<PAGE> 1
Pursuant to Rule 424(b)(4)
Registration No. 333-06617
PROSPECTUS
3,000,000 SHARES
LOGO
COMMON STOCK
Of the 3,000,000 shares of Common Stock offered hereby, 2,000,000 are being
sold by the Company and 1,000,000 shares are being sold by Selling Stockholders.
The Company will not receive any proceeds from the sale of shares by Selling
Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common
Stock of the Company. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company's
Common Stock is quoted on the Nasdaq National Market under the symbol RGFX.
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------
Per Share.............. $8.00 $0.56 $7.44 $7.44
- ------------------------------------------------------------------------------------------------
Total (3).............. $24,000,000 $1,680,000 $14,880,000 $7,440,000
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $850,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$27,600,000, $1,932,000 and $18,228,000, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about August 13, 1996 at the office of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST PRUDENTIAL SECURITIES INCORPORATED
August 8, 1996
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
The Raster Graphics logo, ColorStation(R) and PrimaScript(R) are registered
trademarks of the Company. PosterShop(TM) and DuraPrint(TM) are trademarks of
the Company. This Prospectus also contains the trademarks of other companies.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
THE COMPANY
Raster Graphics, Inc. ("Raster Graphics" or the "Company") develops,
manufactures and markets high-performance, large format color printing systems
and sells related consumables for the on-demand, large format digital printing
("LFDP") market. The LFDP market consists of color print jobs with run lengths
ranging from one to 200 copies and output sizes of 20-inches by 30-inches or
larger. Applications include point of purchase ("POP") signs, trade show exhibit
graphics, banners, billboards, courtroom graphics and backlit signage. The
primary users of the Company's products are color photo labs, reprographic
houses, graphic arts service bureaus, exhibit builders, digital color printers,
screen printers and in-house print shops. The Company's Digital Color Station
("DCS") printing system, consisting of the DCS Printer and PosterShop system
software, allows users to print short runs of high quality color graphics on
demand at substantial time and cost savings relative to traditional printing
methods.
According to IT Strategies, the LFDP printers and consumables market is
projected to grow from annual sales of approximately $319 million in 1995 to
approximately $1.9 billion in 1998. The rapid growth in this market is being
driven primarily by the increasing desire and need for customized, large format
color graphics, as well as significant advances in short-run printing and
desktop publishing technologies. Traditional graphics printing methods,
consisting of photographic, screen and offset printing, do not meet the
requirements for production short-run print jobs due to the time consuming,
multi-step processes and set up costs involved. As a result, digital printing
was developed to fulfill the unmet demand of short-run users by allowing
graphics to be printed directly from desktop publishing systems to paper.
Raster Graphics offers a complete printing solution, consisting of its DCS
printers, integrated image processing software and related consumables, to meet
the performance, cost, versatility and quality demands of the on-demand
production LFDP market. With a production printing speed of 600 to 1,000 square
feet per hour, the DCS printing system can produce 50 to 60, full-color, 36- by
48-inch posters in one hour, which the Company believes is significantly faster
than comparable digital printers. DCS printing systems are more cost-effective
for short-run print jobs in comparison to traditional methods which have high
set-up and labor costs. Using digital printing technology, DCS systems allow
content to be customized on a print-by-print basis. DCS printing systems also
offer two printing resolution modes, which allow the user to adjust the quality
level depending on the application. The Company also markets a line of
consumables, including specialized inks and print media, which the Company
believes will continue to generate increasing recurring revenues to the extent
that the installed base of DCS printing systems expands.
Raster Graphics' objective is to build on its position as a market leader
in sales of digital printing systems and related consumables and services, for
the on-demand production LFDP market. In August 1995, as part of the Company's
strategy to provide a complete system solution, the Company acquired Onyx
Graphics Corporation ("Onyx"), a leading developer of image processing software.
In addition to being used in the Company's DCS printers, Onyx's image processing
software is available for printers manufactured by other companies.
The Company was established in 1987 initially to develop low-cost
electrostatic printers for computer aided design ("CAD") applications. In 1993,
the Company identified the on-demand production LFDP market as a new opportunity
to develop a product based on its proprietary high-speed print head technology.
The Company introduced its initial DCS printer, the DCS 5400 in July 1994 and
introduced its second generation product, the DCS 5442 in January 1996. The
Company currently sells DCS products to a wide range of customers both
domestically through direct and independent sales forces, original equipment
manufacturers ("OEMs") and value-added resellers ("VARs") and internationally
through distributors, OEMs and VARs.
Raster Graphics has received five highly acclaimed industry awards for its
contribution to digital printing technology, including Digital Printing and
Imaging Association's 1994 Product of the Year; Top 10 New Repro Products for
1994 by Modern Reprographics; Hot Product for 1994 by Electronic Publishing;
1994 Editor's Choice from Computer Graphics World; and 1994 Industry Excellence
Award by IEEE Computer Graphics and Applications.
3
<PAGE> 4
THE OFFERING
<TABLE>
<S> <C>
COMMON STOCK OFFERED BY THE COMPANY.............. 2,000,000 shares(1)
COMMON STOCK OFFERED BY THE SELLING
STOCKHOLDERS................................... 1,000,000 shares
COMMON STOCK TO BE OUTSTANDING AFTER THE
OFFERING....................................... 8,341,350 shares(2)
USE OF PROCEEDS.................................. General corporate purposes including
working capital, capital expenditures,
research and development and potential
acquisitions of businesses and
technologies. See "Use of Proceeds."
