UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
F O R M 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period September 30, 1998;
or
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file #0-15797
XIOX CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 95-3824750
- - ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
577 Airport Blvd, Suite 700,
Burlingame, California 94010
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (650) 375-8188
- - -------------------------------------------------------------------------------
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). Yes _X_ No ___
(2) Has been subject to such filing requirements for the past 90
days. Yes _X_ No ___
Issuer's number of common shares
outstanding at October 31, 1998 3,147,387 shares
- - -------------------------------------------------------------------------------
Page 1 of 20
XIOX CORPORATION
INDEX
Page No.
--------
PART I Financial Information
Item 1.
Condensed Consolidated Balance Sheets -
September 30, 1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations Three Months
ended September 30, 1998 (unaudited) and September 30, 1997
(unaudited) 4
Condensed Consolidated Statements of Operations Nine Months
ended September 30, 1998 (unaudited) and September 30, 1997
(unaudited) 5
Condensed Consolidated Statements of Cash Flows -
Nine Months ended September 30, 1998 (unaudited)
and September 30, 1997 (unaudited) 6-7
Notes to Condensed Consolidated Financial Statements 8-12
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
PART II Other Information
Item 6.
Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit 3.3 Certificate of Amendment of Certificate of
Incorporation as filed with the Secretary of State of
the State of Delaware on May 26, 1998.
Exhibit 3.4 Certificate of Designation, Preferences and Other
Rights of the Series A Preferred Stock as filed with
the Secretary of State of the State of Delaware on
September 21, 1998.
Exhibit 4.5 Stock Purchase and Investor Rights Agreement dated
September 21, 1998 by and between the Registrant and
the Investors.
Exhibit 4.6 Right of First Refusal and Co-Sale Agreement dated
September 21, 1988.
Exhibit 27 Financial Data Schedule - September 30, 1998
(unaudited) (separate electronic document attached)
PAGE 2
XIOX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited) ***
ASSETS:
CURRENT ASSETS
CASH & CASH EQUIVALENTS $ 3,395,979 2,633,860
ACCOUNTS RECEIVABLE, NET 598,607 884,612
OTHER RECEIVABLES 14,664 433,190
INVENTORIES 443,552 474,865
PREPAID EXPENSES AND OTHER ASSETS 133,193 158,311
------------ ------------
TOTAL CURRENT ASSETS 4,585,995 4,584,838
PROPERTY & EQUIPMENT, NET 928,541 432,292
PURCHASED SOFTWARE, NET 75,026 42,673
NOTES RECEIVABLE 100,000 100,000
DEPOSITS & OTHER ASSETS 344,778 494,397
------------ ------------
$ 6,034,340 5,654,200
============ ============
LIABILITIES/STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 150,668 202,648
ACCRUED EXPENSES 497,484 175,962
ACCRUED COMPENSATION 214,372 118,252
PURCHASE DEPOSITS 34,422 51,231
DEFERRED REVENUE 806,693 916,237
------------ ------------
TOTAL CURRENT LIABILITIES $ 1,703,639 1,464,330
NOTES PAYABLE 51,470 --
COMMITMENTS & CONTINGENCIES
MINORITY INTEREST 120,280 127,776
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $0.01 par value; 2,000,000 shares authorized; 625,820 shares
issued and outstanding as of September 30, 1998 and none issued and outstanding
as of December 31, 1997 6,258 --
COMMON STOCK, $.01 Par, 10,000,000 shares authorized, 3,147,387
and 2,932,934 shares issued and outstanding as of September 30,
1998 and December 31, 1997 respectively 31,474 29,329
ADDITIONAL PAID-IN CAPITAL 11,126,023 8,266,576
NOTE RECEIVABLE FROM SHAREHOLDER -- (15,938)
DEFERRED COMPENSATION (9,065) --
WARRANTS FOR COMMON STOCK 108,275
ACCUMULATIVE OTHER COMPREHENSIVE INCOME/(LOSS)
7,891 (13,175)
ACCUMULATED DEFICIT (7,111,905) (4,204,698)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,158,951 4,062,094
