancement technology
that will effectively compete with that offered by Hewlett Packard in its own
office products. XLI does not consider Hewlett Packard as its direct competitor,
but as the market leader who is establishing the functionality and quality
requirements that its competitors (the Company's customers) must offer in order
to compete.
Destiny, XLI's main independent competitor currently, has made in-roads in the
area of low cost ASIC chips that typically produce a low level of edge
enhancement for text. At this time Destiny is not considered a competitor in the
area of high quality text and photo image enhancement.
In addition to Destiny, in-house development groups at printer manufacturers
such at Minolta and Canon also provide competition for the Company. Although
these companies do not typically license their internally developed technology
to other printer manufacturers, XLI must have technology demonstrably superior
in order to sell to these companies.
XLI believes its products have advantages that are attractive to customers.
First, XLI's products can provide high quality edge (fax, text and line art
edges) and photo image enhancement, using the Company's proprietary fine dot
positioning technology for optimal quality. Second, XLI's photo enhancement
technology (single-bit grayscale) requirements, as compared to its competitors'
products, provides both increased speed and reduced memory requirements, leading
to lower costs and shorter time to market for the OEM customer.
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SALES AND MARKETING
In the United States, the Company sells its board level products through Value
Added Resellers (VAR's), OEM's, dealers and directly to end users. The Company's
boards are sold primarily for medical and scientific imaging where high
resolution is required. ASIC and VHDL Core Module sales are made directly to
OEMs. XLI has recently retained an independent sales agent and consultant to
focus principally on major accounts in the United States.
The Company markets its products outside the United States through international
distributors pursuant to distribution agreements covering specified territories.
XLI has recently engaged a sales agent in Japan specifically for VHDL and ASIC
sales.
XLI will continue to market, in addition to its offering in ASIC form, VHDL Core
Modules (design modules that can be used by an OEM to develop its own ASIC) and
some software products principally for the OEM and VAR markets. XLI also plans
to provide its existing board and software products to selective VAR markets in
the scientific and specialty printing markets.
CUSTOMER SUPPORT
XLI's LaserPix products are user installed with the aid of installation
manuals provided by the Company. OEM, VAR and direct customer support is
provided by the Company's full-time technical support telephone specialists who
are available during its normal business hours and who have been trained on PC
products and on most popular software applications used by its customers.
Because of features built into LaserPix and PhotoJet for ease of use and
installation, this level of support has to date been satisfactory to users and
resellers and the Company expects this level of support to continue to be
sufficient in the future.
The Company provides a one-year factory repair-or-replace warranty on
all hardware. Out-of-warranty repair is done at the Company on a fixed-fee
basis.
PATENTS AND PROPRIETARY INFORMATION
The Company relies on a variety of methods to protect its products and
technology, including patent, trademark, copyright and trade secret protection.
The Company believes that patent and trade secret protection for its products is
important to its ultimate success. The Company has been awarded U.S. Patent
Number 5,109,283, which covers its innovative method of modulating the laser
device found in desktop printers to yield high-quality text, graphics and
photographic images
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and U.S. patent number 5,122,883, which covers the application of the Company's
technology to high-speed laser printers capable of output of over 100 pages per
minute. The Company has applied for protection for these patents in Korea, Japan
and major western European countries. In 1996 the Company filed three patents
covering new technology developed by the Company; a single-pass color engine,
color and monochrome edge enhancement, and an all digital modulator suitable for
integrated circuit implementation. The Company intends to continue to protect
its technical innovations both domestically and internationally through patent
filings. To protect its trade secrets, proprietary software and know-how, the
Company requires that all employees, key resellers and suppliers, consultants
and licensees, sign nondisclosure agreements. The Company also relies on
copyright protection for its software and documentation. LaserPix is a
registered trademark of the Company.
Although the Company believes that patent protection for its products
is important to its ultimate success, no assurance can be given that any patents
granted will be enforceable or provide the Company with meaningful protection
from competitors. Even if a competitor were to infringe the Company's patents,
the costs of enforcing its patent rights may be substantial or even prohibitive.
In addition, there can be no assurance that the Company's proposed products will
not infringe the patent rights of others. The Company may be forced to expend
substantial resources if the Company is required to defend against any such
infringement claims. Furthermore, there can be no assurance that the Company
will be able to maintain the secrecy of any of its proprietary technology,
know-how or trade secrets or that others will not independently develop
substantially equivalent technology.
The core technology for XLI was invented by Dr. Adam L. Carley (the "Carley
Technology"), a founder, stockholder and director of the Company. Dr. Carley and
the Carley Corporation, a company controlled by Dr. Carley, have assigned to the
Company all rights to the Carley Technology held by him and the Carley
Corporation in return for Common Stock and certain royalties based upon revenues
derived by the Company from the Carley Technology. This royalty obligation
terminates upon payment to Carley by the Company of a cumulative total of $2.4
million. To date, the Company has paid $414,210 pursuant to this agreement. The
Company has sublicensed to the Carley Corporation the exclusive right to use, on
a royalty-free basis, the Carley Technology for retail services in locations
such as stores, kiosks and booths for purposes including but not limited to
picture taking and reproduction.
PERSONNEL
As of March 10, 1997, the Company employed 9 people, 3 of whom were in
research and development, 1 in marketing and sales, 2 in manufacturing and
product service, and 3 in finance and administration. The Company uses part-time
technical contractors, as needed, to augment its full-time staff. Due to the
Company's limited cash flow, certain key personnel have been receiving reduced
cash compensation and have been, and will continue to be, issued stock
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options and shares of Common Stock of the Company in lieu of cash compensation.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's administrative, sales, marketing, research and development,
and product testing facility is located in North Billerica, Massachusetts. The
facility consists of approximately 4,850 square feet and is leased by the
Company from an unaffiliated party for $3,293 per month under a lease that
expires in April 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common stock is currently traded on the NASDAQ Bulletin Board
under the symbol "XLCC," and the Company's Series A Preferred Stock is traded on
NASDAQ Bulletin Board under the symbol "XLCCP". On January 4, 1995, the Company
stock was delisted from the NASDAQ Small Cap market as it did not meet the
minimum requirement for maintaining listing.
The following table sets forth the range of high and low prices quoted on
NASDAQ for the Common Stock for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and do not
necessarily represent actual transactions.
Common Stock
High Low
Bid Bid
Price Price
1996
First Quarter...................... $0.10 $0.001
Second Quarter..................... $0.1875 $0.001
Third Quarter...................... $0.4375 $0.125
Fourth Quarter..................... $0.4375 $0.125
1995
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First Quarter...................... $0.12 $0.02
Second Quarter..................... $0.2815 $0.02
Third Quarter...................... $0.03125 $0.02
Fourth Quarter..................... $0.02 $0.001
On March 12, 1997, the closing sale price of the Company's Common Stock was
$.09375 per share and there were 225 shareholders of record.
DIVIDEND POLICY
The Company has never paid any cash dividends and does not anticipate
payment of cash dividends on the Company's Common Stock in the foreseeable
future. Under Delaware Corporation Law, dividends may be paid only out of
legally available funds as proscribed by statute, subject to the discretion of
the Company's Board of Directors.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. Except for historical
information contained herein, the matters discussed in the Liquidity and Capital
Resources section below contain potential risks and uncertainties, including,
without limitation, risks related to the Company's ability to successfully
develop, test, produce and market its proposed products, identify and attract
partners to help commercialize the Company's products; attract and retain key
employees; obtain meaningful patent protection to cover the Company's
proprietary technology; raise capital for future operations and
commercialization of its products; and successfully respond to technological
changes in the marketplace. The Company will need to attract partners in order
to exploit its products, and there can be no assurance that the Company will be
successful in attracting such partners. Additional information on potential
factors which could affect the Company's financial results are included in the
Company's public filings with the Securities and Exchange Commission.
GENERAL
In 1996 the Company continued its efforts to minimize expenses to match near
term expected revenues. The Company continues to focus on the design and
development of ASIC, VHDL and software products for the OEM printer and printer
controller market. During 1996 the Company completed the VHDL for XLI's
Superchip that incorporates all of the Company's current enhancement technology
into one chip design. This VHDL is the core of XLI's current offerings to OEM's.
The Company hopes to increase revenue through additional corporate alliances and
additional licensing of the Superchip technology. The Company also plans to add
additional engineering resources in 1997 in order to meet
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the demands from existing and anticipated OEM agreements. This will result in
increased research and development costs and may negatively affect cash flow.
For the fiscal year ended December 31, 1996, the Company had a positive cash
flow from operations of $64,316,
The Company has no current plans to undertake a debt or equity financing in
1997. Funds for development efforts will come from current or anticipated
licensing and royalty fees. If the Company is unable to fund its operations
through cash flow, the Company's development efforts and operations will be
materially adversely effected.
The following are key areas where progress has been made during the past year:
o Maintained the reduced levels of expenses and personnel that was put into
place during 1995.
o Continued stock and option grants to retain critical staffing levels.
o Continued focus on mass market product development with strategic partners
to maximize technology leverage and minimize expense.
o Successfully completed the first ASIC development for Samsung.
o Entered into a second ASIC development with Samsung.
o Signed major license agreements with Pipeline Associates, Xionics and a
major Japanese OEM.
o Negotiated agreement with Pipeline for the development and production of
Superchip ---- XLI's next generation enhancement chip.
o Released VHDL for a complete enhancement product for OEM's to incorporate
this technology into their own chip developments.
o Signed a license agreement with Samsung for display scaling/enhancement
technology development.
o Patents filed for monochrome and color edge enhancement plus an all digital
precision modulator.
o Completed fax and single-bit gray scale enhancement algorithms.
o Filed a patent for a unique single-pass color laser engine design concept.
o Continued de-emphasis of the XLI board products and placed all engineering
development on the core laser enhancement technology for OEM printer and
printer controller manufacturers.