NASDAQ NATIONAL MARKET SYMBOL.................... RGFX
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
---------------------------------------------------- -------------------
DEC. 27, DEC. 25, DEC. 31, DEC. 30, DEC. 31, JUNE 30, JUNE 30,
1991 1992 1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues.................. $ 7,770 $ 8,525 $ 14,719 $ 13,235 $ 26,045 $ 11,652 $ 18,151
Gross profit.................. 1,659 2,410 4,777 3,531 9,447 3,951 7,165
Operating income (loss)....... (1,919) (1,725) 106 (2,229) 111 550 1,322
Net income (loss)............. $ (1,963) $ (2,061) $ 41 $ (2,128) $ 77 $ 275 $ 1,201
Net income (loss) per
share(3)................... $ 0.01 $ 0.04 $ 0.16
Shares used in per share
calculation................ 7,187 7,095 7,412
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 1,775 $ 15,805
Total assets........................................................ 16,052 30,082
Long-term debt...................................................... 318 318
Total stockholders' equity.......................................... 7,942 21,972
</TABLE>
- ---------------
(1) Excludes up to 450,000 shares of Common Stock that may be sold by the
Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Excludes 167,789 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $2.18 per
share and 1,355,652 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $2.33 per share
at June 30, 1996. See "Management--Stock Options and Incentive Plans and
note 7 of Notes to Consolidated Financial Statements."
(3) See note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net income (loss) per
share.
(4) Adjusted to reflect the sale of shares of Common Stock offered hereby at the
initial public offering price of $8.00 per share after deduction of the
underwriting discount and the estimated offering expenses payable by the
Company. See "Use of Proceeds" and "Capitalization."
------------------------------------
Except as otherwise noted, all information in this Prospectus (i) assumes a
1-for-5 reverse stock split of the Common Stock and Preferred Stock to be
effective prior to this offering, (ii) assumes the conversion of all outstanding
shares of Preferred Stock into Common Stock upon the closing of this offering,
(iii) reflects the reincorporation of the Company from California to Delaware
prior to the closing of the offering and (iv) assumes no exercise of the
Underwriters' over-allotment option. See "Description of Capital Stock" and
"Underwriting."
4
<PAGE> 5
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. In addition
to the other information in this Prospectus, the following factors should be
considered carefully in evaluating an investment in the shares of Common Stock
offered by this Prospectus. The Prospectus contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth below and elsewhere in this
Prospectus.
Limited History of Profitability and Uncertainty of Future Financial
Results. The Company has incurred a net operating loss in each year subsequent
to its inception in 1987, except for the years ended December 31, 1993 and
December 31, 1995. As a result, the Company had an accumulated deficit as of
June 30, 1996 of approximately $17.2 million. The Company has a limited history
of profitability. There can be no assurance that sales of the Company's products
will generate significant revenues or that the Company can sustain profitability
on a quarterly or annual basis in the future.
The Company expects to expand its manufacturing and administrative
capabilities, technical and other customer support, research and product
development activities. The anticipated increase in the Company's operating
expenses caused by this expansion could have a material adverse effect on the
Company's operating results if revenues do not increase at an equal or greater
rate. Also, the Company's expenses for these and other activities are based in
significant part on its expectations regarding future revenues and are fixed to
a large extent in the short term. The Company may be unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview" and the Consolidated
Financial Statements.
Significant Fluctuations in Quarterly Results. The Company's quarterly
operating results have varied significantly in the past and are likely to vary
significantly in the future based upon a number of factors including general
economic conditions, the introduction or market acceptance of new products
offered by the Company and its competitors, changes in the pricing polices of
the Company or its competitors, the volume and timing of customer orders, the
level of product and price competition, the relative proportion of printer and
consumables sales, the continued availability of sole source components, the
continued availability of consumables from independent vendors, fluctuations in
research and development expenditures, the impact of future Company
acquisitions, the continued availability of financing arrangements for certain
of the Company's customers, the Company's success in expanding its direct sales
force and indirect distribution channels and the risks related to international
operations, as well as other factors. Additionally, because the purchase of a
DCS printer or printing system involves a significant capital commitment, the
Company's DCS printer and printing system sales cycle is susceptible to delays
and lengthy acceptance procedures associated with large capital expenditures.
Moreover, due to the Company's high average sales price and low unit volume per
month, a delay in the sale of a few units could have a material adverse effect
on the results of operations for a financial quarter.
Quarterly revenues and operating results depend primarily on the volume,
timing, shipping and acceptance of orders during the quarter, which are
difficult to forecast due to the length of the sales cycle. A significant
portion of the Company's operating expenses are relatively fixed in the short
term, and planned expenditures are based on sales forecasts. If revenue levels
are below expectations, net income, if any, may be disproportionately affected
because only a small portion of the Company's expenses vary with revenue in the
short term, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Although the Company
has experienced growth in revenue in recent years, there can be no assurance
that the Company will sustain such revenue growth or be profitable on an
operating basis in any future period. For the foregoing reasons, the Company
believes that period-to-period comparisons of its results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Further, it is likely that in some future quarter the Company's revenues or
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Common Stock could be materially
adversely affected.
5
<PAGE> 6
Dependence on a Single Product Line. Substantially all of the Company's
sales are derived from one principal product line, the DCS printing systems,
printers and related software and consumables, such as specialized inks,
varnish, vinyls and papers. The Company anticipates that it will continue to
derive substantially all of its revenues in the next several years from sales of
this product line. Dependence on a single product line makes the Company
particularly vulnerable to the successful introduction of competing products.
The Company's inability to generate sufficient sales of the DCS product line and
to achieve profitability due to competitive factors, manufacturing difficulties,
or other reasons, would have a material adverse effect on its business,
financial condition and results of operations. Moreover, some of the Company's
DCS printing system and printer customers have purchased and will continue to
purchase consumables such as ink and paper from suppliers other than the
Company. If a significant number of current or future purchasers of the DCS
printing systems and printers were to purchase consumables from suppliers other
than the Company, the Company's business would be materially adversely affected.
