1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 29, 1995
COMMISSION FILE NUMBER 0-15487
XYLOGICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2669596
(State of Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification
Number)
53 Third Avenue, Burlington, Mass. 01803
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (617) 272-8140
None
(Former name, former address and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of April 29, 1995.
Common Stock, par value $.10 5,482,603
(Titles of each class) (Number of Shares)
2
XYLOGICS, INC.
TABLE OF CONTENTS
Page
Part I - FINANCIAL INFORMATION (UNAUDITED):
Consolidated balance sheets at
July 29, 1995 and October 31, 1994 3
Consolidated statements of operations
for the three-and nine-month periods ended
July 29, 1995 and July 30, 1994 4
Consolidated statements of cash flows
for the nine-month periods ended
July 29, 1995 and July 30, 1994 5
Notes to consolidated financial
statements 6
Management's discussion and analysis
of financial condition and results
of operations 8
Part II - OTHER INFORMATION 12
3
XYLOGICS, INC.
PART I - FINANCIAL INFORMATION - CONSOLIDATED BALANCE SHEETS
($000's)
ASSETS
_______
7/29/95 10/31/94
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 8,936 $10,834
Accounts Receivable 13,441 9,070
Refundable Income Taxes 133 608
Inventories 7,113 5,971
Prepaid Expenses 557 159
Prepaid Income Taxes 1,806 1,628
_______ ______
Total Current Assets $31,986 $28,270
_______ _______
Equipment and Improvements, at cost:
Equipment $14,286 $13,215
Furniture 518 550
Leasehold Improvements 611 694
_______ _______
$15,415 $14,459
Less: Accumulated Depreciation
& Amortization (12,097) (11,932)
_______ _______
$ 3,318 $ 2,527
_______ _______
Other Assets, net $ 4,873 $ 4,250
_______ _______
$40,177 $35,047
======= =======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts Payable $ 5,179 $ 2,696
Accrued Expenses 6,581 4,699
_______ ______
Total Current Liabilities $11,760 $ 7,395
Deferred Income Taxes $ 2,893 $ 2,679
______ ______
Commitments - -
Stockholders' Investment:
Common Stock, $.10 Par Value
- Authorized -- 25,000,000 shares.
Issued -- 5,507,603 shares at
July 29, 1995 and 5,028,032 shares
at October 31, 1994 $ 551 $ 503
Additional Paid-in Capital 18,562 14,181
Retained Earnings 7,209 10,355
Treasury Stock, 25,000 at July 29,
1995 and 4,776 at October 31, 1994 (798) (66)
_______ _______
Total Stockholders' Investment $25,524 $24,973
_______ _______
$40,177 $35,047
======= =======
See accompanying notes to the consolidated financial statements.
4
XYLOGICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in $000's except per share data)
Three Months Ended Nine Months Ended
7/29/95 7/30/94 7/29/95 7/30/94
_______ _______ _______ _______
Net Sales $17,211 $13,012 $47,269 $36,388
Cost of Sales 8,576 6,829 24,149 18,867
_______ _______ _______ _______
Gross Profit $8,635 $6,183 $23,120 $17,521
_______ _______ _______ _______
Operating Expenses
Engineering, R&D $1,821 $1,362 $4,977 $4,212
Sales and Marketing 3,584 2,489 9,378 6,730
General and
Administrative 1,078 1,000 3,361 3,075
Write-off of
In-Process R & D - - 6,741 -
Write-off of
Impaired Assets - - 921 -
______ ______ ______ _____
Total Expenses $6,483 $4,851 $25,378 $14,017
______ ______ _______ _______
Income (Loss)
from Operations $2,152 $1,332 ($2,258) $3,504
Interest Income, Net 89 68 382 185
Foreign Exchange
Gain (Loss) (7) - (22) (9)
Other Expense, Net (18) (1) (24) (1)
_______ _______ _______ ______
Income (Loss)
Before Income Taxes $2,216 $1,399 ($1,922) $3,679
Provision for
Income Taxes 665 518 1,221 1,362
______ ______ ______ ______
6
Net Income (Loss) $1,551 $881 ($3,143) $2,317
====== ====== ======== ======
Primary Earnings
(Loss) Per Share $0.25 $0.16 ($0.61) $0.44
===== ===== ======= =====
Fully Diluted Earnings
(Loss) Per Share $0.25 $0.16 ($0.61) $0.43
===== ===== ======= =====
Weighted Average
Common Shares - - 5,140 -
Weighted Average Common
and Common Equivalent
Shares Outstanding
Primary 6,109 5,345 5,140 5,301
Fully Diluted 6,158 5,345 5,140 5,382
See accompanying notes to the consolidated financial statements.