The following table sets forth, for the periods indicated, statements of
operation data of the Company expressed as a percentage of revenues.
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Years Ended December 31,
1996 1995 1994
Revenue 100% 100% 100%
Cost of Revenue 29% 45% 118%
Research and Development 32% 30% 30%
OEM Development 0% 0% 36%
Selling and Marketing 5% 11% 59%
General and Administrative 51% 33% 76%
Loss from Operations (16)% (19)% (219)%
Other Income (Expense) (5)% (2)% (13)%
Net Loss (21)% (21)% (232)%
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Revenue. Revenue for the fiscal year ended December 31, 1996 was
$898,618 as compared to $1,097,550 for the fiscal year ended December 31, 1995,
a decrease of $198,932 or 18%. Product board revenues for the fiscal year ended
December 31, 1996 were $200,368 as compared to $397,550 for fiscal year ended
December 31, 1995, a decrease of $197,182 or approximately 50%. Contract and
license revenue for the fiscal year ended December 31, 1996 was $698,250 as
compared to $700,000 for the fiscal year ended December 31, 1995. The decrease
in product revenue was primarily attributable to a discontinuation of the board
product lines.
In 1996, the Company entered into two cooperative development agreements with
Samsung Electronics Co. License agreements were also signed with Pipeline
Associates and Xionics Document Technologies. These agreements resulted in
contract and license revenues of $698,250. The Company anticipates that it will
enter into additional cooperative development relationships in 1997.
Cost of Revenue. Cost of revenue for the fiscal year ended December 31,
1996 was $258,440 or 29% of revenue, as compared to $496,866 or 45% of revenue
for the fiscal year ended December 31, 1995, a decrease of $238,426. The
decrease was due mostly to the 50%
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drop in product revenue and included in the cost of revenue for fiscal year 1996
are inventory write-offs of $30,516.
Research and Development. Research and development expense for the
fiscal year ended December 31, 1996 was $287,748 or 32% of revenue as compared
to $331,279 or 30% of revenue for the fiscal year ended December 31, 1995. The
decrease in 1996 of $43,531 was primarily attributable to a decrease in
sub-contract work associated with the Company's agreement with Samsung
Electronics. The Company's ongoing engineering emphasis will continue to be on
the development of ASICs.
Selling and Marketing. Selling and marketing expenses for the fiscal
year ended December 31, 1996 were $42,942 or 5% of revenue as compared to
$117,896 or 11% of revenue for the year ended December 31, 1995. The decrease of
$74,954 was primarily attributable to use of commissioned personnel in lieu of
salaried personnel.
General and Administrative. General and administrative expenses were
$456,156 or 51% of revenue for the fiscal year ended December 31, 1996 as
compared to $358,040 or 33% of revenue for the fiscal year ended December 31,
1995. The $98,116 increase in general and administrative expenses was primarily
attributable to an increase in professional expenses.
Interest Expense. Net Interest expense for the fiscal year ended
December 31, 1996 was $49,252 or 5% of revenue as compared to $24,655 or 2% of
revenue for the fiscal year ended December 31, 1995. Interest expense for the
fiscal year ended December 31, 1996 was primarily attributable to interest
accrued on subordinated notes issued by the Company and factoring charges
associated with receivables.
Net Loss. The Company recorded a net loss of $192,588 for the fiscal
year ended December 31, 1996 as compared to a net loss of $223,457 for the
fiscal year ended December 31, 1995. The decrease from in the net loss of
$30,869 was the result of lower operating expenses partially offset by reduced
revenues.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
Revenue. Revenue for the fiscal year ended December 31, 1995 was
$1,097,550 as compared to $1,342,212 for the fiscal year ended December 31,
1994, a decrease of $244,658 or 19%. Product revenues for the fiscal year ended
December 31, 1995 were $397,550 as compared to $1,342,212 for the fiscal year
ended December 31, 1994, a decrease of $944,662 or 71%. Contract and license
revenue for the fiscal year ended December 31, 1995 was $700,000 as compared to
$0 for the fiscal year ended December 31, 1994, an increase of $700,000. The
decrease in product revenue was primarily attributable to a discontinuation of
the Company's printer and print server product lines.
In 1995, the Company entered into cooperative development agreements
with Analog Devices and Samsung Electronics Co. These agreements resulted in
contract and license revenues of $700,000.
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Cost of Revenue. Cost of revenue for the fiscal year ended December 31,
1995 was $496,866 or 45% of revenue, as compared to $1,580,052 or 118% of
revenue for the fiscal year ended December 31, 1994, a decrease of $1,083,186.
Included in the cost of revenue for fiscal year 1994 are inventory and fixed
asset write-offs of approximately $389,000, and accelerated amortization of
capitalized software costs of approximately $305,000 associated with the phase
out of the printer and print server product lines.
Research and Development. Research and development expense for the
fiscal year ended December 31, 1995 was $331,279 or 30% of revenue as compared
to $398,026 or 30% of revenue for the fiscal year ended December 31, 1994. The
decrease of $66,747 was primarily attributable to an increase in development
work associated with the Company's agreement with Samsung Electronics, with the
costs being charged to "Cost of Contract and License Revenue".
Selling and Marketing. Selling and marketing expenses for the fiscal
year ended December 31, 1995 were $117,896 or 11% or revenue as compared to
$794,873 or 59% of revenue for the year ended December 31, 1994. The decrease of
$676,977 was primarily attributable to the reduction in personnel to support the
sale and promotion of printers and print servers and reduced expenses for
promotional activities.
General and Administrative. General and administrative expenses were
$358,040 or 33% of revenue for the fiscal year ended December 31, 1995 as
compared to $1,015,624 or 76% of revenue for the fiscal year ended December 31,
1994. The $657,584 decrease in general and administrative expenses was primarily
attributable to a reduction in salaries and professional expenses.
Interest Expense. Net interest expense for the fiscal year ended
December 31, 1995 was $24,655 or 2% of revenue as compared to $199,134 or 15% of
revenue for the fiscal year ended December 31, 1994. Interest expense for the
fiscal year ended December 31, 1995 was primarily attributable to interest
accrued on notes issued in connection with the Company's short-term financing.
Net Loss. The Company recorded a net loss of $223,457 for the fiscal
year ended December 31, 1995 as compared to a net loss of $3,116,448 for the
fiscal period ended December 31, 1994. The decrease in loss was primarily
attributable to decreased general administration, selling and marketing
expenditures.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended December 31, 1996, the Company had a positive cashflow
from operations of $64,316. This is primarily attributable to a decrease in
accounts receivable. At December 31,
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1996 the Company had current assets of $240,037 and current liabilities of
$713,724 and a working capital deficit of ($473,687).
During 1995, the Company entered into an agreement with the Silicon
Valley Bank to borrow against receivables. The agreement calls for interest at a
monthly rate of 2.5% and requires an advance fee of 1%. As of December 31, 1996,
there were no outstanding loan amounts payable to Silicon Valley Bank.
In May 31, 1996, the Company commenced a limited private offering to
accredited investors of subordinated nonrecourse promissory notes in an
aggregate principal amount of up to $500,000. In addition to a note, each
subscriber received a five-year warrant to purchase two shares of the Company's
Common Stock at an exercise price of $.01 per share for each dollar invested.
Principal and interest will be repaid, if at all, solely from the Company's
pre-tax earnings for each of the five fiscal years commencing with the fiscal
year ending December 31, 1996. Payments, if any, will be made annually to the
holders of the notes within thirty days after the Company files its Form 10-KSB
or its then equivalent form with the Securities and Exchange Commission. Such
annual payments shall not exceed, in the aggregate, 25% of the Company's pre-tax
earnings, and shall not exceed over the five year term of the notes, three times
the principal amount of the notes. The offering closed on May 31, 1996 and the
Company raised a total of $283,688. Included in this amount were $13,698 of
accrued interest and $75,000 of outstanding debt that were converted into the
new promissory notes.
In Company has no current plans to raise additional capital in 1997. Funds for
development efforts will come from current or anticipated licensing and royalty
fees. If the Company is unable to fund its operations from cash flow the
Company's development efforts and operations will be materially adversely
effected.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital
expenditures at this time.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation
over the past few years has not had a significant impact on the Company's sales
or operating results.
INCOME TAXES
The Company adopted Statement No. 109 "Accounting for Income Taxes," in
1993 and its implementation has had no effect on the Company's financial
position and results of operation.
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ITEM 7. FINANCIAL STATEMENTS
See Pages F-2 through F-19.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On January 24, 1996, the Company received confirmation from Coopers &
Lybrand of the decision by XLI that Coopers & Lybrand would not be engaged as
the Company's independent accountants. The accounting firm of Wolf & Company,
P.C. was appointed and approved by The Board of Directors to replace Coopers &
Lybrand. There was no adverse opinion or a disclaimer of opinion or disagreement
on any matter of accounting principles or practices in Coopers & Lybrand's
report on the financial statements for either of the past two years.
ITEM 9 DIRECTOR'S EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The current directors, executive officers and key employees of the Company,
their ages and their positions held in the Company are as follows:
Name Age Position
Anthony D'Amelio 67 President, Chief Executive Officer and
Chairman of the Board
James L. Salerno 66 Chief Financial Officer, Treasurer and
Secretary
Daniel J. Allen 36 Vice President of Research and
Development
Roger F. Salava 60 Director of Strategic and Business
Planning
Dr. Joseph L. Katz 54 Director and Vice President of Corporate
Planning
Vincent J. Spoto 51 Director
Dr. Adam Carley 56 Director
Each director is elected for a period of one year and serves until his
successor is duly elected by the stockholders. Officers are elected by and serve
at the discretion of the Board of Directors.
The following is a summary of the principal occupations during the past five
years of each of the directors, executive officers and key employees named
above:
Anthony D'Amelio, 67, is a founder of the Company and has served as
Chairman of the Board, President and Chief Executive Officer since July 1994.
