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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 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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
COMMISSION FILE NUMBER 1-11236
XEROGRAPHIC LASER IMAGES CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 51-0319174
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
101 BILLERICA AVENUE, 5 BILLERICA PARK 01862
NORTH BILLERICA, MA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 670-5999
------------------------
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, 1997 were
$1,520,781.
As of March 27, 1998, 3,574,941 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
$857,765 and $194,429 respectively.
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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 laser printing applications. XLI is a provider of high
technology enhancement products for printers, digital copiers, 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.
XLI's technology is used in the following applications:
- High quality text and line art edge enhancement
- Life-like photographs with gray scale rendition
- Digital copier functions
- Hi-Definition Fax
- High Quality Color Images on inexpensive color laser printers
- High performance image enhancement and modulation for demand printing
applications
- Application Specific Integrated Circuits (ASIC) and Core Modules to meet
customer requirements and costs
PRODUCTS AND PRODUCT DEVELOPMENT
During the past two years XLI has changed its focus from a low-volume niche
market supplier of enhancement board products for VARs and end users toward a
supplier of mass-market integrated circuit technology for printer and printer
controller OEMs. During 1997, the sales of all board products were discontinued
due to diminishing sales caused by the introduction of higher resolution
printers, some with enhancement technology such as the new XLI integrated
circuit chip designed directly into the printer controller. XLI's first ASIC
(Application Specific Integrated Circuit) product, the XLI-2050 ImageChip, was
introduced to the market in 1997. This ASIC is a highly integrated laser printer
enhancement chip with fax, text and line-art edge enhancement plus single-bit
grayscale enhancement. Additional features in the chip are multi-bit modes for
digital copy functions. XLI is also selling the ImageChip technology used in the
XLI-2050 to customers in the form of VHDL Core Modules (design modules that can
be used by XLI customers to develop their own ASICs that incorporate multiple
applications, including XLI's). The ASICs developed using the XLI Core Modules
are incorporated by customers into printer controller boards that are imbedded
into the printing device as an integral component. Engineering samples of the
XLI-2050 ImageChip, with limited functionality (bugs in the first chip
fabrication), are now being sampled to developers with full functionality chips
planned for the second half of 1998. To date the company has entered into six
license agreements for its ImageChip technology, including the recent licensing
by Pixel Magic, Inc. Licenses have been signed with both major printer
controller suppliers and printer OEMs.
XLI also has in development (funded through a licensee non-recurring
engineering development project) a scaling/enhancement ASIC for flat-panel
displays. Although this is an extension of the XLI's technology outside the
printer market, there are no current plans to market such a product and, if done
so, there is no assurance that this product would have market acceptance.
Although the new product developments around the ImageChip technology look
promising at this time, XLI is just beginning to enter the product life cycle
where significant technical and sales support will be necessary to succeed in
this highly competitive market. XLI will require additional funding and
resources in order to maximize the potential of its new products. XLI also
expects to continue development of subsequent generations of its ImageChip
products to incorporate additional features and functions and also to reduce
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costs. No assurance can be given that these products will be developed or, if
developed, will be successfully marketed.
SALES AND MARKETING
In the fall of 1997, XLI added a full-time Vice President of Sales and
Marketing in charge of worldwide sales and marketing of its ASIC and VHDL
product offerings. This individual manages the sales and marketing efforts in
the US market and XLI currently has a sales agent in Japan to aid in covering
the Japanese market. To assist in the sales cycle, an evaluation test board with
the XLI-2050 ASIC is now available to customers. The XLI-2050 ImageChip is
expected to be the major source of income (through licensing, chip sales and
royalties) for the foreseeable future.
PATENTS AND PROPRIETARY INFORMATION
XLI relies on a variety of methods to protect its products and technology,
including patent, trademark, copyright and trade secret protection. Three
patents have been awarded (2 US patents and 1 Korean patent) which cover an
innovative method of modulating the laser devices found in laser printers for
the desktop as well as network printers. Additional patents have been filed on
edge enhancement technology applicable for both text and line graphics, a unique
all digital implementation of the modulator used in the XLI enhancement
technology capable of being implemented in integrated circuits and a single pass
color engine method. An additional patent application is in process for an
innovative grayscale enhancement method. This technology is applicable for both
monochrome and color laser printers. XLI protects its technical innovations both
domestically and internationally (Europe, Korea and Japan) through these patent
filings. To protect its trade secrets, proprietary software and know-how, XLI
requires that all employees, key resellers, consultants and licensees sign
nondisclosure agreements.