------------ ------------
$ 6,034,340 5,654,200
============ ============
<FN>
*** Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
PAGE 3
XIOX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended Three months ended
September 30, 1998 September 30, 1997
------------------ ------------------
REVENUES $ 1,312,083 1,265,527
----------- -----------
PRODUCT COSTS 536,034 519,112
RESEARCH AND DEVELOPMENT 972,978 198,509
MARKETING, SALES, GENERAL AND ADMINISTRATIVE 661,839 632,949
----------- -----------
2,170,851 1,350,570
----------- -----------
LOSS FROM OPERATIONS (858,768) (85,043)
OTHER INCOME, NET 9,831 8,432
----------- -----------
LOSS BEFORE INCOME TAXES (848,937) (76,611)
INCOME TAXES 3,084 3,632
----------- -----------
NET LOSS $ (852,021) (80,243)
=========== ===========
PER SHARE INFORMATION:
BASIC NET LOSS PER SHARE $ (0.27) (0.03)
=========== ===========
NUMBER OF SHARES USED IN BASIC
PER SHARE COMPUTATION 3,147,233 2,932,934
=========== ===========
DILUTED NET LOSS PER SHARE $ (0.27) (0.03)
=========== ===========
NUMBER OF SHARES USED IN DILUTED
PER SHARE COMPUTATION 3,147,233 2,932,934
=========== ===========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
PAGE 4
XIOX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
------------------ ------------------
REVENUES $ 3,867,859 3,788,088
----------- -----------
PRODUCT COSTS 1,757,880 1,502,479
RESEARCH AND DEVELOPMENT 2,967,725 573,903
MARKETING, SALES, GENERAL AND ADMINISTRATIVE 2,093,602 1,751,304
----------- -----------
6,819,207 3,827,686
----------- -----------
LOSS FROM OPERATIONS (2,951,348) (39,598)
OTHER INCOME (LOSS), NET 53,727 (2,541)
----------- -----------
LOSS BEFORE INCOME TAXES (2,897,621) (42,139)
INCOME TAXES 9,586 6,907
----------- -----------
NET LOSS $(2,907,207) (49,046)
=========== ===========
PER SHARE INFORMATION:
BASIC NET LOSS PER SHARE $ (0.92) (0.02)
=========== ===========
NUMBER OF SHARES USED IN BASIC
PER SHARE COMPUTATION 3,146,286 2,556,671
=========== ===========
DILUTED NET LOSS PER SHARE
$ (0.92) (0.02)
=========== ===========
NUMBER OF SHARES USED IN DILUTED
PER SHARE COMPUTATION 3,146,286 2,556,671
=========== ===========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
PAGE 5
XIOX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(2,907,207) (49,046)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH (USED IN) PROVIDED BY OPERATIONS
DEPRECIATION AND AMORTIZATION 212,355 170,211
AMORTIZATION OF DEFERRED COMPENSATION 3,733 --
MINORITY INTEREST IN NET LOSS (16,857) --
CHANGE IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE, NET 286,005 352,780
OTHER RECEIVABLES 390,546 55,871
PROMISSORY NOTE -- 31,138
INVENTORIES 31,313 80,263
PREPAIDS, DEPOSITS AND OTHER ASSETS 195,800 (468,974)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 385,042 (63,404)
PURCHASE DEPOSITS (16,810) (1,878)
DEFERRED REVENUE (109,544) (14,363)
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATIONS (1,545,624) 92,598
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
ACQUISITION OF PROPERTY AND EQUIPMENT (679,132) (150,285)
ACQUISITION OF SOFTWARE (60,763) (18,509)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (739,895) (168,794)
----------- -----------
CASH FROM FINANCING ACTIVITIES:
PROCEEDS FROM BORROWINGS 51,470 --
PROCEEDS FROM SALE OF COMMON STOCK 3,259 2,914,787
PROCEEDS FROM SALE OF PREFERRED STOCK AND WARRANTS FOR COMMON STOCK 2,960,068 --
REPAYMENT OF STOCKHOLDER NOTE 15,938 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,030,735 2,914,787
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 16,903 --
----------- -----------
NET INCREASE IN CASH & CASH EQUIVALENTS 762,119 2,838,592
BEGINNING CASH AND CASH EQUIVALENTS 2,633,860 291,488
----------- -----------
ENDING CASH AND CASH EQUIVALENTS $ 3,395,979 3,130,080
=========== ===========
(continued)
The accompanying notes are an integral part of these condensed consolidated financial statements.