See "Business--Products" and "--Competition."
Competition. The market for printing equipment and related software and
consumables is extremely competitive. Suppliers of equipment for the LFDP market
compete on the basis of speed, print quality, price and the ability to provide
complete solutions, including service. Certain of the Company's competitors are
developing or have introduced products to address the LFDP market. Among these
companies are Xerox ColorgrafX Systems, a subsidiary of Xerox Corporation,
("ColorgrafX"), Encad, Inc. ("Encad"), Hewlett-Packard Corporation
("Hewlett-Packard") and Lasermaster Corporation ("Lasermaster"), which
manufacture LFDP printers, and Cactus, Infographix Technologies, Inc.
("Infographix") and Visual Edge Technology Digital Printing Systems ("Visual
Edge"), which develop LFDP image processing software. A variety of potential
actions by any of the Company's competitors, especially those with substantial
market presence such as ColorgrafX, could have a material adverse effect on the
Company's business, financial condition and results of operations. Such actions
may include reduction of product prices, increased promotion, announcement or
accelerated introduction of new or enhanced products, product giveaways, product
bundling or other competitive actions. In addition, companies that are currently
targeting the photographic enlargement, screen and offset printing markets may
enter the LFDP market in the future or may increase the performance or lower the
costs of such alternate printing processes in a manner that would allow them to
compete more directly with the Company for LFDP customers. Furthermore,
companies that supply consumables, such as ink and paper, to the Company could
compete with the Company by not selling such consumables to the Company or by
widely selling such consumables directly or through other channels to the
Company's customers. Such competition would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Competition" and "-- Suppliers."
Many of the companies that currently compete with the Company or that may
compete with the Company in the future have longer operating histories and
significantly greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
the Company. As a result, these competitors may be able to respond more quickly
and/or effectively to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion, sale
and support of their products than the Company. Consequently, the Company
expects to continue to experience increased competition, which could result in
significant price reductions, loss of market share and lack of acceptance of new
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to compete against current or future
competitors successfully or that competitive pressures faced by the Company will
not have a material adverse effect upon its business, financial condition and
results of operations. See "Business--Competition" and "--Intellectual
Property."
Reliance on Third-Party Distribution. The Company relies heavily on
original equipment manufacturers ("OEMs"), value added resellers ("VARs") and a
network of distributors for both domestic and international sales. In
particular, OEM sales to Oce Graphics France S.A. ("Oce") accounted for
6
<PAGE> 7
10.9% of the Company's revenue in 1995. While the total percentage of Company
revenue represented by sales to Oce has been reduced significantly in recent
years as the Company has expanded its distribution channels, Oce remains one of
the Company's largest single customers. Under the terms of the agreement with
Oce, Oce has a worldwide non-exclusive right to sell the Company's DCS printers.
Further, the Company is required to escrow technology associated with qualified
products under the agreement, to which Oce has a non-exclusive manufacturing
license in the event of the Company's bankruptcy, insolvency, general assignment
of debts or failure to deliver such products or spare parts. The agreement
expires in October 1997. There can be no assurance that the Company will
continue to sell substantial quantities of its products to Oce or that, upon any
termination of the Company's relationship with Oce, the Company will be able to
obtain suitable distribution of its products in Europe through alternate
distributions channels. Such failure would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company also currently maintains OEM, VAR and distribution agreements
for its printing systems and printers with 3M Commercial Graphics, a division of
Minnesota Mining and Manufacturing Company ("3M"), Cactus, C-4 Network, Inc.,
Management Graphics Inc. and Ahearn & Soper Inc. for distribution of its
products in North America; Sumisho Electronics Ltd. ("Sumisho"), Sumitomo-3M
Ltd. ("Sumitomo-3M"), Marubeni Electronics Co. Ltd. ("Marubeni") and Kimoto Co.,
Ltd. ("Kimoto") for distribution of its products in Japan; and Oce, Sign-Tronic
("Sign-Tronic") and CIS Graphik for distribution of its products in Europe. The
Company has given notice to all of its German distributors of its intent to
begin selling its DCS printing systems directly to end-users and through its
recently established German subsidiary. As a consequence of this action, CIS
Graphik has indicated to the Company that it may not continue selling the
Company's DCS printers. CIS Graphik's sales of the Company's products accounted
for approximately 3.0% and 5.0% of the Company's revenue in 1995 and for the six
months ended June 30, 1996, respectively. A reduction in sales by CIS Graphik
could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, the Company distributes its
image processing software products through a number of domestic and
international OEMs, VARs and distributors such as CIS Graphik and
Bildverarbeitung GmbH, The David Group, Access Graphics and Encad. Under the
terms of the Agreement with Encad, Encad has a worldwide non-exclusive right to
distribute the Company's image processing software. Either party may terminate
this agreement without cause upon 180 days written notice. There can be no
assurance that the Company's independent OEMs, VARs and distributors will
maintain their relationships with the Company or that the Company will be able
to recruit additional or, if necessary, replacement OEMs, VARs or distributors.
The loss of one or more of the Company's OEMs, VARs or distributors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In general, the Company's agreements with its OEMs, VARs and distributors
are not exclusive, and each of the Company's OEMs, VARs and distributors can
cease marketing the Company's products with limited notice and with little or no
penalty. Some of the Company's OEMs, VARs and distributors offer competitive
products manufactured by third parties. In addition, some of these customers may
consider Onyx's products to be competitive offerings and, as a result, there can
be no assurance that such customers will continue marketing the Company's
products. Further, there can be no assurance that the Company's OEMs, VARs and
distributors will give a high priority to the marketing of the Company's
products as compared to competitors' products or alternative solutions or that
such OEMs, VARs and distributors will continue to offer the Company's products.