Although XLI 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 XLI with meaningful protection from competitors. In
addition, there can be no assurance that XLI proposed products will not infringe
the patent rights of others. XLI may be forced to expend substantial resources
if XLI is required to defend against any such infringement claims. Furthermore,
there can be no assurance that XLI 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
Core Technology"), a founder, stockholder and director of XLI. Dr. Carley and
the Carley Corporation, a company controlled by Dr. Carley, have assigned to XLI
all printing rights to the Carley Core Technology held by him and the Carley
Corporation in return for XLI Common Stock and certain royalties based upon
revenues derived by XLI from the Carley Core Technology.
PERSONNEL
As of March 27, 1998, XLI employed 14 people, 8 of whom were in research
and development, 2 in marketing and sales, 1 in manufacturing and product
service, and 3 in finance and administration. XLI uses part-time technical
contractors, as needed, to augment its full-time staff. Due to XLI's limited
cash flow, certain key personnel have been receiving reduced cash compensation
and have been issued stock options and shares of Common Stock of XLI in lieu of
cash compensation.
ITEM 2. DESCRIPTION OF PROPERTY
XLI'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 XLI from
an unaffiliated party for $3,293 per month under a lease that expires in April
1999.
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ITEM 3. LEGAL PROCEEDINGS
XLI 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 1997.
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
XLI Common Stock is currently traded on the NASDAQ Bulletin Board under the
symbol "XLCC", and XLI Preferred Stock is traded on NASDAQ Bulletin Board under
the symbol "XLCCP". On January 4, 1995, XLI 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 sales 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.
<TABLE>
<CAPTION>
COMMON STOCK
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HIGH LOW
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<S> <C> <C>
1997
First Quarter.......................................... $0.37500 $0.09375
Second Quarter......................................... $0.28425 $0.09375
Third Quarter.......................................... $0.50000 $0.12500
Fourth Quarter......................................... $0.81250 $0.34375
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
</TABLE>
On March 31, 1998, the closing sale price of the Company's Common Stock was
$.5625 per share and there were approximately 153 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 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 ability of XLI (hereinafter referred to
in this section as the "Company") to successfully develop, test, produce and
market its proposed products, identify and attract partners to help 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
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technological changes in the marketplace. The Company will need to complete the
pending merger or attract partners in order to exploit its products, and there
can be no assurance that the Company will be successful in completing such
transactions. Additional information regarding 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 1997 the Company continued to focus on the design and development of
ASIC and VHDL (Virtual Hardware Description Language) enhancement product
offerings for the OEM printer and printer controller market. During 1997 the
Company delivered VHDL modules to OEMs and introduced the XLI-2050 ImageChip
ASIC (Application Specific Integrated Circuit) that incorporates all of the
Company's current enhancement technology into one chip design. The Company hopes
to increase revenue through additional licensing of the ImageChip technology and
through sales of its ImageChip ASIC to OEMs. Production quantities of the
ImageChip are planned for the second half of 1998. The Company also plans to add
additional engineering resources in 1998 in order to meet the demands from
existing and anticipated OEM agreements. This will result in increased research
and development costs that may negatively affect cash flow. For the fiscal year
ended December 31, 1997, the Company had a negative cash flow from operations of
$102,122.
On January 29, 1998 the Company entered into a Plan of Reorganization and
Agreement of Merger by and among Oak Technology, Inc., Pixel Magic, Inc., and
OTI Acquisition Corporation ("OTI") pursuant to which OTI will be merged with
and into the Company and the Company will become a wholly-owned subsidiary of
Pixel Magic, Inc., which is a wholly-owned subsidiary of Oak Technology, Inc.
The ASIC products of Pixel Magic and XLI are complementary to each other and are
targeted to the same printer/digital copier market. The Company believes that
the merger should enhance XLI's ability to bring its products to the OEM market.
The merger is subject to the approval of the Company's shareholders.
The following table sets forth, for the periods indicated, statements of
operation data of the Company expressed as a percentage of revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue.................................................. 100% 100% 100%
Cost of Revenue.......................................... 18% 29% 45%
Research and Development................................. 33% 32% 30%
Selling and Marketing.................................... 5% 5% 11%
General and Administrative............................... 48% 50% 33%
Loss from Operations..................................... (4)% (16)% (19)%
Other Income (Expense)................................... (1)% (5)% (2)%
Net Loss................................................. (5)% (21)% (21)%
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Revenue. Revenue for the fiscal year ended December 31, 1997 was
$1,520,781 as compared to $898,618 for the fiscal year ended December 31, 1996,
an increase of $622,163 or 69%. Contract and license revenue for the fiscal year
ended December 31, 1997 was $1,422,990 as compared to $698,250 for the fiscal
year ended December 31, 1996. Product revenues for the fiscal year ended
December 31, 1997 were $97,791 as compared to $200,368 for fiscal year ended
December 31, 1996, a decrease of $102,577 or approximately 51%. The 104%
increase in contract and license revenue is due to an increase in the number and
value of license agreements entered into by the Company for its ImageChip
technology, while the decrease in product revenue was attributable to the
discontinuation of the board product lines.