PAGE 6
XIOX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, (cont.)
(unaudited)
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
------------------ ------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID $ 4,157 --
INCOME TAXES 3,850 11,352
NONCASH FINANCING ACTIVITIES
COMMON STOCK ISSUED UPON EXERCISE OF STOCK
OPTIONS IN EXCHANGE FOR NOTE RECEIVABLE
FROM SHAREHOLDER $ -- 27,188
=========== ===========
ADDITIONAL SHARES ISSUED IN CONNECTION WITH THE FLANDERS
LANGUAGE VALLEY STOCK 211,297 --
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
PAGE 7
XIOX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In the
opinion of management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operations. For further information, refer to the financial
statements and footnotes thereto, included in the Annual Report on Form 10-KSB,
filed with the Securities and Exchange Commission for the year ended December
31, 1997.
NOTE 2: REVENUE RECOGNITION
In October 1997, the AICPA issued SOP 97-2, Software Revenue Recognition, which
supersedes SOP 91-1. The Company adopted SOP 97-2 for software transactions
entered into beginning January 1, 1998. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements (i.e., software
products, upgrades/enhancements, post-contract customer support, installation,
training, etc.) to be allocated to each element based on the relative fair
values of the elements. The fair value of an element must be based on evidence
which is specific to the Company. The revenue allocated to software products
(including specified upgrades/enhancements) generally is recognized upon
shipment of the products. The revenue allocated to post-contract customer
support generally is recognized ratably over the term of the support and revenue
allocated to services as they are performed. If the Company does not have
evidence of the fair value for all elements in a multiple-element arrangement,
all revenue from the arrangement is generally deferred until such evidence
exists or until all elements are delivered. The adoption of SOP 97-2 did not
have a material impact on the Company's consolidated results of operation for
the nine months ended September 30, 1998.
NOTE 3: INVENTORIES
Inventories at September 30, 1998 have been stated at the lower of first-in,
first-out cost or market. Inventories consist solely of purchased hardware and
software products (finished goods).
NOTE 4: BANK LINE OF CREDIT
The Company maintains a $1,000,000 line of credit collateralized by eligible
accounts receivable. The line bears interest at prime plus 1.0% (8.25% as of
September 30, 1998) and is renewable in May 1999. No amounts were outstanding
under the line as of September 30, 1998.
NOTE 5: XIOX FLANDERS N.V.
In the third quarter of 1997, Xiox Flanders N.V. ("Xiox Flanders") was
incorporated in Belgium pursuant to an agreement between the Company and
Flanders Language Valley (Flanders") and is owned 94.9% by the Company and 5.1%
by Flanders. The Company has committed to fund Xiox Flanders with approximately
$300,000 in 1998 and approximately $1,472,000 in 1999. The actual amount of
funding provided by the Company will depend on the business needs of Xiox
Flanders and can be modified by a vote of the Board of Directors.
PAGE 8
XIOX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: MARKETING AGREEMENT
In July 1998, the Company signed a marketing agreement with Lucent Technologies
(Lucent), whereby Lucent will market XIOX products to hotels and motels
throughout the United States. The three-year agreement also calls for XIOX to
support Lucent in the pre-sale and post-installation process.
NOTE 7: EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income or loss by
weighted average common shares outstanding during the period. Diluted earnings
per share reflects the net incremental shares that would be issued if preferred
stock were converted to common stock, outstanding warrants were exercised, and
dilutive outstanding stock options were exercised, using the treasury stock
method.
In the case of a net loss, it is assumed that no incremental shares would be
issued because they would be antidilutive. In addition, certain options are
considered antidilutive because the options' exercise price was above the
average market price during the period. Antidilutive shares are not included in
the computation of diluted earnings per share, in accordance with SFAS No. 128.