Any reduction or delay in sales of the Company's products by its OEMs, VARs or
distributors could have a material adverse effect on the Company's business,
financial condition and results of operations. For further description of the
Company's OEM, VAR and distribution agreements, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview" and
"Business--Customers, Sales and Marketing."
7
<PAGE> 8
Although the Company seeks information from foreign customers that purchase
products from the Company's OEMs, VARs and distributors, it generally does not
deal directly with them and cannot directly observe their experience with the
Company's products. The Company also does not have direct control over the
marketing and support efforts of its OEMs, VARs and distributors in foreign
countries. This may result in the inability of the Company to identify potential
opportunities with these customers and a potential delay by the Company in the
recognition and correction of any problems with such OEM, VAR or distributor
sales or support organizations. Failure of the Company to respond to customer
preferences or experience with its products or the failure of OEM, VAR or
distributor supported customers to market and support the Company's products
successfully, could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, third-party distribution
provides the Company with less information regarding the amount of inventory
that is in the process of distribution. This lack of information can reduce the
Company's ability to predict fluctuations in revenues resulting from a surplus
or a shortage in its distribution channels and contribute to volatility in the
Company's financial results, cash flow, and inventory balances. See
"Business--Customers, Sales and Marketing."
Limited History of Product Manufacturing and Use; Product Defects. The
Company's DCS printers are based on relatively new technology, are complex and
must be reliable and durable. Companies engaged in the development and
production of new, complex technologies and products often encounter
difficulties and delays. The Company began commercial production of the DCS 5400
in June 1994 and the DCS 5442 in January 1996. The DCS 5442 was developed as a
second generation to the DCS 5400 and, consequently, the Company has been slowly
phasing out production of the DCS 5400. The Company is continuing to make
upgrades and improvements in the features of the DCS 5442. Despite extensive
research and testing, the Company's experience with volume production of the DCS
5442 and with the reliability and durability of the DCS 5442 during customer use
is limited. Consequently, customers may experience reliability and durability
problems that arise only as the product is subjected to extended use over a
prolonged period of time. The Company and certain DCS 5442 users have
encountered some operational problems which the Company believes it has
successfully addressed. However, given the recent introduction of the DCS 5442,
there can be no assurance that the Company has successfully resolved these
operational issues or that the Company will successfully resolve any future
problem in the manufacture or operation of the DCS printers or any new product.
Failure by the Company to resolve manufacturing or operational problems with the
DCS printers or any new product in a timely manner would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Manufacturing" and "-- Competition."
The Company's image processing software products are extremely complex as a
result of such factors as advanced functionality, the diverse operating
environments in which they may be deployed, the need for interoperability, the
multiple versions of such products that must be supported for diverse operating
platforms and languages and the underlying technological standards. These
products may contain undetected errors or failures when first introduced or as
new versions are released. There can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be found in
new software products after commencement of commercial shipments, resulting in
loss of or delay in market acceptance. Such loss or delay would likely have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Products."
Susceptibility of Certain Customers to Economic and Financing
Conditions. Many of the Company's end user customers are small businesses that
are more susceptible than large businesses to general downturns in the economy.
In some cases, these customers finance the purchase of the Company's products
through third-party financing arrangements. To the extent that such customers
are unable to obtain acceptable financing terms or to the extent that a rise in
interest rates makes financing arrangements generally unattractive, such
customers could forgo the purchase of a LFDP product. Consequently, the
Company's access to a significant portion of its present customer base would be
limited. Moreover, competitors, such as ColorgrafX, that have significantly
greater financial resources
8
<PAGE> 9
than the Company may be able to provide more attractive financing terms to
potential customers than those available through the Company or through third
parties. There can be no assurance that the Company's small business customers
will, if necessary, be able to obtain acceptable financing terms or that the
Company will be able to offer financing terms that are competitive with those
offered by the Company's competitors. The Company's inability to continue to
generate sufficient levels of product revenue from sales to such customers due
to the unavailability of financing arrangements or due to a general economic
downturn would have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertainty Regarding Development of LFDP Market; Uncertainty Regarding
Market Acceptance of New Products. The LFDP market is relatively new and
evolving. The Company's future financial performance will depend in large part
on the continued growth of this market and the continuation of present large
format printing trends such as use and customization of large format
advertisements, use of color, transferring of color images onto a variety of
substrates, point-of-purchase printing, in-house graphics design and production
and the demand for limited printing runs of less than 200 copies. The failure of
the LFDP market to achieve anticipated growth levels or a substantial change in
large format printing customer preferences would have a material adverse effect
on the Company's business, financial condition and results of operations.
Additionally, in a new market, customer preferences can change rapidly and new
technology can quickly render existing technology obsolete. Failure by the
Company to respond effectively to changes in the LFDP market, to develop or
acquire new technology or to successfully conform to industry standards would
have a material adverse effect on the business, financial condition and results
of operations of the Company. See "Business--Industry Background."
The Company's products currently target the high-performance production
segment of the LFDP market. The future success of the Company will likely depend
on its ability to develop and market new products that provide superior
performance at acceptable prices within this segment and to introduce lower-cost
products aimed at a broader segment of the LFDP market. Also, as the Company
develops new printers, it may need to develop new consumables to be used by its
new printer products. Any quality, durability or reliability problems with such
new products, regardless of materiality, or any other actual or perceived
problems with new Company products, could have a material adverse effect on
market acceptance of such products. There can be no assurance that such problems
or perceived problems will not arise or that, even in the absence of such
problems, new Company products will receive market acceptance. A failure of
future Company products to receive market acceptance for any reason would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the announcement by the Company of new
products and technologies could cause customers to defer purchases of the
Company's existing products, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Products," "--Product Technology, Research and Development."