/TABLE
7
Xylogics, Inc.
Consolidated Statements Of Cash Flows
(Unaudited)
(000's)
Nine Months Ended
7/29/95 7/30/94
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($3,143) $2,317
Adjustments to reconcile net income
(loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization 2,534 1,615
Deferred income taxes 36 495
Change in assets and liabilities,
excluding Scorpion Logic Ltd. Acquisition
Refundable income taxes 475 523
Accounts receivable (3,332) (1,972)
Inventories (629) (789)
Prepaid Expenses (386) (151)
Accounts payable 1,985 544
Accrued expenses 1,448 430
Accrued income taxes 60 -
______ ______
Net cash provided by (used
for) operating activities ($952) $3,012
______ ______
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment & improvements ($1,603) ($1,192)
Capitalization of software development
costs (1,498) (1,104)
Decrease in other assets (22) 184
Purchase of intangible assets - (269)
Investing activities related to Scorpion
Logic Ltd. Acquisition
Scorpion Logic NBV, less cash
acquired (612) -
Purchase of intangible assets (1,700) -
Write off of impaired assets 921 -
______ ______
Net cash used for investing
activities ($4,514) ($2,381)
_______ _______
8
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of related
expenses $1,673 $642
Issuance of common stock to acquire
Scorpion Logic Ltd. acquisition 3,157 -
Purchase of treasury stock (1,133) (752)
Decrease in short-term debt, related
to Scorpion Logic Ltd. Acquisition (126) -
Cumulative Translation Adjustment (3) -
______ ______
Net cash provided by (used for)
financing activities $3,568 ($110)
______ ______
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ($1,898) $521
_______ ______
CASH AND CASH EQUIVALENTS,
Beginning of period $10,834 $9,033
______ _____
CASH AND CASH EQUIVALENTS,
End of period $8,936 $9,554
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $318 $278
Cash paid for interest - -
See accompanying notes to the consolidated financial statements.
/TABLE
9
XYLOGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned
subsidiaries. All material intercompany balances and transactions
have been eliminated. On April 20, 1995 the Company acquired
Scorpion Logic Limited and its wholly owned subsidiary, Infinite
Networks, Limited (Note 9). The accompanying balance sheet
includes the assets and liabilities of Scorpion Logic Limited at
July 29, 1995. This transaction was accounted for as a purchase,
and accordingly, the statement of operations includes Scorpion
Logics results of operations from the date of acquisition, April
20, 1995, through the quarter ending July 29,1995.
2. The consolidated financial statements as of July 29, 1995
and for the three and nine-month periods ended July 29, 1995 and
July 30, 1994 are unaudited, but include all adjustments
(consisting of normal, recurring adjustments) that the Company
considers necessary for a fair presentation of such interim
financial statements. The results of operations for the three and
nine-month periods ended July 29, 1995 are not necessarily
indicative of the results for the entire year. The consolidated
financial statements and notes are presented as permitted by Form
10-Q and do not contain certain information included in the
Company's consolidated annual financial statements and notes.
3. Inventories are stated at the lower of cost (first-in,
first-out) or market and include materials, labor and
manufacturing overhead. Inventories consist of the following:
7/29/95 10/31/94
($000's)
Purchase parts and materials $3,374 $2,295
Work-in-process and finished
goods 3,739 3,676
______ _____
$7,113 $5,971
====== ======
4. Net loss per share is based on the weighted average
number of shares of common stock outstanding during the period.
Common equivalents are not considered in the computation of net
loss per share, as the result would be antidilutive. Net income
per share is based on the weighted average number of primary and
fully diluted shares of common stock and common stock equivalents
10
(stock options) outstanding during the period.
5. On November 4, 1994, the Company declared a two-for-one
stock split of the Company's common stock effected as a 100%
stock dividend to shareholders of record on November 18, 1994.
The distribution of the dividend was completed on December 2,
1994. All share and per share amounts have been restated to
reflect the two-for-one stock split.