The shares used in per share computations for the periods ended September 30, 1998 and 1997
are as follows:
Three months Three months Nine months Nine months
ended 9/30/98 ended 9/30/97 ended 9/30/98 ended 9/30/97
------------- ------------- ------------- -------------
Weighted average common
shares outstanding-basic 3,147,233 2,932,934 3,146,286 2,556,671
Dilutive incremental shares -- -- -- --
--------- --------- --------- ---------
Shares used in diluted per
share computations 3,147,233 2,932,934 3,146,286 2,556,671
========= ========= ========= =========
The diluted per share computation for the three and nine months ended September
30, 1998 and 1997, excludes the following incremental shares because the effect
of their inclusion would have been antidilutive.
Three months Three months Nine months Nine months
ended 9/30/98 ended 9/30/97 ended 9/30/98 ended 9/30/97
------------- ------------- ------------- -------------
Stock options 184,640 102,345 147,193 73,000
Contingent Common Stock -- 211,297 -- 71,206
Warrants 4,907 -- -- --
Preferred Stock 625,820 -- 625,820 --
------- ------- ------- -------
Antidiluted shares 815,367 313,642 773,013 144,206
======= ======= ======= =======
PAGE 9
XIOX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No, 130 establishes standards of
reporting and display of comprehensive income and its components of net income
and "other comprehensive income" in a full set of general purpose financial
statements. "Other comprehensive income" refers to revenues, expenses, gains and
losses that are not included in net income but rather are recorded directly in
shareholders' equity. SFAS No. 130 is effective for annual and interim periods
beginning after December 15, 1997 and for periods ended before that date when
presented for comparative purposes. The Company has not yet determined the
format it will use to display the information required by SFAS No. 130 in the
financial statements for the year ending December 31, 1998.
Total comprehensive loss was $826,572 and $2,886,141 for the three and nine
months, respectively, ended September 30, 1998. The Company's total
comprehensive income for the three and nine months ended September 30, 1997, did
not differ from those amounts reported as net income in the 1997 consolidated
statements of operations. The primary difference between net loss and
comprehensive loss for the three and nine months ended September 30, 1998 is the
result of translation of the Company's foreign subsidiary which has a local
functional currency.
NOTE 9: SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". SFAS No. 131 changes current
practice under SFAS No. 14 by establishing a new framework on which to base
segment reporting and also requires interim reporting of segment information.
SFAS No. 131 is effective for fiscal years beginning after December 31, 1997,
with earlier application encouraged. The statement's interim reporting
disclosures would not be required until the first quarter immediately subsequent
to the fiscal year in which SFAS No. 131 is effective.
NOTE 10: DERIVATIVES AND HEDGING
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and
losses resulting from changes in fair value would be accounted for depending on
the use of the derivative and whether it is designated and qualifies for hedge
accounting. The Company will be required to implement SFAS No. 133 for its
fiscal year 2000. The Company does not expect that the adoption of SFAS No. 133
will have a material effect on the Company's consolidated financial statements.
PAGE 10
XIOX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: ISSUANCE OF PREFERRED STOCK
On September 21, 1998, the Company entered into a Stock Purchase and Investor
Rights Agreement (the "Agreement") with Intel Corporation ("Intel"), Flanders
Language Valley CVA, Zero Stage Capital and other private investors for the
private placement of approximately $9.5 million of the Company's Series A
Preferred Stock. On the same date, the first closing was held pursuant to the
Agreement in which approximately $3.1 million of Series A Preferred Stock was
sold to the investors. On October 5, 1998, the Company held its second and final
closing pursuant to the Agreement. In the second closing the Company sold
approximately $6.4 million of the Series A Preferred on substantially the same
terms as the first closing, at which the Company sold approximately $3.1 million
of Series A Preferred on September 21, 1998. All together, 1,907,989 shares of
Preferred were sold under the Agreement at a purchase price of $5.00 per share.
The Series A Preferred Stock will be convertible into Common Stock on a 1:1
basis subject to certain antidilution provisions. In connection with this
financing, the Company has incurred a finders fee of $50,000 plus warrants for
50,000 shares of Common Stock.