From March 1993 to July of 1994, Mr. D'Amelio served as a
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consultant to the Company and from June 1989 to March 1993, Mr. D'Amelio was
Treasurer, Chief Financial Officer, and Director of the Company. From July 1988
to July 1990, Mr. D'Amelio served a senior consultant to Alcan Corp., an
aluminum and chemicals producer in the areas of business development and joint
ventures. Previously, Mr. D'Amelio was Vice President, Computer Operations for
Honeywell, Inc. and held several executive positions at General Electric and Cie
Bull.
James L. Salerno, 66, Chief Financial Officer, Treasurer and Secretary
since March 1995. From 1991-1995 Mr. Salerno was Treasurer of Jem International.
He is a former V.P. of Finance at Preview Products Inc. from 1972-1991 and V.P.
Group Controller at AMF Inc. from 1952-1972. Mr. Salerno graduated from Pace
University with a BBA degree and holds a Master of Science degree from Long
Island University and Harvard Business School.
Daniel Allen, 36, Vice President of Research and Development. Mr. Allen
joined the Company in May 1991. Prior to joining the Company, Mr. Allen was
Chief Engineer at Cirrus Technology, Inc., responsible for the design and
manufacturing of high resolution color laser film recorders and Senior Engineer
at Analogic Corp. Mr. Allen graduated from Penn State University and holds a
B.S. degree in Mathematics with a minor in Computer Science.
Roger Salava, 60, was appointed Director of Strategic and Business
Planning in August 1994. Mr. Salava joined XLI in 1991 as Vice President
Engineering. Prior to joining XLI, Mr. Salava was Senior Vice President of
Kodak/EPPS, a subsidiary of Eastman Kodak Corporation and former Vice President
of Engineering for AGFA/Compugraphic Corporation. He holds a B.S. degree from
Marquette University and an M.S. from Northwestern University, both in
Electrical Engineering.
Joseph L. Katz, 54, was appointed Vice President, Corporate
Development, November 1996 and has been a Director since September 30, 1996.
From 1977 to 1996 Dr. Katz has held the positions of Group Leader, Department
Head, Senior Principal Engineer of Network and Systems Management at Mitre Corp.
Dr. Katz holds Ph.D. and M.S. degrees in Electrical Engineering from Purdue
University.
Vincent J. Spoto, 51, a founder of the Company; previously served as
President, Chief Executive Officer and Chairman of the Board of Directors from
June 1989 to November 10, 1993. Mr. Spoto was a consultant to the Company for
November 1994 to 1996. Presently, Mr. Spoto is President of ImageLabs, Inc. On
January 6, 1997, Mr. Spoto was appointed to fill a vacancy on the Board of
Directors. Mr. Spoto holds an Associates Degree in Electrical Engineering from
the Wentworth Institute of Technology.
Adam Carley, 56, Chief Scientist, Director and founder of the Company.
Dr. Carley invented the laser printing technology that forms the basis of XLI's
imaging enhancement technology. For the past five years, Dr. Carley has been a
consultant to the Company and President of Carley Corporation, a developer of
advanced electronic circuitry for high quality laser image printing. Dr. Carley
received his Ph.D.
16
in Electrical Engineering from the Massachusetts Institute of Technology.
The members of the Board of Directors do not receive any cash compensation
for their services as Directors.
ITEM 10 EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the
Company to its Chief Executive Officer. No executive officer received annual
salary and bonus exceeding $100,000 for their services in all capacities to the
Company during the fiscal year ending December 31, 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
Other Restricted
Annual Stock LTIP All Other
Name and Year Salary Bonus Compensation Awards Options Payouts Compensation Principal
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Position ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Anthony D. 1996 $22,367 -- -- $2,000 (a)
D'Amelio 1995 $27,875 $3,750 (b) 80,000
President, $1,562 (c)
Executive 1994 $35,000 50,000
Officer and Chairman of the Board
(a) 200,000 Shares of Common Stock
(b) 120,000 Shares of Common Stock
(c) 50,000 Warrants
During 1995 investors who loaned money to the Company received warrants (3
warrants for each $1 loaned). Mr. D'Amelio received 88,000 warrants.
</TABLE>
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 12, 1997, the ownership of
the Company's Common Stock by (i) each person who is
17
known by the Company to own of record or beneficially more than five percent of
the Company's Common Stock, (ii) each of the Company's directors and (iii) all
directors, and officers as a group. Except as otherwise indicated, the
stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated. As of March 11, 1997, the Corporation had 225
Stockholders of record.
Name and Address of Number of Shares of Percentage
Beneficial Owner Common Stock Class(1) (2) (3)
Beneficially Owned of
Anthony D. D'Amelio ............ 546,221* 28.2%
101 Billerica Ave.
5 Billerica Park
N. Billerica, Massachusetts 01862
Roger Salava..................... 134,157 7.5%
101 Billerica Ave.
5 Billerica Park
N. Billerica, Massachusetts 01862
James L. Salerno................. 138,584 7.7%
101 Billerica Ave.
5 Billerica Park
N. Billerica, Massachusetts 01862
Daniel Allen .................... 105,000 5.8%
101 Billerica Ave.
5 Billerica Park
N. Billerica, Massachusetts 01862
Joseph Katz ..................... 186,422 9.6%
101 Billerica Ave.
5 Billerica Park
N. Billerica, Massachusetts 01862
Vincent Spoto.................... 81,883 4.7%
50 Cypress Road
Wellesley, MA 02181
Adam Carley...................... 104,917 5.8%
6 Hillside Rd.
Windham, NH 03087
All Directors,
and Officers as a group
(7 persons).................... 849,605 47.8%
*Does not include 5,000 shares of Series A Preferred Stock owned by Mr.
D'Amelio. No other director or officer owns directly or indirectly any shares of
the Company's Series A Preferred Stock.
18
(1)Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60 days
pursuant to the exercise of options or warrants are deemed to be outstanding for
the purpose of computing the percentage ownership of such individual or group,
but are not deemed to be, outstanding for the purpose of computing the
percentage ownership of any other person shown in the table. (2)Does not include
(i) 70,147 shares issuable upon exercise of a warrant issued to Thomas James
Associates, Inc. in connection with the Company's initial public offering which
was completed in January 1993; and (ii) 701,468 shares issuable upon exercise of
the warrants included on the units sold to the public as part of the Company's
initial public offering in January 1993. (3) Does not include 36,298 shares
issuable upon exercise of a warrant issued to Thomas James Associates, Inc. in
connection with the Company's offering of Series A Preferred Shares in February
1994; and 362,984 shares issuable upon exercise of the warrants included in the
offering in February 1994.
At December 31, 1996 the Company had reserved 3,099,607 shares of Common Stock.
(For breakdown see page F-17)
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1990, the Company entered into an Agreement (the "Carley
Agreement') with the Carley Corporation ("Carley Corporation"), a company
founded by Dr. Adam L. Carley, a co-founder of XLI, pursuant to which the
Company acquired an exclusive worldwide license to certain technology (the
"Carley Technology") for the printing of text, graphics and photographic images.
In consideration therefor, the Company issued 268,040 shares of Common Stock to
the two stockholders of Carley Corporation, Dr. Adam L. Carley and Leonard R.
Weisberg (also a co-founder of the Company), and agreed to pay royalties equal
to 5% of monetary receipts resulting from the sale by XLI of hardware or
software products or services based upon or associated with the Carley
Technology and 33 1/3% of monetary receipts from sublicensing the Carley
Technology to XLI. All royalty payments terminate upon payment of a cumulative
total of $2.4 million, at which time the Carley Corporation has agreed to assign
to the Company all rights, title and interest to the Carley Technology,
including any improvements to the Carley Technology or future developments based
on the Carley Technology. The Company has sublicensed on an exclusive and
royalty-free basis the Carley Technology to the Carley Corporation for retail
services including but not limited to stores, kiosks and booths for purposes
including but not limited to picture making and picture reproduction.
In December 1993, the Company and Carley Corporation amended the Carley
Agreement such that Carley Corporation was to be paid minimum royalties of (i)
$75,000 in fiscal year 1994; (ii) $82,500 in fiscal year 1995; and (iii) $90,000
in fiscal year 1996. Additionally, if Carley Corporation develops new Carley
Technology and such new Carley Technology were sublicensed by XLI and the total
sublicense fees received by XLI for such new Carley Technology exceeded $400,000
during the period from 1994 through 1996 (hereinafter called "excess
19
fees"), then XLI would pay Carley Corporation 25% of the excess fees. In the
event that XLI had a net loss before taxes and interest but after the receipt of
such total sublicense fees during the six month period ended in the month when
any excess fee payment was due, then no excess fee payment would be made by XLI
for that month and XLI would have no future obligation to pay that excess fee
payment. Based on the results for the period 1994 to 1996, no excess fees were
payable to the Carley Corporation.
Effective January 1, 1997, the Company and the Carley Corporation again
amended the Carley Agreement such that the Company will pay a royalty of 15% of
cash receipts generated from sales or licenses incorporating the Carley
Technology up to a cumulative total of $2.4 million, in lieu of the previous
royalty rate of 5% on sales of hardware and software products and 33 1/3% of
license fees.
EMPLOYMENT AGREEMENTS
Effective as of December 30, 1993, the Company entered into a
consulting agreement (the Spoto Consulting Agreement) with Vincent J. Spoto, the
Company's former President and Chief Executive Officer. Pursuant to the Spoto
Consulting Agreement, Mr. Spoto serves as a consultant to the Company's Chief
Executive Officer and Board of Directors at a consulting fee of $3,958.33 per
month through May 31, 1997. The Spoto Consulting Agreement includes a
non-competition provision which prevents Mr. Spoto from directly competing with
the Company during the term of the Spoto Consulting Agreement. The Spoto
Consulting Agreement also includes confidentiality provisions and provides for
the assignment by Mr. Spoto of any inventions or technology conceived or
developed by Mr. Spoto during the period of the Spoto Consulting Agreement which
result from or are suggested by any task assigned to or performed by Mr. Spoto
as a consultant to the Company.