6. For the quarter ended July 29, 1995, the Company had
sales to one customer that represented more than 10% of the
Companys total sales for the quarter. The Company had sales to
this customer of approximately $2,989,000 (17% of net sales) in
the third quarter of 1995. Sales to that same customer in the
third quarter of fiscal 1994 were less than 10% of total sales.
During the same quarter of 1994, sales to another customer were
$2,029,000 (16% of net sales). No other customers in the third
quarters ended 1995 and 1994 represented 10% of total revenue for
the quarter.
For the first nine months of fiscal 1995 the Company had
sales to three customers that represented more than 10% of the
Companys sales. Sales to the first customer were $6,548,000
(14% of net sales) compared to sales for the same customer in
1994 of $5,377,000 (15% of net sales). Sales to a second
customer for the first nine months of 1995 were $4,820,000 (10%
of net sales) compared to sales for the same customer in 1994 of
$3,852,000 (11% of net sales). Sales to a third customer for the
nine month period ending July 29, 1995 were $5,669,000 (12% of
net sales) and sales to this customer for the same period in 1994
represented less than 10% of the Companys sales for the period.
7. The Company capitalizes certain computer software
development costs in accordance with Statement of Financial
Accounting Standards No. 86 (SFAS No. 86). These costs are
amortized on a straight line basis over two years beginning at
the time the initial shipment to customers of the related
products. Amortization expense recorded for the three-month
periods ending July 29, 1995 and July 30, 1994 were approximately
$369,000 and $203,000 respectively, and is reflected in cost of
goods sold. During the third quarter of 1995 and 1994,
approximately $545,000 and $385,000, respectively, of certain
software development costs were capitalized in accordance with
SFAS No. 86. For the first nine months of fiscal 1995 and 1994,
amortization expense was $999,000 and $516,000, respectively. In
addition, as a result of the acquisition of Scorpion Logic,
$58,000 of previously capitalized software development costs were
written-off as an impaired asset in the second quarter of fiscal
1995. The unamortized balance of these capitalized costs at July
29, 1995 and July 30, 1994 is approximately $2,710,000 and
$2,018,000 respectively, and is included in other assets.
11
8. In July 1994, the Company completed payment for the
acquisition of certain Novell/IPX remote access and dial-up
routing technology, as well as the LANmodem product line from
Microtest, Inc. of Phoenix, Arizona. The fixed and variable
components of the acquisition price totaled $1,573,000. The
Company also paid Microtest approximately $600,000 for LANmodem
inventory in the first quarter of 1994.
In the first quarter of 1995, the Company began amortizing the
Novell/IPX remote access and dial-up routing technology as a
result of initial shipments. The amortization expense for the
first quarter of fiscal 1995 was approximately $144,000. This
amortization expense is reflected in engineering, research and
development expenses. As a result of the acquisition of Scorpion
Logic, $863,000 representing the remaining balance of the
Novell/IPX technology acquired from Microtest was written off as
an impaired asset in the second quarter of 1995.
9. On April 20, 1995 the Company acquired all of the issued
capital stock of Scorpion Logic Limited, a developer of high
speed, intelligent ISDN on demand routing systems, and its
wholly owned subsidiary, Infinite Networks Limited, each a
private company limited by shares and incorporated in England and
Wales. Scorpion Logic will be combined with Infinite Networks
and will become a separate business unit of Xylogics.
Scorpion Logic was acquired for a combination of 244,000 shares
of Xylogics common stock, par value $0.10 and $4,800,000 in
cash. The total cost of the acquisition includes the purchase
price of $9,263,000 and a charge to earnings for $921,000 for
Xylogics intangible assets impaired as a result of the
acquisition. The impaired assets consist of $58,000 of previously
capitalized research and development expenses and $863,000
representing the remaining balance of the Novell/IPX technology
acquired from Microtest.
The acquisition was accounted for as a purchase in accordance
with Accounting Principles Board Opinion No. 16 (APB 16). The
purchase price exceeded the book value of the net assets of
Scorpion Logic by $8,441,000, which was allocated principally to
in-process research and development for $6,741,000 and was
charged to earnings in the second fiscal quarter ended April 29,
1995. The balance of the purchase price was allocated as
follows:
Product Line $ 600,000
IPX Technology 400,000
Trademark and customer lists 300,000
Goodwill 400,000
_______
$1,700,000
===========
12
The product line and IPX technology are being amortized, for
financial accounting purposes, over a two and three year period,
respectively, commencing in the third fiscal quarter of 1995.