The sale of the Series A Preferred Stock occurred in two closings due to the
requirements of NASDAQ Marketplace Rule 4310(c)(25)(H). Xiox has received from
NASD a waiver of compliance with the rule, which generally requires shareholder
approval when a NASDAQ Small Cap Market company issues securities convertible
into common stock equal to more than 20% of the common stock outstanding before
such issuance, if the sale price of the shares is less than market value. Xiox
requested the waiver to save time and expense because over 61% of the Company's
Common Stock is owned or controlled by members of the Xiox Board of Directors
and each director indicated that he would vote the shares he owns or controls in
favor of the sale, if such vote were required.
The Series A Preferred bears non-cumulative dividends at an annual rate of 6%
payable if and when declared by the Company. The conversion rate of the Series A
Preferred will be adjusted on a weighted average basis if the Company issues
Common Stock at a price less than the then-effective conversion price, other
than issuances pursuant to incentive stock arrangements approved by the Board.
In the event of a liquidation, dissolution or winding up of the Company, the
holders of the Series A Preferred will receive, prior to any distribution to the
holders of the Common Stock, a liquidation preference entitling them to receive
an amount equal to the purchase price of the Series A Preferred plus any
declared but unpaid dividends.
Each share of the Series A Preferred has the number of votes equal to the number
of shares of Common Stock then issuable upon its conversion into Common Stock.
Although the holders of the Series A Preferred will generally vote together with
the Common Stock and not as a separate series, the consent of the holders of two
thirds of the outstanding shares of Series A Preferred is required to: (1) alter
or change any of the powers, preferences, privileges or rights of the Series A
Preferred Stock; (2) create any new class or series of shares having preferences
prior to the Series A Preferred Stock in any manner, including, without
limitation, as to dividends or liquidation; (3) take any action that
reclassifies any outstanding shares into shares having preferences prior to the
Series A Preferred Stock in any manner, including, without limitation, as to
dividends or liquidation; or (4) alter or change the Company's Certificate of
Incorporation in a manner that adversely affected the rights of the Series A
Preferred Stock.
The Company has certain rights, beginning one year after the first closing, to
redeem shares of the Series A Preferred upon a registered public offering with
gross proceeds in excess of $15 million or when the closing Common Stock price
exceeds $15 per share for 15 consecutive business days.
PAGE 11
XIOX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: ISSUANCE OF PREFERRED STOCK (continued)
The holders of the Series A Preferred have been granted certain registration
rights and information rights, including the right to be notified in advance of
certain corporate events. In addition, Intel and Zero Stage Capital each have
the right to appoint an observer to attend meetings of the Board of Directors of
the Company, and committees thereof, subject to certain conditions.
Each holder of Series A Preferred has certain rights to maintain its percentage
ownership interest of the Company's outstanding voting securities (on an
as-converted basis). During the first year following the closing the Company
will not, without the prior written consent of the holders of 66 2/3% of the
outstanding shares of Series A Preferred Stock, enter into any acquisitions in
which the aggregate consideration paid is more than 20% of the Company's voting
securities. Intel has certain additional rights during the first two years
following the closing, as set forth in Exhibits 3.4, 4.5 and 4.6 to the reports
on Form 8-K referenced in Item 6 on page 19.
PAGE 12
XIOX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The forward-looking statements included in this Quarterly Report filed on Form
10-QSB, which reflect management's best judgment based on factors known, involve
risks and uncertainties. In addition, the Company may from time to time make
forward-looking statements. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including but not limited to those discussed under "Certain
Risk Factors Which May Impact Future Operating Results and Market Price of
Stock" on page 15. Forward-looking information provided by Xiox should be
evaluated in the context of these factors.
The following is management's discussion and analysis of certain significant
factors which have effected Xiox's financial position and operating results
during the periods included in the accompanying condensed consolidated financial
statements.
Results of Operations
Third Quarter 1998 vs. 1997
Revenue for the three months ended September 30, 1998 was $ 1,312,083, an
increase of 4% versus the $1,265,527 recorded during the three months ended
September 30, 1997. The $46,556 increase in revenue is attributable to higher
demand for call accounting products in the third quarter of 1998 versus the
third quarter of 1997.