On February 1, 1994, the Company entered into a Consulting Agreement (the
Salava Consulting Agreement) with Roger Salava. Pursuant to the Salava
Consulting Agreement, Mr. Salava currently serves as Director of Strategic &
Business Planning at the rate of $3,750 per month through November 30, 1997. The
Salava Consulting Agreement includes non-competition provisions which prevent
Mr. Salava from competing with the Company during the term of the Salava
Consulting Agreement and for six months thereafter. The Salava Consulting
Agreement also includes confidentiality provisions and requires the assignment
by Mr. Salava to the Company of any inventions or technology conceived or
developed by Mr. Salava during the period of the Salava Consulting Agreement
which relate to the business of the Company.
20
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits required to be filed herewith are
incorporated by reference to the filings previously made by the Company as noted
below (the number before each Exhibit indicates the number of the Exhibit as it
was filed in the document referenced below):
<TABLE>
<CAPTION>
Exhibit Number Title
<S> <C>
1.1** Underwriting Agreement
1.2** Agreement Among Underwriters
3.1* Restated Certificate of Incorporation, as amended
3.2* By-laws of the Registrant
4.1** Certificate of Designations, Preferences and Rights of Series A Cumulative
Redeemable Convertible Preferred Stock
4.2** Specimen Series A Preferred Stock Certificate
4.3** Specimen Common Stock Purchase Warrant
4.4** Form of Warrant Agreement
4.5** Form of Warrant to be issued to the Representative
10.9* Equipment Lease Agreement between the Company and Alco Capital Resources, Inc.
dated February 26, 1992
10.11* Agreement between the Company and William T. Lundberg, d.b.a. Alliance Associates
dated February 11, 1992
10.12* Form of Stock Escrow Agreement among American Stock Transfer & Trust Company, the
Company and the stockholders of the Company
10.13* 1990 Stock Option Plan
10.14* 1992 Stock Option Plan
10.15* Form of Financial Consulting Agreement between the Company and the Underwriter
10.16* Form of Investment Banking Agreement between the Company and the Underwriter
10.17* Research and Development Agreement between the Company and Kroy, Inc. dated October
26, 1990, as amended
10.18* Form of Employee Development and Confidential
21
Information Agreement
10.19* Agreement between the Company, Carley Corporation and Informed Decisions dated
January 15, 1990, as amended
10.19.A Fifth Amendment Agreement between the Company, Carley Corporation dated February
12, 1997. (Filed with Form 10-KSB December 31, 1996)
10.26** Second Amendment Agreement dated December 16, 1993 between the Company and Carley
Corporation
10.28** Agreement between the Company and TOP Alliance Consultants dated July 5, 1993
10.29** Form of Merger and Acquisition Agreement
10.32** Consulting Agreement between the Company and Roger Salava dated February 1, 1994
10.33** Consulting Agreement between the Company and Vincent J. Spoto effective as of
December 30, 1993
10.37 Agreement between the Company and Analog Devices, Inc. dated February 22, 1995
10.39 Development and Licensing Agreement dated April 26, 1995, between the Company and
Samsung Electronics, Ltd. (filed with September 30, 1995 Form 10-QSB)
10.40 Lease for premises at 101 Billerica Ave., N. Billerica, MA dated June 6, 1995
(filed with September 30, 1995 Form 10-QSB)
10.41 License and Royalty Agreement dated March 11, 1996, between the Company and
Pipeline Associate, Inc.
(filed with March 30, 1996 Form 10-QSB)
10.42 License and Royalty Agreement dated November 13,
1996 between the Company and Xionics Document
Technologies, Inc. (filed on November 14, 1996)
</TABLE>
22
* Filed with the Commission on June 18, 1992; Registration Statement
No. 33-48684.
** Filed with the Commission on August 31, 1992; Registration Statement
No. 33-48684.
(b) Reports on Form 8-K. The Company has filed the following reports on
Form 8-K during the three months ended December 31, 1996.
1 - November 14, 1996
The Company and Xionics Document Technologies Inc. announced on
November 14, 1996 that the companies signed a Memorandum of Understanding for
Xionics to acquire XLI. Simultaneously the companies announced that Xionics has
acquired a non-exclusive license to all XLI printing technology.
2 - November 14, 1996
A Licensing and Royalty Agreement was entered into by and between
Xerographic Laser Images Corp. and Xionics Document Technologies, Inc.
3 - December 12, 1996
Xionics Document Technologies Inc. and Xerographic Laser Images
Corporation announced on December 12, 1996 that the companies had terminated
their Memorandum of Understanding for Xionics to acquire XLI.
Exhibit 10.19.A
Fifth Agreement Amendment
This amends the Agreement dated 15 January 1990 (hereinafter referred to as the
"Printer Agreement") among Carley Corporation (hereinafter referred to as
"Carley"), Xerographic Laser Images Corporation (hereinafter referred to as
"XLI"),and Informed Decisions, and all amendments prior to this Fifth Agreement
Amendment (hereinafter referred to as "Amendment") as applicable thereto. It is
noted that the Third Amendment to the Carley Agreement has been null and void
because the proposed merger with Jardine Cho, Ltd. was not completed.
WHEREAS, XLI expects it royalty ( including license fee) income from the sale of
sublicenses to increase over the next few years, and accordingly XLI wishes to
increase its profits over the next few years or more by having its resulting
royalty payments to Carley for the sale of sublicenses substantially reduced;
WHEREAS, to reduce the possibility of future disputes concerning royalty
payments to Carley and thereby promote potential team work
23
between XLI and Carley, XLI wishes to simplify the determination and
administration of the royalty payments due to Carley;
WHEREAS, Carley has completely and successfully fulfilled the obligations
indicated to the Printer Agreement, and has performed very considerable and
important work for XLI's benefit beyond the scope of the Printer Agreement, and
XLI is very satisfied with and highly values these contributions by Carley to
XLI;
WHEREAS, Carley wishes to help XLI achieve improved profitability by accepting
substantially lower royalty payments for XLI's sale of sublicenses, and is
willing to have the determination and administration of the royalty payments by
XLI to Carley simplified; and
WHEREAS, both XLI and Carley wish to further clarify certain items in the
Printer Agreement and add certain items which were not addressed in the Printer
Agreement;
NOW, THEREFORE, the parties hereto agree to the following amendments to the
Printer Agreement which will be effective as of January 1, 1997:
1. Definitions: Section A. 1. of the Printer Agreement is hereby canceled and
replaced by: "Carley Technology" means both hardware and software methods
and implementations, manufacturing methods and implementations, designs,
techniques, and inventions whether patentable or not, originated, developed,
and/or significantly contributed to by Carley, comprising information,
documents, samples, models, equipment, source codes, electronically stored
information, and know-how relating to, connected with, or in any way
describing the electronic printing (including plate making) of pictures and
text, including both black-and-white and color pictures and text, to the
extent to which they are used or can be used for printing applications such
as laser printers, ink jet printers, fax, and multifunction. It also means
embodiments of and changes and improvements to Carley Technology developed
by XLI and new concepts originated by XLI which incorporate Carley
Technology, including applications of Carley Technology to specific
combinations of computers and electronic printers, and including both
hardware and software. There is no claim or guarantee that Carley Technology
in aggregate or in part thereof is not public information, or that patents
resulting from Carley Technology will be held to be valid, or that products,
licenses, or sublicenses sold by XLI incorporating Carley Technology will
not be held to infringe other patents. "Carley Technology" will hereinafter
in this amendment be referred to as "Carley Printer Technology." "Carley
Non-Printer Technology" means technologies originated, developed, and/or
implemented by Carley which are used or can be used for all other
applications such as displays and communication devices ("non-printing
applications"). Other technologies originated, developed, and/or implemented
by XLI not incorporating Carley Printer Technology, independent of their
application, are the property of XLI ("XLI Technology"). It is noted here
for clarity that XLI has not been granted rights of privileges of any sort
to use Carley Printer Technology for non-printing applications.
24
1.1 There is no obligation, implication, or presumption of any sort
that Carley will make further contributions to Carley Printer
Technology; such contributions shall be made at the sole discretion of
Carley.
2. Cancellations: Sections F.1., F.2., F.3., and F.5. of the Printer Agreement
are canceled in there entirety.
3. Royalty Basis: Royalties payable by XLI to Carley will be based on the Net
Cash Receipts, which shall mean cash (or cash equivalents) received by XLI
after December 31, 1996, from customers, licensees and sublicensees in
consideration for items including but not limited to hardware and software
products, services, and licenses or sublicenses, and independent of the date
of the agreement or contract granting said licenses and sublicenses,
provided said items at least partially incorporate Carley Printer Technology
as defined heretofore, less any refunds made by XLI of such cash receipts,
and less import and export duties and import and export taxes allocable to,
and not exceeding, such cash receipts when paid by XLI under contracts or
agreements with third parties for products sold, rights granted, and/or for
services performed by XLI if and only if the payment of said duties and
taxes decrease profits.
3.1. If in any given month the Net Cash Receipts are negative, the
negative amount will be carried forward to future months until
eliminated.
4. Royalty Payments: Royalties payable by XLI to Carley shall be paid on a
monthly basis and determined by multiplying the monthly Net Cash Receipts by
15%. Such royalty payments shall be made for each month during the last week
of the subsequent month at the latest.
4.1. As stated in the Second Agreement Amendment: Royalty payments
from XLI to Carley shall cease when an accumulated total
royalty fee of $2.4 million has been paid to Carley. The total
royalty fee of $2.4 million shall be considered a first
priority fiduciary responsibility of XLI.
5. Royalties in Arrears Due Carley: As of December 31, 1996, XLI owes Carley
accrued royalties of $103,375 (based on currently available information).