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Cost of Revenue. Cost of revenue for the fiscal year ended December 31,
1997 was $281,123 or 18% of revenue, as compared to $258,440 or 29% of revenue
for the fiscal year ended December 31, 1996, an increase of $22,683. The
increase was due mostly to the foundry cost for manufacturing the prototype
XLI-2050 ImageChip partially offset by the decrease in board sales.
Research and Development. Research and development expense for the fiscal
year ended December 31, 1997 was $507,051 or 33% of revenue as compared to
$287,748 or 32% of revenue for the fiscal year ended December 31, 1996. The
increase in 1997 of $219,303 was primarily attributable to the hiring of
additional personnel and to associated expenses to support the increase in
development activity. The Company's ongoing engineering emphasis continued to be
on the development of ASICs.
Selling and Marketing. Selling and marketing expenses for the fiscal year
ended December 31, 1997 were $72,485 or 5% of revenue as compared to $42,942 or
5% of revenue for the year ended December 31, 1996. The increase of $29,543 was
primarily attributable to the hiring of a Vice President of Sales & Marketing in
late 1997 and expenses associated with the introduction of the XLI-2050
ImageChip.
General and Administrative. General and administrative expenses were
$718,832 or 48% of revenue for the fiscal year ended December 31, 1997 as
compared to $456,156 or 50% of revenue for the fiscal year ended December 31,
1996. The $262,678 increase in general and administrative expenses was
attributable to the increase in royalty expenses associated with increased
contract and license revenue, increased insurance costs, increased legal fees
associated with the merger, increased consulting fees and additional salary
costs. These increases were partially offset by a recovery of Korean taxes and
negotiated settlements with vendors.
Interest Expense. Net interest expense for the fiscal year ended December
31, 1997 was $19,361 or 1% of revenue as compared to $49,252 or 5% of revenue
for the fiscal year ended December 31, 1996. Interest expense for the fiscal
year ended December 31, 1997 was primarily attributable to interest on leased
equipment.
Net Loss. The Company recorded a net loss of $72,283 for the fiscal year
ended December 31, 1997 as compared to a net loss of $192,588 for the fiscal
year ended December 31, 1996. The decrease in the net loss of $120,305 was
primarily the result of significantly higher contract and licensing revenues.
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.
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 primarily due to the approximately 50% decrease in product revenue
and inventory write-offs of $30,516 in connection with the discontinuation of
the Company's board product lines.
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 continued 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.
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General and Administrative. General and administrative expenses were
$456,156 or 50% 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 fees and 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 in the net loss of $30,869 was the
result of lower operating expenses partially offset by reduced revenues.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended December 31, 1997, the Company had a negative
cash flow from operations of $102,122. This is primarily attributable to an
increase in personnel and expenses associated with the development and
introduction of the XLI-2050 ASIC. At December 31, 1997 the Company had current
assets of $116,001, current liabilities of $647,525 and a working capital
deficit of $531,542. The Company's cash balance at December 31, 1997 was
$112,401 as compared to $219,723 at December 31, 1996.
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, 1997,
there were no outstanding loan amounts payable to Silicon Valley Bank.
The Company has no current plans to raise additional capital in 1998. The
Company hopes to fund its ongoing operations and development efforts from
ongoing and additional license and royalty fees. If the Company is unable to
generate sufficient cash flow from license agreements and ASIC sales, the
Company's development efforts and ability to continue as a going concern will be
materially adversely affected. The Company's auditors have included in their
opinion a paragraph indicating that there is substantial doubt about the
Company's ability to continue as a going concern.
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.
FINANCIAL STATEMENTS
The Company's financial statements are shown on pages F-1 through F-15. The
accounting firm of Wolf & Company, P.C. has been engaged as the Company's
independent accountant for the past three years and its Report of Independent
Accountants for fiscal 1997 is shown on page F-2.
ITEM 7. FINANCIAL STATEMENTS
See pages F-2 through F-15.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 24, 1996, XLI received confirmation from Coopers & Lybrand of
the decision by XLI that Coopers & Lybrand would not be engaged as XLI'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 disclaimer of opinion or disagreement on any
matter of accounting principles or practices in Coopers & Lybrand's report on
the financial statements for the fiscal years ended December 31, 1994 and
December 31, 1993.