The trademark and customer lists and goodwill are being amortized
over a ten year period commencing in the third fiscal quarter of
1995.
The cost and accumulated amortization of the intangible assets
acquired were as follows as of July 29, 1995:
Product IPX Trademark &
Line Technology Customer List Goodwill
Cost $600,000 $400,000 $300,000 $400,000
Accumulated
Amortization 75,000 33,333 7,500 14,286
________ ________ _________ ________
$525,000 $366,667 $292,500 $385,714
======== ======== ======== ========
[TEXT]
10. On September 6, 1995, the Company announced that it had
signed a binding agreement to be acquired by Bay Networks, Inc.
Under the terms of the agreement, Bay Networks, Inc. will
exchange 1.05 shares of its common stock for each outstanding
share of the Company's common stock. The Company will become an
independent operating unit of Bay Networks, Inc. and will
continue to focus on the remote access market. The stock-for-
stock merger is expected to be a tax-free reorganization and
accounted for as a pooling of interests. The agreement is
subject to approval by the Company's stockholders and to standard
antitrust clearances and various other requirements specified in
the agreement. The consummation of the merger is currently
anticipated to occur in the fourth calendar quarter of 1995. As
part of the transaction, the Company granted Bay Networks, Inc.
an option to purchase a number of shares equal to approximately
6.3 percent of the Company's outstanding shares, under certain
circumstances as specified in the agreement.
<PAGE 13>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Quarter of Fiscal 1995 Compared to Third Quarter of Fiscal
1994
Net Sales: Net sales for the third quarter of 1995 increased by
$4,199,000 or 32% as compared to the third quarter of 1994. The
increase was attributable to higher revenue generated by the
networking product line, and an increase in sales of the
Company's controller products.
Net sales to resellers increased $4,766,000 or 81% and sales to
OEM's decreased $566,000 or 8% in the third quarter of 1995 as
compared to the third quarter of 1994. The $4,766,000 growth in
sales to resellers consisted primarily of a $4,875,000 or 86%
increase in sales of networking products, offset by a decrease of
$109,000 or 53% in sales of the controller product. The strength
of the sales in the reseller channel is attributable to the
success of the new Remote Annex product line and the new ISDN
products. The product mix was heavily skewed towards reseller
business: reseller revenues were higher than anticipated, while
OEM revenues were lower than anticipated. A significant amount
of reseller revenue in the third quarter of fiscal 1995 was
directly attributable to OEM referrals.
Networking revenue increased $3,253,000 or 27% in the third
quarter of 1995 from the third quarter of 1994. As a percentage
of total revenue, networking revenue decreased from 91% in the
third quarter of 1994 to 88% in the third quarter of 1995.
Controller revenues increased $946,000 in the third quarter of
1995 compared to the third quarter of 1994. This increase was due
to an increase in sales of the newer generation Multibus II
product to our largest international OEM. Although controller
revenue was stronger than anticipated, the Company believes it
will represent a declining percentage of overall revenue in the
future.
Revenue grew in both the domestic and international markets. Net
domestic sales in the third quarter of 1995 increased $2,180,000
or 25% from the third quarter of 1994. Domestic sales represented
64% of total revenue as compared with 67% a year ago. The
increase in domestic revenue was attributable to a 27% increase
in networking revenue and a 3% increase in controller sales. The
domestic reseller channel grew 64% primarily due to an increase
in sales of the new Remote Annex product line. International
sales represented 36% of total revenue as compared to 33% a year
ago. The increase in international revenue was attributable to an
increase in the networking sales of the new Remote Annex product
line and the new ISDN products coupled with an increase in
controller revenues of the newer generation Multibus II product
14
to our largest OEM. The international reseller channel grew 114%,
primarily due to an increase in sales of both the new Remote
Annex product line and the new ISDN products. The international
OEM channel decreased 12%.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new
product introductions. The Company's future success depends upon
its ability to enhance its existing products and to introduce new
products and features to meet and adapt to changing customer
requirements and emerging technologies. The Company will be
required, therefore, to invest significant amounts in marketing
and research and development. Because of these and other
factors, including those discussed below, there can be no
assurance that the Company will be able to continue its growth in
revenues and sustain its profitability on a quarterly or annual
basis.
The Company does not require most resellers to carry inventory.