Commencing in January 1997, XLI agrees to pay Carley $7,500 per month during
the last week of each calendar month until such accrued royalties are paid
in full. It is noted that Section F.10.d. of the Second Agreement Amendment
may increase the accrued royalties that XLI owes Carley.
6. Holding of Royalties: The portion of the Net Cash Receipts that are required
to be paid to Carley as royalties according to Section 4 above and the
amount required to be paid to Carley according to Section 5 above shall be
deemed bay all parties to be the property of Carley the moment they are
received by XLI and held by XLI
25
accordingly.
7. Interest: In the event that XLI fails to pay when due the monthly royalty
payments called by Section 4 hereof and/or the monthly $7,500 payments
called for by Section 5 hereof, then such unpaid amounts shall bear interest
at the rate of 10% per annum compounded continuously until paid in full.
8. Security Interest: When the aggregated monthly royalty payments by XLI to
Carley pursuant to Sections 4 and 5 above total %200,000, Section F.9.
(Security Interest) of the Printer Agreement will be canceled in its
entirety and Carley will withdraw the UCC-1 registration.
9. Carley Work on Behalf of XLI: Carley and XLI agree that any work on
technology done by Carley exclusive of Carley Printer Technology will not be
deemed to be done on behalf of XLI unless and except under terms and
conditions mutually agreed in writing between XLI and Carley. Further, it is
understood that technology done by Carley may involve both Carley Printer
Technology and Carley Non- Printer Technology; any such Carley Non-Printer
Technology done by Carley will not be considered to be done on behalf of XLI
unless and except under terms and conditions mutually agreed to in writing
between XLI and Carley.
10. Multi-Technology Patents: In the event that technology includes both Carley
Printer Technology and Carley Non-Printer Technology and patents are applied
for for such technology, then XLI and Carley shall jointly own such patent
applications and the resulting patent(s) if granted, XLI and Carley will
jointly notify the patent office of the joint ownership, and the following
provisions will then apply:
10.1. XLI will have the exclusive right to sell products based on
and to license third parties exclusively or non-exclusively
or sell its interest (with the buyer subject this Amendment)
in such patent applications and patents ( if and when they
are issued) for and only for printing applications. Carley
will have the exclusive right to sell products based on and
to license third parties exclusively or non-exclusively or
sell its interest (with the buyer subject to this Amendment)
in such patent applications and patents (if and when they are
issued) for and only for non- printing applications.
10.2. If the patent application is initiated by XLI, XLI will have
the responsibility to pursue the issuance of such U.S.
patents, and thereafter to track the need for payment of
maintenance fees for both patent applications. XLI will pay
all U.S. Patent Office fees involved in having the patent
issued and maintained, and will be reimbursed by Carley
within 30 days of notification at the rate of 50% of such
fees based on the small entity basis. If the patent
26
application is initiated by Carley, Carley will have the
responsibility to pursue the issuance of such U.S, patents,
and thereafter to track the payment for maintenance fees for
both patent applications. Carley will pay all U.S. Patent
Office fees involved in having the patent issued and
maintained, and will be reimbursed by XLI within 30 days of
notification for those fees, less 50% of such fees based on
the small entity basis.
10.3. XLI and Carley will work together in responding to patent
office actions, including utilization of conference calls
with the patent examiner for substantive issues. Both must
agree to responses, striving for the broadest coverage. If a
patent application is split, such resulting patents would be
jointly owned under the terms of this Amendment unless
applicable to one field only.
10.4. Either party may employ legal counsel or conduct patent or
prior art searches at their own expense. Such expense can be
incurred on a shared basis only by written consent of both
parties.
10.5. Either party may apply for foreign patents at their sole
discretion and their sole expense. In such case, the party
will immediately notify the other party of such actions in
writing. Such patents will be considered jointly owned for
the purpose of Sections 10.1., 10.4., 10.6., 10.7., 10.8.,
and 10.9. hereof.
10.6. If either party wishes to abandon its interest in a patent
application or patent after it is issued (such as when
maintenance fees become due), it will immediately inform the
other party, and relinquish its ownership in the patent
application and rights under 10.3. and 10.8. to the other
party if the other party wishes to continue it.
10.7. In the event that patent litigation and/or an injunction is
brought against XLI and/or Carley concerning the sale, use,
or manufacturing of hardware or software products and/or
licensing or sublicensing by XLI and/or Carley, then (a) if
pertaining to applications XLI will hold Carley and its
principals blameless and harmless and not hold Carley or its
principals responsible for any of XLI's expenses involved, or
(b) if pertaining to non-printing applications but associated
with patents jointly owned by Carley and XLI, Carley will
hold XLI and its principals blameless and harmless and will
not hold XLI or its principals responsible for any of
Carley's expenses involved.
10.8. Either party at its own choice and expense may pursue
infringers in and only in its field and collect associated
damages. If an infringer is infringering in both the printer
and non-printer fields, then such pursuit may be
27
done jointly by written agreement, and any damages collected
will be divided proportionally according to reasonable
applicability. In the event that either party initiates
infringement litigation or formal notification to suspected
infringer, that party will immediately inform the other
party.
11. Other Terms
11.1. Royalty payments according to Sections 4 and 5 above shall be
deposited to Bank Boston to account #2651 408 8 (under the
name of Adam L. Carley and Leonard R. Weisberg) for the
benefit of Carley unless otherwise directed by Carley.
11.2. XLI will provide an unaudited report to Carley within thirty
days subsequent to the end of each month and calendar quarter
providing the total XLI cash receipts, the Net Cash Receipts,
the exclusions according to Section 3 above, and the basis
for such exclusions. XLI will also provide Carley according
to the same schedule a record of the total new and back
royalty payments to Carley according to Sections 4 and 5
above respectively. XLI will further provide Carley with the
results of its annual financial audit includes the Net Cash
Receipts and royalty payments to Carley, but no separate
auditor's report will be required for such Net Cash Receipts
and royalty payments to Carley.
11.3. Adam L. Carley may attend XLI meetings and appropriate
customer meetings. XLI will provide Adam L. Carley and
Leonard R. Weisburg ( the Carley shareholders) full access to
XLI records including but not limited to reports, Board
Minutes, contracts, and financial data. Adam L. Carley and
Leonard R. Weisburg agree to keep all XLI proprietary
information confidential, and shall not disclose or use such
information without the prior written consent of XLI.
11.4. The invalidity or unenforceability of any provision of this
Amendment will not affect the validity or enforceability of
any other provision and any unenforceable provision will be
deemed severable from and shall not render unenforceable the
remainder of this Amendment.
11.5. Waivers: No waiver of any right hereunder by any party shall
operate as a waiver of any other right, or of the same right
with respect to any subsequent occasion for its exercise, or
of any right to damages. No waiver by any party of any breach
of this Amendment shall be held to constitute a waiver of any
other breach or a continuation of the same breach.
11.6. Other Agreements: This Amendment, and the Printer Amendment
28
as amended, contain the entire understanding of the parties,
written or oral, with respect to the subject matter hereof.
11.7. Counterparts: This Amendment may be executed in counterparts,
each of which together shall constitute one and the same
instrument.
11.8. Amendment: This Amendment can be amended only in writing and
with the mutual consent and agreement by both Carley and XLI
and signed by the duly authorized officers of the parties.
11.9. Disputes: In the event of any disputes between XLI and Carley
and/or their principals and agents regarding any matter
governed by this Amendment or any other matter, the parties
will, if they cannon resolve the matter by negotiation,
submit the dispute to mediation/arbitration. The provisions
of Schedule "A" attached to the Printer Agreement will apply
to any mediation/arbitration.
IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED THIS AMENDMENT EFFECTIVE AS OF THE
DATE SET FORTH ABOVE.
XLI CORPORATION:
By /s/ Anthony D. D'Amelio 2/12/97
Date signed
CARLEY CORPORATION
By /s/ Adam L. Carley 2/12/97
Date signed
By /s/ Adam L. Carley 2/12/97
Date signed
By /s/ Leonard R. Weisburg 2/11/97
Date signed
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized,
on March 7, 1997.
XEROGRAPHIC LASER IMAGES CORPORATION
By: /s/ Anthony D. D'Amelio
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
Name Capacity Date
President, Chief Executive March 7, 1997
/s/ Anthony D. D'Amelio Officer and Chairman
of the Board (Principal
Executive Officer)
Chief Financial Officer,
/s/ James L. Salerno Treasurer, Secretary March 7, 1997
(Principal Financial Officer)
/s/ Dr. Joseph Katz Director March 7, 1997
/s/ Vincent J. Spoto Director March 13, 1997
/s/ Dr. Adam L. Carley Director March 7, 1997
Xerographic Laser Images Corporation
Index to Financial Statements
Page(s)
Independent Auditor's Report F-2
F-2b
Balance Sheets as of December 31, 1996 and 1995 F-3
Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 F-4
Statements of Changes in Stockholders'
(Deficit) Equity for the years ended
December 31, 1996, 1995, and 1994 F-5
Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 F-6
Notes to Financial Statements F-7 to F-19
F-1
[LETTERHEAD OF WOLF & COMPANY, P.C.]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Xerographic Laser Images Corporation:
We have audited the accompanying balance sheets of Xerographic Laser Images
Corporation as of December 31, 1996 and 1995 and the related statements of loss,
stockholders' deficit and cash flows for each of the years in the two year
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Xerographic
Laser Images Corporation for the year ended December 31, 1994 were audited by
other auditors whose report dated April 12, 1995 included an explanatory
paragraph that described the uncertainty of the Company's ability to continue as
a going concern.