ITEM 9. DIRECTORS, 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:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Anthony D'Amelio.......................... 68 President, Chief Executive Officer and Chairman of
the Board
James L. Salerno.......................... 67 Chief Financial Officer, Treasurer and Secretary
Daniel J. Allen........................... 37 Vice President of Research and Development
Roger F. Salava........................... 61 Director of Strategic and Business Planning
Dr. Joseph L. Katz........................ 55 Director and Vice President of Corporate Planning
Vincent J. Spoto.......................... 52 Director
Dr. Adam Carley........................... 57 Director
</TABLE>
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 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 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 as 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, 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, 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 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.
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Joseph L. Katz 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, 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, 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. 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 $100,000 for their services in all capacities to the Company
during the fiscal year ending December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
AWARDS PAYOUTS
--------------------- -------
ANNUAL COMPENSATION OTHER RESTRICTED
---------------------- ANNUAL STOCK LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- --------------------------- ---- ------- ----- ------------ ---------- ------- ------- ------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anthony D. D'Amelio........ 1997 $90,919 35,000
President, Executive
Officer 1996 $22,367 -- -- $2,000(1)
and Chairman of the Board 1995 $27,875 $3,750(2) 80,000
$1,562(3)
</TABLE>
- ---------------
(1) 200,000 Shares of Common Stock
(2) 120,000 Shares of Common Stock
(3) 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.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF XLI
The following table sets forth, as of March 27, 1998, the ownership of XLI
Common Stock by (i) each person who is known by XLI to own of record or
beneficially more than five percent of XLI Common Stock, (ii) each of XLI'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 27, 1998, XLI had
approximately 153 stockholders of record.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
BENEFICIALLY OWNED(1)(2) BENEFICIALLY OWNED
------------------------ -------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
---------------- ----------- --------- ------- --------
<S> <C> <C> <C> <C>
Anthony D. D'Amelio.................................... 634,554 17.7% 6,000 1.9%
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Roger F. Salava........................................ 182,750 5.1% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
James L. Salerno....................................... 163,584 4.6% 50,000 15.9%
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Daniel J. Allen........................................ 215,001 6.0% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Joseph L. Katz, Trustee of Research
Investment Trust....................................... 186,422 5.2% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Joseph L. Katz, Individually........................... 30,000 0.8% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Vincent J. Spoto....................................... 97,108 2.7% -- --
50 Cypress Road
Wellesley, MA 02181
Adam L. Carley......................................... 104,917 2.9% -- --
6 Hillside Road
Windham, NH 03087
All directors and executive officers as a group (7
persons)............................................. 1,614,336 45.0% 56,000 17.8%
</TABLE>
- ---------------
(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.
(2) Does not include 42,777 shares issuable upon exercise of a warrant issued to
Thomas James Associates, Inc. in connection with XLI's offering of Series A
Preferred Stock in February 1994; 254,765 shares issuable upon exercise of
the Underwriter's Warrant included in the offering in February 1994; and
427,758 shares issuable upon exercise of Class A Warrants.
9
<PAGE> 11
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 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.
10
<PAGE> 12
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
- ------- -----
<C> <S>
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 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 (filed with December 31, 1994 10-KSB)
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)
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------- -----
<C> <S>
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)
10.43 Development and License Agreement dated May 30, 1997 by and
between the Company and SIS Microelectronics, Inc. (filed
with June 30, 1997 Form 10-QSB).
10.44 Licensing and Royalty Agreement dated June 26, 1997 by and
between the Company and PCPI Technologies, Inc. (filed with
June 30, 1997 10-QSB).
10.45 Technology License and Supply Agreement dated October 15,
1997 by and between the Company and Pixel Magic, Inc. (filed
with September 30, 1997 Form 10-QSB).
</TABLE>
- ---------------
* 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, 1997.
1 -- November 17, 1997
The Company and Pixel Magic, Inc. announced on November 17, 1997 that the
companies signed a Letter of Intent for Pixel Magic, Inc. to acquire XLI by
merger.
12
<PAGE> 14
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 April 1, 1998.