Total operating expenses for the three months ended September 30, 1998 were
$2,170,851, an increase of 61% or $820,281 versus the $1,350,570 of operating
expenses incurred during the three months ended September 30, 1997. Total
product cost as a percentage of revenue remained the same in the third quarter
of 1998, at 41%, as compared to the third quarter of 1997.
Research and development expenses increased by 390% or $774,469 to $972,978 in
the third quarter of 1998 compared to $198,509 in the third quarter of 1997 due
to an increased investment in new product development. The Company expects
quarterly research and development spending to exceed 1997 levels throughout
1998.
Marketing, sales and general and administrative expenses in the third quarter of
1998 increased by 5% or $28,890 to $661,839 compared to $632,949 in the third
quarter of 1997, primarily due to administrative costs associated with formation
of a foreign subsidiary and increased costs associated with new product business
development.
Other income increased by $1,399 from the third quarter of 1997 primarily due to
income earned on cash equivalent investments of $11,217 in the third quarter of
1998 versus $8,576 earned in the third quarter of 1997.
The Company lost $858,768 from operations during the third quarter of 1998 and
reported a net loss after taxes of $852,021 versus a loss of $85,043 from
operations and a net loss after taxes of $80,243 in the comparable quarter of
1997. The Company attributes this to increased research and development expenses
associated with its new product development in addition to administrative and
marketing expenses necessary to support this effort.
PAGE 13
XIOX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nine Months, 1998 vs. 1997
Revenue for the nine months ended September 30, 1998 was $3,867,859, an increase
of 2% versus the $3,788,088 recorded during the nine months ended September 30,
1997. The $79,771 increase is attributable to higher demand for call accounting
products in the first nine months of 1998 versus the first nine months of 1997.
Total operating expenses for the nine months ended September 30, 1998 were
$6,819,207, an increase of 78% or $2,991,521 versus the $3,827,686 of operating
expenses incurred during the nine months ended September 30, 1997. Total product
costs as a percentage of revenue increased to 45% in the first nine months of
1998 from 40% in the first nine months in 1997, primarily due to variations in
product mix and an increase in fixed labor costs.
Research and development expenses increased by 417% or $2,393,822 to $2,967,725
in the first nine months of 1998 compared to $573,903 in the first nine months
of 1997 due to an increased investment in new product development. The Company
expects quarterly research and development spending to exceed 1997 levels
throughout 1998.
Marketing, sales and general and administrative expenses in the first nine
months of 1998 increased by 20% or $342,298 to $2,093,602 compared to $1,751,304
in the first nine months of 1997, primarily due to administrative costs
associated with formation of a foreign subsidiary and increased costs associated
with new product business development.
Other income increased by $56,268 from the first nine months of 1997 primarily
due to income earned on cash equivalent investments of $57,883 in the first nine
months of 1998 versus $14,668 earned in the first nine months of 1997. In
addition, there was no profit sharing distribution in the first nine months of
1998 versus a distribution of $17,208 in the first nine months of 1997.
The Company lost $2,951,348 from operations during the first nine months of 1998
and reported a net loss after taxes of $2,907,207 versus a loss of $39,598 from
operations and a net loss after taxes of $49,046 in the comparable period of
1997. The Company attributes this to increased research and development expenses
associated with its new product development in addition to administrative and
marketing expenses necessary to support this effort.
PAGE 14
XIOX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital
At September 30, 1998, Xiox held cash and cash equivalents totaling $3,395,979
and had working capital of $2,882,356 versus cash equivalents of $2,633,860 and
working capital of $3,120,508 at December 31, 1997. The Company anticipates
investing in excess of $1,200,000 in capital equipment during 1998, consisting
primarily of computer hardware and software and testing equipment. Since
December 31, 1997, capital equipment procurements have totaled $739,895.