International Revenues. The Company's international revenues accounted for
approximately 48.1%, 55.9%, 51.3% and 54.3% of the Company's revenues in 1993,
1994, 1995, and the first six months of 1996, respectively. The Company makes a
material amount of sales to third party distributors based in Japan, France and
Germany. However, the Company believes that sales to its European distributors
are resold throughout Europe. The Company expects that international sales will
continue to account for a significant portion of its total revenues in future
periods. International sales are subject to certain inherent risks, including
unexpected changes in regulatory requirements and tariffs, government controls,
political instability, longer payment cycles, increased difficulties in
collecting accounts receivable and potentially adverse tax consequences. The
Company's inability to obtain foreign regulatory approvals on a timely basis
could have a material adverse effect on the Company's business, financial
condition and results of operations. Sales from the Company's German and UK
subsidiaries are denominated in local currencies. Accordingly, fluctuations in
currency exchange rates could cause the Company's products to become relatively
more expensive to end users in a particular country, leading to a reduction in
sales in that country. The impact of future exchange rate fluctuations cannot be
predicted adequately. To date, the Company has not found it appropriate to hedge
the risks
9
<PAGE> 10
associated with fluctuations in exchange rates, as substantially all of the
Company's foreign sales have been transacted in U.S. dollars. However, it is
possible that the Company may undertake such transactions in the future. There
can be no assurance that any hedging techniques implemented by the Company would
be successful or that the Company's results of operations will not be materially
adversely affected by exchange rate fluctuations. In general, certain seasonal
factors and patterns impact the level of business activities at different times
in different regions of the world. For example, sales in Europe are adversely
affected in the third quarter of each year as many customers and end users
reduce their business activities during the summer months. These seasonal
factors and currency fluctuation risks could have a material adverse effect on
the Company's quarterly results of operations. Further, because the Company has
operations in different countries, the Company's management must address
differences in regulatory environments and cultures. Failure to address these
differences successfully could be disruptive to the Company's operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "Business--Customers, Sales and
Marketing."
Dependence on Sole Source Subcontractors and Suppliers. The Company relies
on subcontractors and suppliers to manufacture, subassemble, and perform
first-stage testing of DCS printer components and may, in the future, rely on
third parties to develop or provide printer components, some of which are, or
may be, critical to the operation of the Company's products. The Company relies
on single suppliers for certain critical components, such as rubber drive
rollers, electrostatic writing head circuit boards, and application-specific
integrated circuits. In addition, the Company relies on limited source suppliers
for consumables, such as specialized inks, varnish, vinyls and papers, that the
Company sells under the Raster Graphics brand name. The Company's agreements
with its subcontractors and suppliers are not exclusive, and each of the
Company's subcontractors and suppliers can cease supplying DCS printing system
components or consumables with limited notice and with little or no penalty. In
the event it becomes necessary for the Company to replace a key subcontractor or
supplier, the Company could incur significant manufacturing set-up costs and
delays while new sources are located and alternate components and consumables
are integrated into the Company's manufacturing process. There can be no
assurance that the Company will be able to maintain its present subcontractor
and supplier relationships or that the Company will be able to find suitable
replacement subcontractors and suppliers, if necessary. Further, there can be no
assurance that the Company's present subcontractors and suppliers will continue
to provide sufficient quantities of suitable quality DCS product components and
consumables at acceptable prices. The loss of subcontractors or suppliers or the
failure of subcontractors or suppliers to meet the Company's price, quality,
quantity and delivery requirements would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Products," "--Suppliers" and "--Manufacturing."
Risks Associated with Intellectual Property. Although the Company has been
issued nine United States patents related to its printer technology and one
United States patent related to its image processing software, the Company
currently holds no foreign patents and has no foreign or United States patent
applications pending. Despite the Company's precautions, it may be possible for
a third party to copy or otherwise obtain and use the Company's technologies
without authorization or to develop competing technologies independently.
Furthermore, the laws of certain countries in which the Company does business,
including countries in which the Company does a significant amount of business,
such as France, Germany and Japan, may not protect the Company's software and
intellectual property rights to the same extent as do the laws of the United
States. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. If unauthorized copying or misuse of
the Company's products were to occur to any substantial degree, or if a
competitor of the Company were to effectively duplicate the Company's
proprietary technology, the Company's business, financial condition and results
of operations would be materially adversely affected. See
"Business -- Intellectual Property."
10
<PAGE> 11
Although the Company has not received notices from third parties alleging
infringement claims that the Company believes would have a material adverse
effect on the Company's business, there can be no assurance that third parties
will not claim that the Company's current or future products or manufacturing
processes infringe the proprietary rights of others. Any such claim, with or
without merit, could result in costly litigation or might require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all, which could have a material adverse effect upon the
Company's business, financial condition and results of operations. See
"Business--Intellectual Property."
Recent Acquisition of Onyx. In August 1995, the Company acquired Onyx,
which, like Raster Graphics, is at an early stage of development. There can be
no assurance that Onyx will be able to successfully develop, manufacture and
commercialize its products in the future. In addition, there can be no assurance
that the managements and operations of the two companies can be successfully
combined. Furthermore, some of Onyx's current customers may perceive the Company
as a potential competitor. As a result, there can be no assurance that such
customers would continue to purchase Onyx's products which would cause a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Transactions."
Difficulties in Managing Growth. The Company has experienced significant
growth in its business over the past two years, which has placed demands on the
Company's administrative, operational and financial personnel and systems,
manufacturing operations, research and development, technical support and
financial and other resources. Certain of the Company's officers have recently
joined the Company, including the Company's Chief Financial Officer, and the
Company anticipates further increases in the number of its senior managers.