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.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
President, Chief Executive April 1, 1998
/s/ Anthony D. D'Amelio Officer
- --------------------------------------------------- and Chairman of the Board
(Principal Executive Officer)
Chief Financial Officer, April 1, 1998
/s/ James L. Salerno Treasurer, Secretary
- --------------------------------------------------- (Principal Financial Officer)
/s/ Dr. Joseph Katz Director April 1, 1998
- ---------------------------------------------------
/s/ Vincent J. Spoto Director April 1, 1998
- ---------------------------------------------------
/s/ Dr. Adam L. Carley Director April 1, 1998
- ---------------------------------------------------
</TABLE>
13
<PAGE> 15
XEROGRAPHIC LASER IMAGES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1997 and 1996............. F-3
Statements of Loss for the Years Ended December 31, 1997,
1996 and 1995............................................. F-4
Statements of Changes in Stockholders' Deficit for the Years
Ended December 31, 1997, 1996 and 1995.................... F-5
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995....................................... F-6
Notes to Financial Statements............................... F-7 to F-15
</TABLE>
F-1
<PAGE> 16
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, 1997 and 1996 and the related statements of loss,
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1997. 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.
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, 1997 and 1996 and the results of its operations
and cash flows for each of the years in the three-year period ended December 31,
1997, 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,
which include a merger for which they will be seeking shareholder approval, are
also discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
WOLF & COMPANY, P.C.
Boston, Massachusetts
February 27, 1998
F-2
<PAGE> 17
XEROGRAPHIC LASER IMAGES CORPORATION
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(NOTE 1)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 112,401 $ 219,723
Accounts receivable, less allowance for doubtful accounts
of $5,000 in 1996...................................... 3,600 20,314
----------- -----------
Total current assets.............................. 116,001 240,037
Property and equipment, net (Note 4)........................ 16,478 35,191
Other assets................................................ 3,499 4,432
----------- -----------
Total assets...................................... $ 135,978 $ 279,660
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 237,873 $ 352,346
Deferred revenue.......................................... 10,000 101,000
Accrued payroll........................................... 101,705 33,750
Accrued expenses (Note 7)................................. 286,216 146,193
Accrued severance costs (Note 8).......................... -- 68,704
Current portion of capital lease obligations (Note 6)..... 11,731 11,731
----------- -----------
Total current liabilities......................... 647,525 713,724
Capital lease obligations (Note 6).......................... 5,176 16,908
Subordinated notes payable (Note 13)........................ 283,688 283,688
----------- -----------
Total liabilities................................. 936,389 1,014,320
----------- -----------
Stockholders' deficit (Notes 5 and 9)
Series A Preferred stock, $.01 par value; authorized
1,000,000 shares; 315,238 issued and outstanding....... 3,152 3,152
Common stock, $.01 par value; 30,000,000 shares
authorized; 2,039,310 and 1,778,646 issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 20,393 17,786
Additional paid-in capital................................ 8,438,278 8,434,353
Accumulated deficit....................................... (9,262,234) (9,189,951)
----------- -----------
Total stockholders' deficit....................... (800,411) (734,660)
----------- -----------
Total liabilities and stockholders' deficit....... $ 135,978 $ 279,660
=========== ===========
</TABLE>
See accountants' report and accompanying notes to financial statements.
F-3
<PAGE> 18
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF LOSS
(NOTE 1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues (Note 7):
Product revenues..................................... $ 97,791 $ 200,368 $ 397,550
Contract and license revenues........................ 1,422,990 698,250 700,000
---------- ---------- ----------
Total revenues............................... 1,520,781 898,618 1,097,550
---------- ---------- ----------
Costs and expenses:
Cost of product revenues............................. 29,358 176,886 294,851
Cost of contract and license revenue................. 251,765 81,554 202,015
Research and development............................. 507,051 287,748 331,279
Selling and marketing................................ 72,485 42,942 117,896
General and administrative........................... 718,832 456,156 358,040
---------- ---------- ----------
Total cost and expenses...................... 1,579,491 1,045,286 1,304,081
---------- ---------- ----------
Loss from operations................................... (58,710) (146,668) (206,531)
---------- ---------- ----------
Other income (expense):
Interest expense..................................... (19,361) (49,252) (24,655)
Interest income...................................... -- -- 396
Other income......................................... 5,788 3,332 7,333
---------- ---------- ----------
Total other expense, net..................... (13,573) (45,920) (16,926)
---------- ---------- ----------
Net loss............................................... $ (72,283) $ (192,588) $ (223,457)
========== ========== ==========
Net loss per common share -- Basic..................... $ (0.04) $ (0.12) $ (0.18)
Weighted average common and common equivalent shares
outstanding -- Basic................................. 1,799,999 1,565,105 1,255,314
</TABLE>
See accountants' report and accompanying notes to financial statements.