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 financial statements referred to above present fairly, in
all material respects, the financial position of Xerographic Laser Images
Corporation as of December 31, 1996 and 1995 and the results of their operations
and cash flows for the years ended December 31, 1996 and 1995, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
Financial Statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
January 17, 1997, Wolf & Company, P.C.
except for Note 9, as to which
the date is February 12, 1997
Boston, Massachusetts
F-2
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Chairman of the Board and Stockholders of
Xerographic Laser Images Corporation:
We have audited the accompanying balance sheet of Xerographic Laser Images
Corporation as of December 31, 1994, and the related statements of operations,
cash flows and stockholders' deficit for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Xerographic Laser Images
Corporation as of December 31, 1994, and the related statements of operations,
cash flows and stockholders' deficit for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
Financial Statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 12, 1995
F-2b
<TABLE>
<CAPTION>
XEROGRAPHIC LASER IMAGES CORPORATION
Balance Sheets
December 31, December 31,
1996 1995
-------------- ----------------
<S> <C> <C>
ASSETS
===============
Current assets:
Cash $ 219,723 $ -
Accounts receivable, less allowance for
doubtful accounts of $5,000 in 1996 and
$14,033 in 1995 20,314 279,271
Finished goods inventory - 55,181
Other current assets - 3,250
--------------
----------------
Total current assets 240,037 337,702
-------------- ----------------
Property and equipment, net (Note 4) 35,191 68,512
Other assets 4,432 12,651
-------------- ----------------
Total assets $ 279,660 $ 418,865
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
===============================================================================
Current liabilities:
Cash overdraft $ - $ 1,432
Notes payable - 101,000
Accounts payable 352,346 439,228
Deferred revenue (Note 5) 101,000 -
Accrued expenses 179,943 220,694
Accrued severance costs (Note 10) 68,704 103,634
Current portion of capital lease obligations (Note 7) 11,731 12,161
--------------
----------------
Total current liabilities 713,724 878,149
-------------- ----------------
Capital lease obligations (Note 7) 16,908 28,639
Suborndinated notes payable (Note 16 ) 283,688 -
Accrued severance costs (Note 10) - 69,474
--------------
----------------
Total liabilities 1,014,320 976,262
-------------- ----------------
Stockholders' equity (deficit) (Note 11)
Series A Preferred stock, $.01 par value; authorized 1,000,000
shares; 315,238 issued and outstanding at December 31,
1996 and 1995, respectively. 3,152 3,152
Common stock, $.01 par value; 30,000,000 shares authorized:
1,778,646 and 1,338,646 issued and outstanding at
December 31, 1996 and 1995, respectively 17,786 13,386
Additional paid- in capital 8,434,353 8,423,428
Accumlated deficit (9,189,951) (8,997,363)
--------------
----------------
Total stockholders' equity (deficit) (734,660) (557,397)
-------------- ----------------
Total liabilities and stockholders' equity $ 279,660 $ 418,865
==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-3
<TABLE>
<CAPTION>
XEROGRAPHIC LASER IMAGES CORPORATION
Statement of Operations
Years Ended Decemeber 31,
-----------------------------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
----------------- ------------------ ----------------
Revenues:
Product revenues $ 200,368 $ 397,550 $ 1,342,212
Contract and license revenues 698,250 700,000 - -
----------------- ------------------ ----------------
Total revenues 898,618 1,097,550 1,342,212
----------------- ------------------ ----------------
Cost and expenses:
Cost of product revenues 176,886 294,851 1,580,052
Cost of contract and license revenue 81,554 202,015 - -
Research and development 287,748 331,279 398,026
Selling and marketing 42,942 117,896 794,873
OEM development - - - - 497,867
General and administrative 456,156 358,040 1,015,624
----------------- ------------------ ----------------
Total cost and expenses 1,045,286 1,304,081 4,286,442
----------------- ------------------ ----------------
Loss from operations (146,668) (206,531) (2,944,230)
----------------- ------------------ ----------------
Other income (expense)
Interest expense (49,252) (24,655) (199,134)
Interest income - - 396 26,916
Other income 3,332 7,333 - -
----------------- ------------------ ----------------
Total other expense, net (45,920) (16,926) (172,218)
----------------- ------------------ ----------------
Net loss $ (192,588) $ (223,457) $ (3,116,448)
================= ================== ================
Net loss per common share $ (0.12) $ (0.18) $ (3.44)
Weighted average common and common
equivalent shares outstanding 1,565,105 1,255,314 906,143
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<TABLE>
<CAPTION>
XEROGRAPHIC LASER IMAGES CORPORATION
Statements of Changes in Stockholders' (Deficit) Equity
Preferred Stock Common Stock Total
------------------------- ------------------------ Additional Stockholders'
Number of Number of Paid-in Accumulated (Deficit)
Shares Issued Par Value Shares Issued Par Value Capital Deficit Equity
------------- --------- ------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 - - 3,817,174 38,172 5,503,247 (5,657,458) (116,039)
Issuance of common stock
for bridge financing - - 100,000 1,000 221,082 - 222,082
Issuance of common stock in exchange
for conversion of long term debt - - 40,000 400 79,600 - 80,000
Issuance of common stock in exchange
for conversion of bridge financing - - 50,000 500 99,500 - 100,000
Issuance of common stock in exchange
for extension of long term note - - 15,000 150 18,600 - 18,750
Issuance of Series A convertible
preferred stock 850,000 8,500 - - 2,461,403 - 2,469,903
Conversion of Series A Preferred Stock
into common stock (518,442) (5,184) 2,592,210 25,922 (20,738) - -
Reverse common stock split
on November 29, 1994 - - (5,539,361) (55,394) 55,394 - -
Net loss - - - - - (3,116,448) (3,116,448)
Balance at December 31,1994 331,558 3,316 1,075,023 10,750 8,418,088 (8,773,906) (341,752)
Conversion of Series A Preferred Stock
into common stock (16,320) (164) 13,623 136 28 - -
Issuance of common stock to key
employees in lieu of full cash
compensation - - 250,000 2,500 5,312 - 7,812
Net loss - - - - - (223,457) (223,457)
Balance at December 31, 1995 315,238 3,152 1,338,646 13,386 8,423,428 (8,997,363) (557,397)
Issuance of common stock to key
employees in lieu of full cash
compensation - - 440,000 4,400 10,925 - 15,325
Net loss - - - - - (192,588) (192,588)
Balance at December 31,1996 315,238 $ 3,152 1,778,646 $ 17,786 $ 8,434,353 $(9,189,951) $(734,660)
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<TABLE>
<CAPTION>
XEROGRAPHIC LASER IMAGES CORPORATION
Statement of Cash Flows
Years Ended December 31,
1996 1995 1994
---------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activies
Net loss $ (192,588) $ (223,457) $ (3,116,448)
Adjustments to reconcile net loss to
net cash used in operating activities:
Restructuring charge - - 33,750
Write-offs - - 305,143
Inventory write-offs 30,516 41,855 174,267
Write-offs of fixed assets - 3,471 114,686
Bad debt adjustment & sales adjustment - - 656,590
Depreciation and amortization 33,321 73,766 293,692
Issuance of common stock for bridge
financing - - 157,200
Issuance of common stock for services
rendered 15,325 7,812 -
(Increase) decrease in operating assets:
Accounts receivable 258,957 (222,702) (299,590)
Inventory 24,665 75,821 (259,383)
Other assets 11,469 6,281 (24,389)
Increase(decrease) in operating liabilities:
Accounts payable (86,882) 118,854 (180,553)
Deferred revenue 101,000 - -
Accrued expenses (27,063) 186,467 (78,087)
Accrued severence costs (104,404) (128,221) (112,038)
Due to related parties - - (56,703)
---------- ---------- ------------
Net cash provided (used) by operating activities 64,316 (60,053) (2,391,863)
---------- ---------- ------------
Cash flows from investing activities:
Purchase of property and equipment - - (15,046)
Capitalized software - - (60,918)
---------- ---------- ------------
Net cash used by investing activities - - (75,964)
---------- ---------- ------------
Cash flows from investing activities:
Proceeds from issuance of preferred stock - - 2,469,903
Receipts of notes payable 204,500 26,000 -
Payments of notes payable (35,500) - (150,000)
Payments of related party notes payable - - (205,000)
Payments under capital lease obligations (12,161) (43,253) (148,168)
Net Proceeds from bridge financing - - 500,000
Cash overdraft (1,432) 1,432 -
---------- ---------- ------------
Net cash provided (used) by financing activities 155,407 (15,821) 2,466,735
---------- ---------- ------------
Net increase (decrease) in cash 219,723 (75,874) (1,092)
Cash at beginning of period - 75,874 76,966
---------- ---------- ------------
Cash at end of period $ 219,723 $ - $ 75,874
========== ========== ============
Supplemental disclosure of cash flow information:
Interest paid $ 45,616 $ 20,340 $ 24,102
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
Xerographic Laser Images Corporation (the "Company") was founded in June
1989 to develop, manufacture and market a proprietary technology which improves
the quality of output from laser printers.
For the fiscal years ended December 31, 1996, 1995 and 1994, the Company
had net losses of $192,588, $223,457 and $3,116,448, respectively. The Company
had a working capital deficit of $473,687 and accumulated deficit of $734,660 at
December 31, 1996.
The Company has no current plans to undertake a debt or equity financing in
1997. Funds for development efforts will come from current or anticipated
licensing and royalty fees. If the Company is unable to fund its operations
through cash flow, the Company's development efforts and operations will be
materially adversely effected.
Management believes that progress has been made in reducing expenses and in
obtaining additional development partnership agreements which will enhance the
Company's chances of operating on a profitable basis. Despite these factors
there remains substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going concern.
2. Summary of Significant Accounting Policies
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the balance
sheet date and the amounts of revenues and expenses recorded during the
reporting period. Actual results could differ from those estimates. Such
estimates primarily relate to the fair values of financial instruments, the
allowance for doubtful accounts, the valuation allowance for deferred tax assets
and the depreciable lives of property and equipment.
F-7
Revenue Recognition
Revenues from product sales are recognized at the time of shipment or in
accordance with contractual acceptance terms. Research, development and
licensing contract revenues are recognized when the related costs are incurred
and performance criteria in the contract are met.