On September 21, 1998, the Company entered into a Stock Purchase and Investor
Rights Agreement (the "Agreement") with Intel Corporation, Flanders Language
Valley CVA, Zero Stage Capital and other private investors for the private
placement of approximately $9.5 million of the Company's Series A Preferred
Stock. On the same date, the first closing was held pursuant to the Agreement in
which approximately $3.1 million of Series A Preferred Stock was sold to the
investors. On October 5, 1998, the Company held its second and final closing
pursuant to the Agreement. In the second closing the Company sold approximately
$6.4 million of the Series A Preferred on substantially the same terms as the
first closing, at which the Company sold approximately $3.1 million of Series A
Preferred on September 21, 1998. All together, 1,907,989 shares of Preferred
were sold under the Agreement at a purchase price of $5.00 per share. The Series
A Preferred Stock will be convertible into Common Stock on a 1:1 basis subject
to certain antidilution provisions. In connection with this financing, the
Company has incurred a finders fee of $50,000 plus warrants for 50,000 shares of
Common Stock.
The Company has committed to fund Xiox Flanders N.V., a 94.9% owned subsidiary,
with approximately $300,000 in 1998 and approximately $1,472,000 in 1999. The
actual amount of funding provided by the Company will depend on the business
needs of Xiox Flanders and can be modified by a vote of the Board of Directors.
In the current quarter, the Company has not paid any money directly to Xiox
Flanders.
The Company maintains a bank line of credit of $1,000,000. The bank line, when
utilized, is collateralized by certain current assets and property and
equipment. The line carries a variable interest rate based upon prime plus 1.0
(8.25% as of September 30, 1998). No amounts were outstanding under the line as
of September 30, 1998.
Certain Risk Factors Which May Impact Future Operating Results and Market Price
of Stock
Xiox operates in a rapidly changing environment that involves a number of risks
and uncertainties, some of which are beyond the Company's control and any of
which may have an adverse effect on the Company's business, financial condition
and results of operations. These uncertainties include, but are not limited to,
the Company's reliance on the sale of few products; the Company's dependence on
the ability of its distribution channels to market the Company's products; the
fluctuations in the Company's quarterly results and the effect of these results
on the Company's ability to maintain its listed status on the Nasdaq Small Cap
Market; the ability of the Company's product developers to design products and
software that do not contain defects and "bugs" which render the products or
software inoperable or susceptible to breakdown, software viruses or "hacking";
and the outcome of any litigation the Company may be involved in. In addition,
the Company typically experiences weaker sales in the first quarter of each
calendar year compared to sales for the last quarter of the previous year.
PAGE 15
XIOX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year 2000 Readiness
Definition
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs and
embedded systems that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. If a Company's internal
systems, or those of a supplier or service provider, do not correctly recognize
date information when the year changes to 2000, there could be an adverse impact
on the Company's operations.
Products
The Company has assessed the capability of its products sold to customers and
believes that it has no material exposure to contingencies related to the Year
2000 Issues for the products it has sold. A list of Year 2000 Ready products has
been posted on the Company's web site and has been sent to customers and
distributors via Company newsletters.
The Company's products receive data from other equipment such as PC's and PBX's
and can only properly handle Year 2000 dates if it receives Year 2000 compliant
data. Some systems sold by the Company with computer BIOS manufactured prior to
1996 will need to have the internal clock reset or the BIOS modified in order to
ensure proper performance.
Management believes that the likelihood of a material adverse impact due to
problems with products sold to customers is remote and expects that any costs to
be incurred to assure Year 2000 capability relating to product released or in
development will not have a material adverse effect on the Company's financial
position or results of operations.
Internal Systems
During the nine months ending September 30, 1998, the Company continued its
efforts to assess and remediate its computer systems, telecommunications
systems, software systems and related equipment to ensure each system will
function properly as the Year 2000 approaches. The Year 2000 program is being
conducted in four phases; (a) Identification, (b) Assessment, (c) Remediation,
(d) Testing.
The Identification Phase is nearing completion for all currently installed
systems. The target for completion of this phase is 12/31/98. All new systems
acquired after this date will be subject to assessment prior to purchase.
The Assessment Phase is estimated at 75% complete and is targeted for completion
by 12/31/98 for all systems currently implemented.