One exception is Westcon, Inc., a two-tier distributor that
carries inventory for its own resellers. Therefore, the
Company's ability to fill orders within a seven day period is
critical to the Company's overall success. The Company's OEM
customers do carry inventory; however, just-in-time inventory
procurement and management practices are generally applied, and
our customers, both OEMs and resellers, are demanding shorter and
shorter lead-times to obtain product. This adds a significant
element of risk, as the Company is required to anticipate what
products will be required for sale before any firm orders or
forecasts are received from the customer. In addition, over one
half of each quarter's revenue is typically booked in the second
half of each fiscal quarter and is shipped in the last month of
the quarter. These factors require the Company to carry more
inventory and raise the risk that the Company will not properly
forecast the mix or timing of when actual sales are made. This
trend is expected to continue over the foreseeable future.
Westcon is also able to do stock rotation on up to 15% of its
purchases over the last 90 days. Any inventory exchanged by
Westcon will be unused product and will be available for resale
to other customers. Other international resellers also have
stock rotation privileges
Gross Profit: Gross profit as a percentage of sales was 50.2% in
the third quarter of 1995 as compared to 47.5% in the third
quarter of 1994. Gross profit was favorably impacted by the
strong growth in the reseller channel which yields higher
margins. This favorable impact on gross margins was partially
offset by higher FASB 86 amortization expense. Gross profit
margins on networking products increased to 51.4% in the third
quarter of 1995 as compared to 48% in the same quarter of 1994,
as a result of higher margins achieved in the reseller channel
and shipments of the new Remote Annex product line. Gross profit
margins on the controller product line were 41% in the third
15
quarter of 1995 and 1994.
Operating Expenses:
Engineering, research and development expenses were $1,821,000
during the third quarter of fiscal 1995, reflecting an increase
of $459,000 or 34% over the same period in fiscal 1994. As a
percentage of revenue, these expenses increased from 10.5% in the
third quarter of 1994 to 10.6% in the third quarter of 1995. Most
of the growth in expenses was due to an increase in the labor
force and software consulting for our networking product line.
Partial funding is provided by several of the Company's OEMs to
cover some of the networking development costs. The 1995 and 1994
third quarter expenses exclude the capitalization of $545,000 and
$385,000, respectively, capitalized pursuant to Statement of
Financial Accounting Standards No. 86 (SFAS No. 86). Engineering,
research and development expenses also exclude $369,000 and
$203,000 of amortization expense of previously capitalized
expenses pursuant to SFAS No. 86 which appears in cost of sales.
Sales and marketing expenses were $3,584,000 during the third
quarter of 1995, reflecting an increase of $1,095,000 or 44% over
the same period in 1994. As a percentage of revenue, these
expenses increased from 19% in the third quarter of 1994 to 20.8%
in the third quarter of 1995. The growth in spending was
primarily attributable to an increase in the labor force and
increased sales promotional activities.
General and administrative expenses were $1,078,000 during the
third quarter of 1995, reflecting an increase of $78,000 or 8%
from the same period in 1994. As a percentage of revenue, these
expenses decreased from 8% in the third quarter of 1994 to 6% in
the same quarter of 1995. The increase in spending was primarily
due to payroll related expenses.
The Company has targeted the networking market as the focus of
its development efforts, and has carefully restricted any
resources that are devoted to the controller business. As a
result, the controller products continue to generate a greater
share of the Company's income than would be expected from the
amount of revenue realized.
Interest Income: Net interest income was $89,000 in the third
quarter of 1995 as compared to $68,000 during the same period in
fiscal 1994. Higher interest rates led to the increase in
interest income.
Foreign Exchange and Translation Gain (Loss): The Company
incurred an insignificant foreign exchange loss of $7,000 in the
third quarter of 1995. There was no foreign exchange loss in the
third quarter of 1994. The Company records currency gains or
16
losses when translating the financial statements of the Company's
foreign subsidiaries in accordance with Statement of Financial
Accounting Standards No. 52 (SFAS No. 52)
Income Taxes: The Companys effective federal and state income
tax rate during the third quarter ended July 29, 1995 was 30% as
compared to 37% for the comparable period in 1994.
First Nine Months of Fiscal 1995 Compared to the First Nine
Months of Fiscal 1994
Net Sales: Net sales for the nine months ending July 29, 1995
increased $10,881,000 or 30% as compared to the first nine months
of 1994. The increase was attributable to higher revenue
generated by the networking product line, coupled with a small
increase in sales of the Company's controller products.