Failure to manage these changes and to expand effectively any of these areas
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business--Manufacturing."
Need to Attract and Retain Highly Skilled Personnel. The success of the
Company depends to a large extent upon its ability to retain and continue to
attract highly skilled personnel. The Company believes that the loss of its
Chief Executive Officer could have a material adverse effect on the Company's
business, financial condition or results of operations. Competition for
employees in the high technology sector in general, and in the LFDP industry in
particular, is intense, and there can be no assurance that the Company will be
able to attract and retain enough qualified employees. If the business of the
Company increases, it may become increasingly difficult to hire, train and
assimilate the new employees needed. With the exception of employment agreements
containing initial compensation terms and severance obligations with respect to
the Company's Chief Executive Officer and Chief Financial Officer, the Company
has not entered into employment agreements with any of its key personnel.
Additionally, the Company has not required its key personnel to enter into
non-competition agreements with the Company. The Company has not procured key
man insurance for any of its employees. The Company's inability to retain and
attract key employees would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Employees," "Management--Officers and Directors and "--Executive
Compensation."
Environmental. The Company is subject to local laws and regulations
governing the use, storage, handling and disposal of the inks sold for use with
the Company's printers. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, and while the Company is not aware of
any notice or complaint alleging any violation of such laws or regulations, risk
of accidental contamination, improper disposal or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, there can be no assurance that the
Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future.
11
<PAGE> 12
Concentration of Stock Ownership. Upon completion of this offering, the
present directors and officers and their affiliates will beneficially own
approximately 28.6% of the outstanding Common Stock. As a result, these
stockholders will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company. See
"Principal and Selling Stockholders."
No Prior Public Market; Possible Volatility of Stock Price; Benefits to
Existing Stockholders. There has been no public market for the Common Stock
prior to this offering, and there can be no assurance that an active trading
market will develop or be sustained after this offering. The initial public
offering price will be determined through negotiations among the Company, the
representatives of the Underwriters and the selling stockholders. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The negotiated public offering price may not
be indicative of the market price for the Common Stock following this offering.
In recent years, the stock market in general, and the stock prices of technology
companies in particular, have experienced extreme price fluctuations, sometimes
without regard to the operating performance of particular companies. Factors
such as quarterly variation in actual or anticipated operating results, changes
in earnings estimates by analysts, market conditions in the industry,
announcements by competitors, regulatory actions and general economic conditions
may have a significant effect on the market price of the Common Stock. Following
fluctuations in the market price of a corporation's securities, securities class
action litigation has often resulted. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
consummation of this offering will result in the creation of a public market for
the Company's Common Stock that will permit secondary sales by existing
stockholders and allow them to realize any unrealized gain on their shares of
Common Stock.
Immediate and Substantial Dilution. The initial public offering price is
substantially higher than the book value per share of Common Stock. Investors
purchasing shares of Common Stock in this offering will incur immediate and
substantial dilution of $5.38 in the pro forma net tangible book value per share
of the Common Stock, at the initial offering price of $8.00 per share. While the
investors purchasing shares of Common Stock in this offering will have paid
39.8% of the total consideration paid for all shares of Common Stock outstanding
after the offering, such investors will only own 24.0% of the Company. To the
extent outstanding options and warrants to purchase the Company's Common Stock
are exercised, there will be further dilution. See "Dilution."
Shares Eligible for Future Sale. Upon completion of this offering, the
Company will have outstanding 8,341,350 shares of Common Stock, assuming no
exercise of any outstanding stock options or warrants after June 30, 1996. On
the date of this Prospectus, 3,007,500 shares of Common Stock (including the
3,000,000 shares offered hereby and assuming no exercise of the Underwriters'
over-allotment option) will be immediately eligible for sale in the public
market. An additional 120,000 shares of Common Stock will be eligible for sale
beginning 91 days after the effective date of the Registration Statement unless
earlier released, in whole or in part, by Hambecht & Quist LLC. An additional
4,844,744 shares of Common Stock (including approximately 687,033 shares
issuable upon exercise of vested options) will be eligible for sale beginning
181 days after the date of this Prospectus, unless earlier released, in whole or
in part, by Hambrecht & Quist LLC. In addition, at various times after 181 days
after the date of this Prospectus, an additional 1,056,139 shares will become
eligible for sale in the public market upon expiration of their respective
two-year holding periods, subject to certain volume and resale restrictions as
set forth in Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). In addition, holders of warrants exercisable for an aggregate
of 79,626 shares of Common Stock will be eligible to sell such shares beginning
181 days after the date of this Prospectus, unless earlier released, in whole or
in part, by Hambrecht & Quist LLC. Certain stockholders holding 4,478,786 shares
of Common Stock (assuming exercise of outstanding warrants for 167,789 shares of
Common Stock) are entitled to registration rights with respect to their shares
of Common Stock. If such stockholders, by exercising their demand registration
rights, cause a large
12
<PAGE> 13
number of securities to be registered and sold in the public market, such sales
could have an adverse effect on the market price of the Company's Common Stock.
The Securities and Exchange Commission has recently proposed to reduce the Rule
144 holding periods. If enacted, such modification will have a material effect
on the timing of when shares of Common Stock become eligible for resale. Sales
of substantial amounts of such shares in the public market after this offering,
or the prospect of such sales, could adversely affect the market price of the
Common Stock. Such sales also might make it more difficult for the Company to
sell equity securities or equity-related securities in the future at a time and
price that the Company deems appropriate. See "Description of Capital Stock,"
"Shares Eligible for Future Sale" and "Underwriting."