F-4
<PAGE> 19
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(NOTE 1)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------
NUMBER OF NUMBER OF ADDITIONAL TOTAL
SHARES SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED PAR VALUE ISSUED PAR VALUE CAPITAL DEFICIT DEFICIT
--------- --------- --------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Exercise of stock options.............. -- -- 260,664 2,607 3,925 -- 6,532
Net loss............................... -- -- -- -- -- (72,283) (72,283)
------- ------ --------- ------- ---------- ----------- ---------
Balance at December 31, 1997........... 315,238 $3,152 2,039,310 $20,393 $8,438,278 $(9,262,234) $(800,411)
======= ====== ========= ======= ========== =========== =========
</TABLE>
See accountants' report and accompanying notes to financial statements.
F-5
<PAGE> 20
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF CASH FLOWS
(NOTE 1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $ (72,283) $(192,588) $(223,457)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Inventory write-offs............................... -- 30,516 41,855
Write-offs of fixed assets......................... -- -- 3,471
Depreciation and amortization...................... 18,713 33,321 73,766
Issuance of common stock for services rendered..... -- 15,325 7,812
(Increase) decrease in operating assets:
Accounts receivable.............................. 16,714 258,957 (222,702)
Inventory........................................ -- 24,665 75,821
Other assets..................................... 933 11,469 6,281
Increase (decrease) in operating liabilities:
Accounts payable................................. (114,473) (86,882) 118,854
Deferred revenue................................. (91,000) 101,000 --
Accrued expenses................................. 207,978 (27,063) 186,467
Accrued severance costs.......................... (68,704) (104,404) (128,221)
--------- --------- ---------
Net cash provided (used) by operating activities........ (102,122) 64,316 (60,053)
--------- --------- ---------
Cash flows from financing activities:
Exercise of stock options............................. 6,532 -- --
Receipts of notes payable............................. -- 204,500 26,000
Payments of notes payable............................. -- (35,500) --
Payments under capital lease obligations.............. (11,732) (12,161) (43,253)
Increase (decrease) in cash overdraft................. -- (1,432) 1,432
--------- --------- ---------
Net cash provided (used) by financing activities........ (5,200) 155,407 (15,821)
--------- --------- ---------
Net increase (decrease) in cash......................... (107,322) 219,723 (75,874)
Cash at beginning of year............................... 219,723 -- 75,874
--------- --------- ---------
Cash at end of year..................................... $ 112,401 $ 219,723 $ --
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid......................................... $ 19,361 $ 45,616 $ 20,340
</TABLE>
See accountants' report and accompanying notes to financial statements.
F-6
<PAGE> 21
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, 1997, 1996 and 1995, the Company
had net losses of $72,283, $192,588 and $223,457, respectively. The Company had
a working capital deficit of $531,524 and total stockholders' deficit of
$800,411 at December 31, 1997.
On January 29, 1998, certain stockholders of the Company executed a "Plan
of Reorganization and Agreement of Merger" (the "Merger Agreement") with OTI
Acquisition Corporation, a wholly-owned subsidiary of Pixel Magic, Inc.
("Pixel"). Under the terms of the Merger Agreement, the Company will become a
wholly-owned subsidiary of Pixel and the Company's stockholders will receive a
cash payment based on the number of shares outstanding at the time of the merger
and the conditional right to receive additional cash payments based on the
Company meeting certain milestones through December 31, 2000. A majority of the
Company's Preferred Stockholders and Common Stockholders, each voting as a
separate class, must vote in favor of the Merger Agreement in order for it to be
effective. Among other things, the Merger Agreement, once effective, appoints
stockholder representatives, adjusts the terms of the Carley Agreement (see note
7), requires the execution of employment agreements and provides for unexercised
stock options and warrants. Please refer to the amended preliminary Proxy
Statement filed on March 11, 1998, pursuant to Section 14(a) of the Securities
Exchange Act of 1934.
Should the Merger Agreement not be consummated, there would be substantial
doubt regarding the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that may 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 accrued expenses and the valuation allowance on
deferred taxes.
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. The Company defers revenue
associated with future services over the term of the related services.
Inventory
Inventory was 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
F-7
<PAGE> 22
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 equivalents are not included
in the per share calculations as the effect of their inclusion would be
antidilutive.
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.
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.
Net Income (Loss) Per Share
In February 1997, FASB issued SFAS No. 128, "Earnings per Share" which
requires that earnings per share be calculated on a basic and dilutive basis.