Inventory
Inventory is stated at the lower of cost (first in, first out) or market.
During 1996, all remaining board product inventory became obsolete due to
changing technology, and was written off.
Property and Equipment
Purchased property and equipment are recorded at cost. Depreciation is
recorded using the straight-line method over the estimated useful lives of the
related assets, which is generally five years. Property and equipment leased
under capital leases are stated at cost and are amortized over the lesser of the
lease term or estimated useful life.
Maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the assets and related allowances for
depreciation and amortization are eliminated from the accounts and any resulting
gain or loss, if any, is reflected in the results of operations.
Research and Development
Research and development costs are expensed as incurred.
Product Warranty Costs
The Company's warranty period on sales of its product is generally one
year. Estimated future costs for initial product warranties are considered
immaterial.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities using
the currently enacted income tax rates expected to be in effect when the taxes
are actually paid or recovered. A deferred tax asset is also recorded for net
operating loss and tax credit carryforwards to the extent their realization is
more likely than not. The deferred tax expense for the period represents the
change in the deferred tax asset or liability from the beginning to the end of
the period.
Net Loss Per Common Share
Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common share
F-8
equivalents are not included in the per share calculations as the effect of
their inclusion would be antidilutive. The net loss per common share for fiscal
years presented have been adjusted to reflect the six for one common stock
reverse stock split as described in Note 11.
Organization Costs
Certain costs relating to the organization of the Company were capitalized
and were amortized over 60 months using the straight-line method.
Patent and Trademark Application Costs
Certain costs relating to obtaining patents and trademarks for the
Company's technology and products have been capitalized. Amortization commences
when the patent or trademark is allowed and granted and is amortized over 60
months, which is the estimated useful life of the asset.
Capitalization of Software Costs
The Company follows Statement of Financial Accounting Standard ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." The remaining balance of Capitalized Software costs was
written off in 1994. Prior to the write-off, software costs incurred prior to
the establishment of technological feasibility were charged to research and
development expense. Software production costs incurred subsequent to the
establishment of technological feasibility were capitalized until the product
was available for general release to customers. Amortization of capitalized
software costs was charged to cost of sales over the estimated economic lives of
the related products, beginning at their initial shipment date.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
"SFAS" No. 123, "Accounting for Stock-Based Compensation." This Statement
encourages all entities to adopt a fair value based method of accounting for
stock compensation, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which
is usually the vesting period. However, it also allows an entity to continue to
measure compensation cost for employee plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date
(or other measurement date) over the amount an employee must pay to acquire the
stock. Entities electing to continue to apply APB Opinion No.25 for employee
stock-based compensation must make pro forma disclosures of net income and
earnings per share, as if the fair value based method of accounting had been
applied.
F-9
Generally, stock options issued under the Company's stock option plan
have no intrinsic value at the grant date, and under APB Opinion No. 25 no
compensation cost is recognized. The Company will continue its current
accounting treatment for employee stock options and make the pro forma
disclosures proscribed by this Statement. Stock options granted to individuals
not classified as employees were immaterial during 1996.
3. Income Taxes
The Company has generated operating loss carryforwards for federal and
state income tax and federal alternative minimum tax purposes of approximately
$8,710,000 for the period June 9, 1989 (inception) through December 31, 1996.
These net operating losses will expire at various dates through 2011. The
Company has also generated research and development credits of approximately
$211,000 for the period June 9, 1989 (inception) through December 31, 1996,
which expire at various dates through 2011. Utilization of these net operating
loss carryforwards and research and development credits will be subject to
annual limitations based on Internal Revenue Code provisions relating to changes
in the Company's ownership.
The approximate tax effect of each type of temporary difference before
allocation of the valuation allowance is as follows:
December 31,
Deferred tax assets: 1996 1995
Net operating loss carryforwards . . . $3,484,000 $3,460,000
Tax credit carryforwards . . . . . . . 211,000 181,000
Allowance for doubtful accounts. . . . 2,000 9,200
Accrued Restructuring Costs . . . . . 27,500 76,400
------ ------
Total deferred tax asset . . . . . . . . 3,724,500 3,726,600
Valuation allowance . . . . . . . . . . (3,724,500) (3,726,600)
--------- ---------
Net deferred tax asset . . . . . . . . . $ -- $ --
========= =======
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
100% valuation allowance against deferred tax assets.
4. Property and Equipment
Property and equipment consists of the following:
F-10
December 31, December 31,
1996 1995
Equipment . . . . . . . . . . . . . . $121,740 121,740
Capitalized lease equipment . . . . . 368,964 368,964
------- -------
490,704 490,704
Less accumulated depreciation (455,513)
and amortization . . . . . . . . . . (422,192)
Property and equipment, net . . . . . $ 35,191 $ 68,512
======== ========
5. Deferred Revenue
During November and December 1996 the Company received revenue for contract
and licensing agreements that included fees for support engineering services
that will be performed in 1997.
6. Stock Option Plan
The Company maintains two stock options plans (the "1990 Stock Option Plan"
and the "1992 Stock Option Plan") whereby the Board of Directors, at their
discretion, may issue either incentive stock options or nonqualified options to
employees and nonqualified options to consultants, directors or other
nonemployees.
Incentive stock options may not be granted at a price less than the fair
market value of the shares at the grant date (or less than 110% of fair market
value in the case of employees or officers holding 10% or more of the voting
stock) while the nonqualified options may not be granted at a price lower than
the lesser of 50% of the fair market value of the shares at the grant date or
the book value of the shares as of the end of the fiscal year of the Company
immediately preceding the date of the grant. All grants as of December 31, 1996
were at fair market value or greater. The options generally vest ratably over a
period of zero to five years. Incentive stock options granted under the plan
must expire not more than 10 years from the date of grant and not more than five
years in the case of incentive stock options granted to an employee or officer
holding 10% or more of the voting stock of the Company. All options not
exercised prior to the expiration date automatically expire.
F-11
The following table summarizes all stock option activity:
Weighted
Average
Number of Options Exercise
price
Outstanding at December 31, 1993 370,583 $1.41-3.88
=======
Granted........................ 1,029,417 .25
Cancelled...................... (370,583) 1.41-3.88
Terminated..................... (201,500) .25
-------
Outstanding at December 31, 1994
giving effect to reverse stock
split on November 29, 1994 137,986 1.99
Granted........................ 287,000 .03125
Canceled....................... (74,381) 1.50
Terminated..................... (25,638) 1.50
------
Outstanding at December 31, 1995 324,967 $ .41
=======
Granted....................... 125,500 .02
Canceled...................... (10,417) .03125
Terminated.................... (1,176) 1.50
-----
Outstanding at December 31, 1996 438,874 $ .30
=======
At December 31, 1996, 8,936 shares are available for future grants.
Information pertaining to options outstanding at December 31, 1996 is as
follows:
Options Outstanding
Weighted Avg.
Remaining
Range of Number Contractual Weighted Avg.
Exercise Prices Outstanding Life Exercise Price
- --------------- ----------- ------------ --------------
$.01-$.10 402,500 2.9 years $.03
$1.50-$3.00 30,375 2.4 years $1.54
$10.50-$22.50 5,999 1.9 years $12.16
438,874 2.8 years $.30
F-12
Options Exercisable
-------------------
Range of Number Weighted Avg.
Exercise Prices Exercisable Exercise Price
- --------------- ----------- --------------
$.01-$.10 160,834 $.03
$1.50-$3.00 30,375 $1.54
$10.50-$22.50 5,999 $12.16
197,208 $ .63
The Company applies APB Opinion 25 and related interpretations in accounting for
its employee option and warrant grants. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant dates for awards under those plans consistent with the method
prescribed by SFAS No. 123, the Company's net loss and net loss per common share
would have been increased to the pro forma amounts indicated below:
Years Ended December 31,
1996 1995
---------- ----------
Net loss: As Reported $(192,588) $(223,457)
Pro Forma (194,138) (251,426)
Net loss As Reported (.12) (.18)
per common share: Pro Forma (.12) (.20)
The fair value of each option or warrant granted is estimated on the grant
date using the Black-Scholes option pricing model. Due to the historical
volatility of the Company's stock price, the fair value of the option or warrant
is generally equal to the fair value of the underlying stock. The weighted
average fair value of options granted as of the grant dates was $.01 and $.03
for 1996 and 1995 respectively.
7. Commitments
The Company leases its facilities and certain equipment under operating
lease agreements which expire on various dates through 1999. Rental expense
incurred under these agreements was $36,100, $56,179 and $80,762 during 1996,
1995, and 1994 respectively. The Company has entered into various capital leases
for office equipment, the net book value of which were $28,638, $51,915 and
$61,458 at December 31, 1996, 1995 and 1994, respectively.
The future minimum annual lease obligations under these leases for the
respective years ending December 31 are as follows:
F-13
Capital Leases Operating Leases
1997 $ 18,528 $ 42,700
1998 18,528 37,830
1999 8,249 12,610
----- ------
Total Obligation 45,305 97,074
------
Less amount representing interest (16,666)
Present value of minimum lease payments 28,639
Less current portion (11,731)
Long-term obligation $16,908
8. Related Party Transactions
In July 1989, the Company entered into an Agreement with the Carley
Corporation, a company founded by Dr. Adam L. Carley, a founder of the Company,
pursuant to which the Company acquired an exclusive worldwide license to certain
technology (the "Carley Technology") for the printing of text, graphics and
photographic images. In consideration therefore, the Company issued 268,040
shares of common stock valued at $.01 per share to the two stockholders of the
Carley Corporation and agreed to pay royalties equal to 5% of cash received in
connection with sales of hardware or software products incorporating the Carley
Technology and 33 1/3% on all related technology sublicensed to third parties,
up to $2,400,000. The Carley Corporation has agreed that upon payment of the
total royalty amount it will assign all rights, title and interest to the Carley
Technology, including any improvements or future developments on the Carley
Technology, to the Company. Upon the assignment the Company has agreed to
sublicense the Carley Technology to the Carley Corporation, on an exclusive and
royalty-free basis, for retail services including but not limited to stores,
kiosks and booths for purposes of picture making and picture reproduction.