The Remediation Phase is estimated at 50% complete based on the systems
requiring patches or upgrades. The primary system requiring attention is the
Company's Manufacturing and Financial Management System, Macola. The upgrade to
this system is scheduled for completion in 1999.
The Testing Phase is currently in a preliminary stage. Testing of systems and
interfaces will occur near the end of the Remediation phase.
The Company currently believes its information systems will be Year 2000
compliant by the end of the second quarter of 1999.
PAGE 16
XIOX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year 2000 Readiness (cont.)
External Suppliers
The Company has begun the process of identifying its top suppliers and seeking
confirmation on their Year 2000 compliance. For those with sizeable volume or
that are single source for components or services, the Company will be sending
these suppliers a Year 2000 compliance survey. The Company expects this process
to be completed by mid 1999.
The Company has received information that the most critical systems, services or
products supplied to the Company by external sources are Year 2000 ready or are
expected to be Year 2000 ready by mid 1999.
The Company will be developing contingency plans for systems and services
provided by vendors that do not respond to the Company's requests or fail in
their readiness efforts.
State of Readiness
As of this date, the Company has made significant progress in the process of
identifying systems, completing an assessment and implementing solutions for the
high priority internal systems so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter.
The Company is actively participating with customers and suppliers to ensure
progress is being made and that the dates forecast are reasonable and
attainable.
Costs
Other than time spent by the Company's internal information technology and other
personnel, the Company has not incurred any significant costs in identifying,
assessing and remediating year 2000 issues.
Due to the fact that the Company is in a growth phase, systems improvement
initiatives are underway to improve the Company's primary business systems. The
Company does not anticipate any significant costs related to remediation efforts
because planned systems improvements shall include year 2000 readiness as a
standard requirement.
This statement assumes that third party suppliers have accurately assessed the
compliance of their products and that they will successfully correct any issues
in non-compliant products. Because of the complexity of correcting the Year 2000
issue, actual costs may vary from estimates.
While the total cost to obtain Year 2000 compliance is not known at this time,
the Company currently expects the cost to be less than $150,000. The actual
cost, however, could exceed this estimate. These costs are not expected to have
a material effect on the Company's financial position, results of operations or
cash flows.
PAGE 17
XIOX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year 2000 Readiness (cont.)
Contingency Plans
Based upon the progress of its plan, the Company expects that it will not
experience a material disruption of its operations as a result of the change to
the new millennium. However, there can be no assurance that the third parties
who have supplied technology used in the Company's mission critical systems will
be successful in taking corrective action in a timely manner.
The Company is developing contingency plans with respect to certain key
technology used in its mission critical systems, which are intended to enable
the Company to continue to operate.
The contingency plans include performing certain processes manually, repairing
systems and changing suppliers if necessary, although there can be no assurance
that these contingency plans will successfully avoid service disruption in the
operation of business as usual.
PAGE 18
PART II - OTHER INFORMATION
XIOX CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
The Company filed reports on Form 8-K on September 24, 1998 and October 8, 1998
pertaining to the sale of Preferred Stock. The following exhibits are filed as
part of this Report:
Exhibits
3.3 Certificate of Amendment of Certificate of Incorporation as filed with
the Secretary of State of the State of Delaware on May 26, 1998.
3.4 Certificate of Designation, Preferences and Other Rights of the Series
A Preferred Stock as filed with the Secretary of State of Delaware on
September 21, 1998.
4.5 Stock Purchase and Investor Rights Agreement dated September 21, 1998
by and between the Registrant and the Investors.
4.6 Right of First Refusal and Co-Sale Agreement dated September 21, 1988.
PAGE 19
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XIOX CORPORATION
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officers of the registrant.
XIOX CORPORATION
Registrant
Date: November 16, 1998 /s/ William H. Welling
--------------------------------
William H. Welling, Chairman/
CEO (Duly Authorized Officer)
Date: November 16, 1998 /s/ Melanie D. Reid
--------------------------------
Melanie D. Reid, VP Finance/
CFO/ Secretary (Duly
Authorized Officer)
PAGE 20