Blank Check Preferred Stock; Anti-Takeover Provisions. The Company's Board
of Directors has the authority to issue up to 2,000,000 shares of Preferred
Stock and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change of control of the Company without further
action by the stockholders and may adversely affect the voting and other rights
of the holders of Common Stock. The Company has no present plans to issue shares
of Preferred Stock. The Company's Certificate of Incorporation and Bylaws
provide for, among other things, the prospective elimination of cumulative
voting with respect to the election of directors, the elimination of actions to
be taken by written consent of the Company's stockholders and certain procedures
such as advance notice procedures with regard to the nomination, other than by
or at the direction of the Board of Directors, of candidates for election as
directors. In addition, the Company's charter documents provide that the
Company's Board of Directors be divided into three classes, each of which serves
for a staggered three-year term. The foregoing provisions could have the effect
of making it more difficult for a third party to effect a change in the control
of the Board of Directors. In addition, these provisions could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, or of making the Company less attractive
to a potential acquiror of, a majority of the outstanding voting stock of the
Company, and may complicate or discourage a takeover of the Company. The
foregoing provisions may also result in the Company's stockholders receiving
less consideration for their shares than might otherwise be available in the
event of a takeover attempt of the Company. See "Description of Capital Stock."
13
<PAGE> 14
THE COMPANY
The Company was incorporated in July 1987 in the State of California and
was reincorporated in Delaware in July 1996. The Company's principal executive
offices are located at 3025 Orchard Parkway, San Jose, California 95134. Its
telephone number at that location is (408) 232-4000.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby are estimated to be $14,030,000 ($17,378,000 if the
Underwriters' over-allotment option is exercised in full) after deducting
underwriting discounts and commissions and estimated offering expenses and at an
initial public offering price of $8.00 per share. The Company intends to use the
net proceeds from this offering for general corporate purposes, including
working capital, capital expenditures and research and development. A portion of
the proceeds may also be used to acquire or invest in complementary businesses
or products, to obtain the right to use complementary technologies and to
acquire or expand distribution channels. From time to time, the Company
evaluates potential acquisitions of such businesses, products or technologies.
However, the Company has no present understandings, commitments or agreements
with respect to any material acquisition of other businesses, products or
technologies. Pending use of the net proceeds for the above purposes, the
Company intends to invest such funds in short-term, interest-bearing,
investment-grade obligations.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future.
In addition, the Company's existing bank line of credit currently prohibits the
payment of cash dividends on its capital stock without the bank's consent. See
note 7 of Notes to Consolidated Financial Statements.
14
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on an actual basis and as adjusted to give effect to the conversion
of all outstanding Preferred Stock of the Company into Common Stock upon the
closing of this offering and the changes in the number of authorized shares of
Common and Preferred Stock (all of which will occur in connection with the sale
of Common Stock offered hereby) and (ii) as adjusted to give effect to the sale
by the Company of the shares of Common Stock offered hereby at an initial public
offering price of $8.00 per share and the application of the estimated proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
(IN THOUSANDS)
Current portion of long-term debt.................................... $ 361 $ 361
======= =======
Long-term debt....................................................... $ 318 $ 318
Stockholders' equity:
Preferred Stock,
2,000,000 shares authorized;
no shares issued or outstanding................................. -- --
Convertible Preferred Stock, $0.001 par value,
6,030,000 shares authorized, actual
5,892,716 shares issued and outstanding, actual;
no shares authorized, none issued or outstanding, as adjusted... 6 --
Common Stock, $0.001 par value, 50,000,000 shares authorized,
448,634 shares issued and outstanding, actual; 8,341,350 shares
issued and outstanding, as adjusted(1).......................... -- 8
Additional paid-in capital......................................... 25,596 39,624
Retained earnings (accumulated deficit)............................ (17,222) (17,222)
Deferred compensation.............................................. (418) (418)
Notes receivable from stockholders................................. (20) (20)
------- -------
Total stockholders' equity...................................... 7,942 21,972
------- -------
Total capitalization....................................... $ 8,260 $22,290
======= =======
</TABLE>
- ---------------
(1) Excludes, as of June 30, 1996, 167,789 shares of Common Stock issuable upon
exercise of outstanding warrants at a weighted average exercise price of
$2.18 per share, 1,355,652 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $2.33 per share
and 39,197 shares available for future issuance under the 1988 Stock Option
Plan. See "Management--Stock Option and Incentive Plans," "Description of
Capital Stock" and note 7 of Notes to Consolidated Financial Statements.
15
<PAGE> 16
DILUTION
The net tangible book value (total tangible assets less total liabilities)
of the Company at June 30, 1996 was approximately $7,816,000, or $1.23 per share
of Common Stock. After giving effect to the sale by the Company of the 2,000,000
shares of Common Stock offered hereby, the Company's pro forma net tangible book
value at June 30, 1996 would have been $21,846,000, or $2.62 per share. This
represents an immediate increase in net tangible book value of $1.39 per share
to existing stockholders and an immediate dilution in net tangible book value of
$5.38 per share to new investors purchasing shares in the offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.................................... $8.00
Net tangible book value per share before the offering.................... $1.23
Increase per share attributable to new investors......................... 1.39
------
Pro forma net tangible book value per share after the offering............. 2.62
Dilution per share to new investors........................................ $5.38
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by (i) existing
stockholders and (ii) new investors (before deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........ 6,341,350 76.0% $24,235,000 60.2% $ 3.82
New investors(1)................ 2,000,000 24.0 16,000,000 39.8 8.00
----- ------ ----- ------
Total......................... 8,341,350 100.0% $40,235,000 100.0%
===== ====== ===== ======
</TABLE>
The foregoing computations assume no exercise of the Underwriters'
over-allotment option, outstanding warrants or outstanding options after June
30, 1996. As of June 30, 1996, there were outstanding warrants to purchase
167,789 shares of Common Stock at an exercise price of $2.18 per share, and
outstanding options to purchase 1,355,652 shares of Common Stock, at a weighted
average exercise price of $2.33 per share. To the extent these warrants and
options are exercised, there will be further dilution to new investors. See
"Capitalization," "Management--Stock Option and Incentive Plans," "Description
of Capital Stock" and note 7 of Notes to Consolidated Financial Statements.