In the first nine months of 1995, net domestic sales increased
$5,119,000 or 21% and international sales increased $5,762,000 or
48% as compared to the first nine months of 1994. Domestic sales
represented 62% of total revenue as compared to 67% a year ago.
The increase in domestic revenue was attributable to an increase
of $5,849,000 or 27% in networking revenues offset by a $730,000
or 29% decrease in controller revenues. The domestic OEM and
reseller channel grew 1% and 53% respectively, as compared to the
first nine months of 1994. International sales represented 38 %
of total revenue as compared to 33% a year ago. The increase in
international sales was attributable to an increase of $4,030,000
or 42% in networking revenues and an increase of $1,732,000 or
71% in controller revenues. The international reseller and OEM
channels grew 77% and 23%, respectively, in the first nine
months of 1995 as compared to the same period in 1994.
Net sales to resellers and OEMs increased $9,172,000 or 62% and
$1,709,000 or 8%, respectively, from the first nine months of
1994. The $9,172,000 growth in sales to resellers consisted of a
$9,446,000 increase in sales of networking products partially
offset by a decrease of $274,000 in sales of controller products.
The $1,709,000 growth in sales to OEMs consisted of a $433,000
increase in sales of networking products coupled with an increase
of $1,276,000 in sales of controller products.
Networking revenue increased $9,879,000 or 31% in the first nine
months of 1995 from the first nine months of 1994. As a
percentage of total revenue, networking increased from 86% in the
first nine months of 1994 to 87% in the first nine months of
1995. Controller revenues increased $1,002,000 in the first nine
months of 1995 as compared to the first nine months of 1994. A
significant increase in international sales of a custom developed
Multibus II controller was sufficient to offset declines across
17
the rest of the controller product line.
Gross Profit: Gross profit as a percentage of sales was 49% in
the first nine months of 1995 as compared to 48.4% in the first
nine months of 1994. Gross profit margins on networking products
improved to 49.8% in the first nine months of 1995 from 49.2% in
the first nine months of 1994, while gross margins on the
controller product line declined to 43% in the first nine months
of 1995 from 45% in the first nine months of 1994.
The gross profit margin on networking products was favorably
impacted by shipments of the new Remote Annex product line and
the new ISDN products and the growth in the reseller channel.
These favorable affects on gross margins were partially offset by
higher FASB 86 amortization expense. The decrease in gross
profit margins on controller products was due to a change in
product mix toward newer, lower margin products.
Operating Expenses:
Engineering, research and development expenses were $4,977,000
during the first nine months of fiscal 1995, reflecting an
increase of $765,000 or 18% over the same period in 1994. As a
percentage of revenue, engineering expenses decreased from 12% in
the first nine months of 1994 to 10.5% in the first nine months
of 1995. The increase in spending was primarily due to an
expanding labor force and additional software consultants to
support continued development efforts within the Company's
networking product line. Partial funding is provided by several
of the Company's OEMs to cover networking development costs.
Offsetting the increase in spending is the capitalization of
software development costs, which totaled $1,499,000 and
$1,108,000 in the first nine months if fiscal 1995 and 1994,
respectively, capitalized pursuant to Statement of Financial
Accounting Standards No. 86 (SFAS No. 86). Engineering, research
and development expenses also exclude amortization expense of
$999,000 and $516,000 in the first nine months of fiscal 1995 and
1994, respectively. Amortization of previously capitalized
engineering expenses is included in cost of sales.
Sales and marketing expenses were $9,378,000 during the first
nine months of fiscal 1995, reflecting an increase of $2,648,000
or 39% over the same period in fiscal 1994. The increase was due
to an increase in sales and marketing labor expenses and
increased sales promotional activities.
General and administrative expenses were $3,361,000, reflecting
an increase of $286,000 or 9% over the same period in fiscal
1994. As a percentage of revenue, these expenses decreased from
8% in the first nine months of 1994 to 7% in the first nine
months of 1995. The increase in spending was primarily due to
payroll related expenses and an investor relations program to
promote the Company to the financial community.
18
Write-off of in-process research and development was $6,741,000
representing the appraised value of in-process research and
development of primary rate ISDN technology and other ISDN
routing technology under development for which technological
feasibility has not been established.