Basic earnings per share represents income available to
F-8
<PAGE> 23
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
common stock divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
conversion. Potential common shares that may be issued by the Company relate
solely to outstanding stock options and warrants, and are determined using the
treasury stock method. The assumed conversion of outstanding dilutive stock
options and warrants would increase the shares outstanding but would not require
an adjustment to income as a result of the conversion. For the years ended
December 31, 1997 and 1996, options and warrants applicable to 3,651,250 shares
and 3,710,492 shares, respectively were anti-dilutive and excluded from the
diluted earnings per share computation. The statement is effective for interim
and annual periods ending after December 15, 1997, and requires the restatement
of all prior period earnings per share data presented. No restatement was
necessary as the adoption of SFAS No. 128 did not impact the Company's earnings
per share calculations.
3. INCOME TAXES
The Company has generated operating loss carryforwards for federal and
state income tax and federal alternative minimum tax purposes of approximately
$9,110,000 for the period June 9, 1989 (inception) through December 31, 1997.
These net operating losses will expire at various dates through 2012. The
Company has also generated research and development credits of approximately
$268,000 through December 31, 1997, which expire at various dates through 2012.
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:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 3,655,000 $ 3,484,000
Tax credit carryforwards........................ 268,000 211,000
Allowance for doubtful accounts................. -- 2,000
Accrued severance costs......................... -- 27,500
----------- -----------
Total deferred tax asset.......................... 3,923,000 3,724,500
Valuation allowance............................... (3,923,000) (3,724,500)
----------- -----------
Net deferred tax asset............................ $ -- $ --
=========== ===========
</TABLE>
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.
F-9
<PAGE> 24
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Equipment............................................ $ 121,740 $ 121,740
Capitalized lease equipment.......................... 368,964 368,964
--------- ---------
490,704 490,704
Less accumulated depreciation and amortization....... (474,226) (455,513)
--------- ---------
Property and equipment, net.......................... $ 16,478 $ 35,191
========= =========
</TABLE>
5. STOCK OPTION PLANS
The Company maintains two stock option 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
non-employees.
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, 1997
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.
The following table summarizes all stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1994........................ 137,986 $1.99
Granted............................................... 287,000 0.03
Canceled.............................................. (74,381) 1.50
Terminated............................................ (25,638) 1.50
--------
Outstanding at December 31, 1995........................ 324,967 $0.41
Granted............................................... 125,500 0.02
Canceled.............................................. (10,417) 0.03
Terminated............................................ (1,176) 1.50
--------
Outstanding at December 31, 1996........................ 438,874 $0.30
Granted............................................... 205,000 0.127
Exercised............................................. (260,664) 0.025
Terminated............................................ (3,542) 0.75
--------
Outstanding at December 31, 1997........................ 379,668 $0.39
========
</TABLE>
F-10
<PAGE> 25
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In January 1998, all options became exercisable in connection with the
Merger Agreement. All options will terminate once the merger is completed.
Information pertaining to options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE
- --------------- ----------- ----------------
<S> <C> <C>
$ .01-$.1375 344,169 $ 0.09
$ 1.50 29,500 $ 1.50
$10.50-$22.50 5,999 $12.16
-------
379,668 $ 0.39
</TABLE>
At December 31, 1997, 59,143 shares are available for future grants. In
January and February 1998, 334,169 options were exercised.
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C> <C>
Net loss: As reported.... $(72,283) $(192,588) $(223,457)
Pro Forma...... (98,318) (194,138) (251,426)
Net loss per common share: As reported.... (0.04) (0.12) (0.18)
Pro Forma...... (0.05) (0.12) (0.20)
</TABLE>
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 $.13 and $.01
for 1997 and 1996, respectively.
6. 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 $38,558, $36,100 and $56,179 during 1997,
1996, and 1995, respectively. The Company has entered into various capital
leases for office equipment, the net book value of which were $16,478 and
$28,638 at December 31, 1997 and 1996, respectively.
The future minimum annual lease obligations under these leases for the
respective years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998................................................... $ 18,528 $42,234
1999................................................... 8,249 17,014
2000................................................... -- 2,936
-------- -------
Total obligation............................. 26,777 62,184
Less amount representing interest...................... (9,870)
--------
Present value of minimum lease payments................ 16,907
Less current portion................................... (11,731)
--------
Long-term obligation................................... $ 5,176
========
</TABLE>
F-11
<PAGE> 26
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS
In July 1989, the Company entered into an Agreement (the "Carley
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 $.0l 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.
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.
Royalties expensed under the Carley Agreement were approximately $222,644,
$90,000 and $82,500 for the years ended December 31, 1997, 1996 and 1995
respectively. Cumulative royalties expensed in connection with this agreement
were $740,229 through December 31, 1997. Accrued expenses at December 31, 1997
includes $222,094 due under the Carley Agreement. (See Note 1).