In December 1993, the Company and Carley Corporation amended the Carley
Agreement such that Carley Corporation shall be paid minimum royalties of : (i)
$75,000 in fiscal year 1994; (ii) $82,500 in fiscal year 1995; and (iii) $90,000
in fiscal year 1996. Additionally, Carley Corporation will be entitled to
additional royalties not to exceed $225,000 in each of these years based on a
percentage of net profit after interest, taxes and the minimum royalty payments.
F-14
Royalties expensed under the Carley Agreement were approximately $90,000,
$82,500 and $104,000 for the years ended December 31, 1996, 1995 and 1994
respectively. Cumulative royalties expensed in connection with this agreement
were $517,585 through December 31, 1996. Accrued Expenses at December 31, 1996
includes $103,375 due under the Carley Agreement.
Effective January 1, 1997, the Company and the Carley Corporation again
amended the Carley Agreement to provide a royalty of 15% of cash receipts from
sales and licenses of products incorporating the Carley Technology, in lieu of
the previous royalty rate of 5% on boards and 33 1/3% of license fees.
9. Capitalized Software Costs
The Company previously capitalized software costs in connection with
certain printer related products. During 1994, the Company wrote down the
balance of capitalized software costs by $305,143, which was the remaining
balance.
10. Severance Charges
On November 11, 1993, the Company recorded approximately $380,000 for
severance charges relating to the resignation of the Company's President and
Vice President of Engineering. The cash payments associated with these charges
will extend through November 1997. The Company paid $104,404 and $89,908 under
these agreements during 1996 and 1995, respectively.
11. Capital Stock
Series A Preferred Stock
On February 22, 1994, the Company completed an offering of 850,000 units,
each consisting of one share of Series A Convertible Preferred Stock and one
Class A redeemable Common Stock Purchase Warrant. Each share of convertible
preferred stock is convertible into five shares of the Company's Common Stock at
any time after 90 days from the date of issue. During 1995 and to date, 534,762
shares of Series A Convertible Preferred Stock have been converted into 445,635
shares of Common Stock. At December 31, 1996, 315,238 shares of Series A
Preferred Stock remained outstanding. To date, there have been no dividends paid
or accrued on Series A Preferred Stock. Series A Preferred stockholders are
entitled to an annual cumulative dividend of 9% provided net income exceeds 150%
of the aggregate dividend payable, and in any year in which the Company does not
have net earnings after taxes in excess of 150% of the aggregate dividend
payable, no dividend shall be paid.
Common Stock
On January 20, 1993, the Company completed an initial public offering of
775,000 units, each consisting of two shares of Common Stock and one redeemable
Common Stock Purchase Warrant. On November
F-15
29, 1994, the Company held a Special Meeting of the Stockholders and authorized
a 1-for-6 reverse stock split of the Company's Common Stock. At December 31,
1996 there were 1,778,646 shares of Common Stock outstanding. During 1996 and
1995 the Company awarded 440,000 and 250,000 shares of Common Stock,
respectively, to key employees in lieu of cash compensation.
Warrants
In connection with the Company's initial public offering in January 1993,
the Company issued 775,000 Common Stock Purchase Warrants ("IPO Warrants") at a
price of $5.00 per share if exercised prior to July 12, 1995, and at $7.00 per
share if exercised thereafter until January 12, 1998. The Company also issued to
Thomas James Associates, Inc., a warrant (the "Underwriter's Warrant") to
purchase 77,500 Units, each Unit consisting of two shares of Common Stock, and
one IPO Warrant. The Underwriter's IPO Warrant is exercisable for a four year
period commencing January 20, 1994, at an exercise price of $8.45 per unit.
In connection with the Company's offering of Series A Preferred Stock in
February 1994, the Company issued 850,000 Class A Warrants, each warrant
allowing for the purchase of one share of Common Stock, at a price of $1.1375
per share if exercised prior to August 22, 1997, and at $1.3125 per share if
exercised thereafter until February 22, 1999. The Company also issued to Thomas
James Associates, Inc., a warrant to purchase 85,000 Units, each Unit consisting
of five shares of Common Stock, and one Class A Warrant. The Underwriter's Class
A Warrant is exercisable for a four year period commencing February 20, 1994, at
an exercise price of $4.80 per Unit.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the IPO, Class A and Underwriter Warrants are subject to
adjustment upon the occurrence of certain events, including stock dividends,
stock splits, combinations or reclassifications of the Common Stock, or sale by
the Company of shares of its Common Stock at a price below the then applicable
exercise price of the Warrants. Additionally, an adjustment would be made in the
case of a reclassification or exchange of Common Stock, consolidation or merger
of the Company with another corporation or sale of all or substantially all of
the assets of the Company in order to enable Warrant holders to acquire the kind
and the number of shares of stock or other securities or property receivable in
such event by a holder of the number of shares of Common Stock there might
otherwise have been purchased upon the exercise of the Warrant. No adjustment to
the exercise price of the Warrants will be made for dividends (other than stock
dividends), if any, paid on the Common Stock or for securities issued pursuant
to the Company's Stock Option Plans or other employee benefit plans of the
Company.
Giving effect to the events during 1994, 1995, and 1996, the holders of IPO
Warrants are entitled to purchase .91 share of Common Stock for each Warrant
held at a price of $7.38 per share until
F-16
January 12, 1998; the holders of Class A Warrants are entitled to purchase .43
share of Common Stock for each warrant held at a price of $2.62 until August 22,
1997, and at $3.06 per share until February 22, 1999; Underwriter's IPO Warrant
entitles the Underwriter to purchase 23,302 units, consisting of two shares of
Common Stock and one Common Stock Purchase Warrant at a price of $22.14; and the
Underwriters Class A Warrant entitles the Underwriter to purchase one share of
Common Stock at a price of $15.72.
The Company issued warrants to various lenders in 1992 which expire five
years from the date of issue, of which, 5,990, 1,777 and 8,319 warrants remain
outstanding at December 31, 1996, at an exercise price of $5.88, $8.46 and $5.88
per share, respectively.
At December 31, 1996, the Company had the following shares of Common Stock
reserved in the following amounts:
Reserved For: Number of Shares
Employee Stock Options 447,810
IPO Warrants 701,468
Underwriter's IPO Warrants 70,147
Class A Warrants 362,984
Underwriter's Class A Warrants 36,298
Lender's Warrants 1992* 16,075
Lender's Warrants 1995* 225,000
Lender's Warrants 1996* 593,462
Convertible Preferred Shares 262,698
Other Warrants 383,665
----
Total 3,099,607
* Warrants issued to lenders
including insiders
12. Export Revenues
The Company currently operates in one industry segment. Export product
revenues are generated predominantly from Europe and accounted for approximately
19%, 16% and 9% of total revenues in fiscal years 1996, 1995 and 1994
respectively.
13. Significant Customers
For the year ended December 31, 1996, 1995 and 1994, the Company did not
have any customers that accounted for greater than 10% of total product revenue.
One customer accounted for 72% of total contract and license revenues in 1996
and 59% in 1995.
14. Other Income Statement Information
Advertising costs for the years ended December 31, 1996, 1995 and 1994 were
$6,704, $1,905 and $48,440 respectively.
F-17
15. Supplementary Cash Flow Information
Accrued interest converted to subordinated notes payable amounted to
$13,688. Noncash financing and investing activities are as follows:
Years Ended December 31,
1996 1995 1994
Assets acquired and obligations
incurred resulting from capital
lease obligations $ - - $61,458
Issuance of common stock for
services rendered 15,325 7,812 -
Issuance of common stock in
connection with bridge financing - - 322,082
Issuance of common stock in
exchange for conversion of
long term debt - - 98,750
Accrued interest converted to 13,688 - -
subordinated notes payable
16. Subordinated Notes Payable
On May 31, 1996, the Company raised $283,688 in a limited private offering
to accredited investors of subordinated nonrecourse promissory notes. Included
in this amount was $13,688 of accrued interest and $75,000 of outstanding debt.
In addition to a note, each subscriber received for each dollar invested a five
year warrant to purchase two shares of the Company's Common Stock at an exercise
price of $.01 per share. Principal and interest will be repaid, if at all,
solely from the Company's pre-tax earnings for each of the five fiscal years
commencing with the fiscal year ending December 31, 1996. Payments, if any, will
be made annually to the holders of the notes within thirty days after the
Company files its Form 10-KSB or its then equivalent form with the Securities
and Exchange Commission. Such annual payments shall not exceed, in the
aggregate, approximately 14% of the Company's pre-tax earnings, and shall not
exceed over the five year term of the notes, three times the principal amount of
the notes.
The Company issued 593,462 warrants in connection with the offering.
F-18
17. Factoring Agreement
On December 21, 1995, the Company entered into a financing arrangement
with Silicon Valley Financial Services, a division of Silicon Valley Bank, to
borrow against the Company's outstanding receivables. The advances bear interest
at a monthly rate of 2.5% and require an advance fee of 1%. As of December 31,
1996, there were no receivables with Silicon Valley Bank.
18. Significant risks and uncertainties
In the normal course of business, the Company is exposed to certain risks
and uncertainties which could have an impact on the Company's operations.
Patent protection
The Company protects its products and technology through the use of
patents. There can be no assurance that any patent granted will be enforceable
or provide meaningful protection from competitors.
Foreign customers
The Company derives a portion of its revenues from international sales (See
Note 11). The Company could be adversely affected by changes in foreign laws,
regulations, tariffs, and taxes.
[THIS SPACE IS INTENTIONALLY LEFT BLANK]
F-19
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<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
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