Write-off of impaired assets represents the Company's intangible
assets impaired as a result of the acquisition. These assets
were reflected as other assets on the Company's balance sheet
prior to the acquisition.
The Company has targeted the networking market as the focus of
its development efforts and has carefully restricted any
resources that are devoted to the controller business. As a
result, the controller products continue to generate a greater
share of the Company's income than would be expected from the
amount of revenue realized.
The Company reported a net loss for the nine month period ended
July 29, 1995 of $3,143,000 or $.61 per share based on 5,140,000
weighted average shares outstanding. The loss reflects pretax
charges of $6,741,000 for acquired in-process research and
development as a result of the Scorpion Logic acquisition, and
$921,000 for the write-off of the Company's intangible assets;
impaired as a result of this acquisition. (See note 9.)
Interest Income: Net interest income was $382,000 in the first
nine months of fiscal 1995 as compared to $185,000 during the
same period of fiscal 1994. The increase of $197,000 or 106% was
due to higher interest rates in fiscal 1995 as compared to fiscal
1994, coupled with higher invested cash balances in fiscal 1995
as compared to fiscal 1994.
Foreign Exchange and Translation Gain (Loss): The Company
incurred a foreign exchange loss of $22,000 in the first nine
months of 1995 as compared to a $9,000 loss in the same period of
fiscal 1994. The Company records foreign currency gains and
losses when translating the financial statements of the Company's
foreign subsidiaries in accordance with Statement of Financial
Accounting Standards No. 52 (SFAS No. 52).
Income Taxes: The provision for income taxes for the nine month
period ended July 29, 1995 takes into effect that $5,992,000 of
the $6,741,000 write off of in-process research and development
is not tax deductible. Therefore, the Company provided income
taxes at a 30% rate based on pretax income of $4,070,000
(adjusted for the non-deductible write-off). The Company's
effective federal and state income tax rate during the nine month
period ended July 30, 1994 was 37%.
19
Liquidity and Capital Resources:
At July 29, 1995, the Company had cash and cash equivalents of
$8,936,000 which represents a decrease of $1,898,000 from October
31, 1994. On April 20, 1995 the Company acquired Scorpion Logic
Limited for approximately $4,800,000 in cash and 244,000 shares
of the Company's common stock (see note 9). Accounts receivable
increased $4,372,000 reflecting the higher volume of revenue
shipments in the third quarter ending July 29, 1995. Inventories
increased $1,142,000 in the first nine months of 1995, to
accommodate the lack of visibility in customer orders from the
increase in business from the reseller channel. Most of the
Company's resellers do not carry inventory and require rapid turn
around of orders. Our OEM customers are also continuing to strive
to carry lower inventory balances.
The Company expended $1,603,000 for the purchase of equipment and
capitalized $1,499,000 of software development costs in the first
nine months ending July 29, 1995. The Company repurchased
treasury shares for $1,133,000.
Working capital was $20,226,000 at July 29, 1995 as compared to
$16,668,000 at October 31, 1994. The current ratio was 2.7-1.0 at
July 29, 1995 as compared to 3.6-1.0 at October 31, 1994.
The Company believes that the available cash balances, together
with cash from operations, will be sufficient to meet the
Company's cash requirements through its fiscal year ending
October 31, 1995.
20
XYLOGICS, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Westcon Agreement (EX-99) - Confidential Treatment Requested
b. Reports on Form 8-K
Form 8K was filed for the acquisition of
Scorpion Logic Ltd. Exhibits included the
Share Purchase Agreement and the Shelf Registration
Rights agreement. The filing was submitted on
diskette on May 4, 1995. The Company was informed,
at a later date, that the filing was accepted by the
Securities and Exchange Commission, but was not an
official filing. The Company electronically filed
Form 8K on June 9, 1995 and it was officially
accepted.
Form 8K/A was filed electronically on May 31, 1995
to include the financial statements of Scorpion
Logic Ltd. The submission was accepted and we
received a confirming copy from the Securities and
Exchange Commission. We were recently informed that
the confirming copy is not indicative of a
successful electronic filing and the Company was
asked to refile the 8K/A on September 12, 1995.
21
SIGNATURE
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned there unto duly
authorized.
Xylogics, Inc.
Registrant
Date: Maurice L. Castonguay
Vice President Finance,
Treasurer
and Chief Financial Officer