8. 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
were completed in November 1997.
9. 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 (see "Warrants"). Through
December 31, 1997, 534,762 shares of Series A Convertible Preferred Stock have
been converted into 445,635 shares of Common Stock. 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.
The number of shares of Common Stock that the Series A Convertible
Preferred Stock is convertible into is subject to adjustment based upon the
occurrence of certain events. Each share of convertible preferred stock is
currently convertible into approximately 2.5 shares of the Company's Common
Stock. At December 31, 1997 the 315,238 shares of Series A Preferred Stock are
convertible into 784,429 shares of Common Stock.
F-12
<PAGE> 27
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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, 1997 and 1996 there were 2,039,310 and
1,778,646 shares of Common Stock outstanding, respectively. 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 IPO 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 (the "Underwriter's Class A Warrant") to
purchase 85,000 Class A Units, each Class A Unit consisting of one share of
Series A Preferred Stock, and one Class A Warrant. The Underwriter's Class A
Warrant is exercisable for a five year period commencing February 22, 1994, at
an exercise price of $4.80 per Class A Unit.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the IPO, Class A, Underwriter's IPO and Underwriter's Class
A 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 that 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.
As a result of certain events, at December 31, 1997 the holders of the IPO
Warrants were entitled to purchase 845,329 shares of Common Stock at a price of
$6.42 per share and the Underwriter's IPO Warrant entitled the holder to
purchase 301,602 shares of Common Stock and one Common Stock Purchase Warrant
for $4.34 per share. These Warrants expired in January, 1998. Additionally, as
of December 31, 1997 the holders of Class A Warrants are entitled to purchase
427,758 shares of Common Stock at $2.61 per share and the Underwriter's Class A
Warrant entitles the Underwriter to purchase 254,765 Class A Units at a price of
$1.60 per Unit. These Warrants expire on February 22, 1999. (See Note 1).
At December 31, 1997, the Company had outstanding 818,462 warrants to the
lenders, including insiders, for financings in 1995 and 1996 and 383,000 other
warrants. These warrants were exercised and 1,201,462 shares of Common Stock
were issued for $31,810 in January and February 1998.
F-13
<PAGE> 28
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. EXPORT REVENUES
The Company currently operates in one industry segment. Export product
revenues are generated predominantly from Europe and accounted for approximately
6%, 19% and 16% of total revenues in fiscal years 1997, 1996 and 1995,
respectively.
11. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1997, 1996 and 1995, the Company did not
have any customers that accounted for greater than 10% of total product revenue.
In 1997, three customers accounted for 43%, 33% and 16% of total contract and
license revenue. One customer accounted for 72% of total contract and license
revenues in 1996 and 59% in 1995.
12. SUPPLEMENTARY CASH FLOW INFORMATION
Noncash financing and investing activities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
----- ------- ------
<S> <C> <C> <C>
Issuance of common stock for services rendered.... -- 15,325 7,812
Accrued interest converted to subordinated
notes payable................................... -- 13,688 --
</TABLE>
13. 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 $.0l 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.
In January, 1998 the holders of the notes agreed that if the Merger
Agreement (see Note 1) were consummated, the notes could be repaid at face
value.
14. 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, 1997
and 1996, there were no receivables factored with Silicon Valley Bank.
15. 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.
F-14
<PAGE> 29
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 10). The Company could be adversely affected by changes in foreign laws,
regulations, tariffs, and taxes.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to an amendment to the subordinated notes payable, the notes are
expected to be repaid at face value (see Note 13), therefore, the fair value of
the instruments is considered to be their face value. The fair value of capital
lease obligations approximates their carrying value as they bear interest at
market rates.
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS DATED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 112,401
<SECURITIES> 0
<RECEIVABLES> 3,600
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 116,001
<PP&E> 490,704
<DEPRECIATION> 474,226
<TOTAL-ASSETS> 135,978
<CURRENT-LIABILITIES> 647,525
<BONDS> 288,864
0
3,152
<COMMON> 20,393
<OTHER-SE> (823,956)
<TOTAL-LIABILITY-AND-EQUITY> 135,978
<SALES> 97,791
<TOTAL-REVENUES> 1,520,781
<CGS> 29,358
<TOTAL-COSTS> 353,608
<OTHER-EXPENSES> 1,225,883
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,361
<INCOME-PRETAX> (72,283)
<INCOME-TAX> 0
<INCOME-CONTINUING> (72,283)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (72,283)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