- ---------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 5,341,350 shares or approximately
64.0% of the total shares of Common Stock outstanding after this offering
and will increase the number of shares held by new investors to 3,000,000
shares or approximately 36.0% of the total shares of Common Stock
outstanding after the offering.
16
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The following selected
consolidated financial data for the years ended December 31, 1993, December 30,
1994 and December 31, 1995 and as of December 30, 1994 and December 31, 1995
have been derived from the Company's Consolidated Financial Statements included
elsewhere in this Prospectus which have been audited by Ernst & Young LLP,
independent public auditors, whose report thereon is also included elsewhere in
this Prospectus. The following selected consolidated financial data for the
years ended December 27, 1991 and December 25, 1992 and as of December 27, 1991,
December 25, 1992 and December 31, 1993 have been derived from the audited
financial statements of the Company not included in this Prospectus. The
selected financial data for the six months ended June 30, 1995 and 1996, and as
of June 30, 1996, have been derived from unaudited interim consolidated
financial statements of the Company contained elsewhere herein and reflect, in
management's opinion, all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results of operations for
these periods. Results of operations for interim periods are not necessarily
indicative of results to be expected for the entire year.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
---------------------------------------------------- ---------------------
DEC. 27, DEC. 25, DEC. 31, DEC. 30, DEC. 31, JUN. 30, JUN. 30,
1991 1992 1993 1994 1995(1) 1995 1996
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net revenues................................ $ 7,770 $ 8,525 $14,719 $13,235 $26,045 $11,652 $18,151
Cost of revenues............................ 6,111 6,115 9,942 9,704 16,598 7,701 10,986
------- ------- ------- ------- ------- ------- -------
Gross profit................................ 1,659 2,410 4,777 3,531 9,447 3,951 7,165
Operating expenses:
Research and development.................. 1,497 1,638 2,179 2,748 3,373 1,426 2,244
Sales, general and administrative......... 2,081 2,497 2,492 3,012 5,074 1,975 3,599
Acquired in-process research and
development(1).......................... -- -- -- -- 889 -- --
------- ------- ------- ------- ------- ------- -------
Total operating expenses.................... 3,578 4,135 4,671 5,760 9,336 3,401 5,843
------- ------- ------- ------- ------- ------- -------
Operating income (loss)..................... (1,919 ) (1,725 ) 106 (2,229 ) 111 550 1,322
Interest income (expense), net.............. (44 ) (336 ) (60 ) 101 49 22 3
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for income
taxes..................................... (1,963 ) (2,061 ) 46 (2,128 ) 160 572 1,325
Provision for income taxes.................. -- -- 5 -- 83 297 124
------- ------- ------- ------- ------- ------- -------
Net income (loss)........................... $(1,963 ) $(2,061 ) $ 41 $(2,128 ) $ 77 $ 275 $ 1,201
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share(2).............. $ 0.01 $ 0.04 $ 0.16
======= ======= =======
Shares used in per share calculation........ 7,187 7,095 7,412
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
DEC. 27, DEC. 25, DEC. 31, DEC. 30, DEC. 31, JUN. 30,
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.............................. $ 1,440 $ 1,695 $ 4,148 $ 1,607 $ 1,550 $ 1,775
Total assets........................................... 4,397 5,899 9,010 7,912 12,343 16,052
Long-term debt......................................... 108 10 -- 338 504 318
Total stockholders' equity............................. (798 ) (2,861 ) 5,900 3,801 6,713 7,942
</TABLE>
- ---------------
(1) In August 1995, the Company acquired Onyx and incurred a charge of $889,000
for acquired in-process research and development. See note 3 of Notes to
Consolidated Financial Statements.
(2) See note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net income (loss) per share.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Raster Graphics was established in 1987 initially to develop low-cost
electrostatic raster printers for the computer-aided design ("CAD") market.
Raster Graphics commenced shipments of its first printer, a 22-inch printer, in
1989, followed by a 24-inch printer in 1990 and a 36-inch printer in 1992.
In 1993, the Company identified the on-demand production LFDP market as a
new opportunity to develop a product based on its proprietary high-speed print
head technology. As a result, in 1993 the Company shifted its product focus and
began to develop the DCS 5400 specifically for the LFDP market. See
"Business -- Markets." The Company began shipping the DCS 5400 in July 1994.
Since the Company began commercial production of the DCS 5442 in January 1996 as
a second generation to the DCS 5400, this line has represented an increasing
percentage of the Company's product revenue. Consequently, to the extent the DCS
5442 continues to achieve market acceptance, the Company expects that the DCS
5400 will represent a declining percentage of the Company's product revenue.
Although the Company has no current plans to replace the DCS 5442, the future
success of the Company will likely depend on its ability to develop and market
new products that provide superior performance at acceptable prices within the
production segment of the LFDP market and to introduce lower-cost products aimed
at a broader segment of the LFDP market. See "Risk Factors -- Limited History of
Product Manufacturing and Use; Product Defects" and "-- Uncertainty Regarding
Development of LFDP Market; Uncertainty Regarding Market Acceptance of New
Products."
In order to provide a complete digital printing solution to its customers,
the Company began shipping Onyx's image processing software with its DCS 5400
printer in July 1994. Onyx develops and markets image processing software for
digital printers such as the Company's DCS 5400 and 5442 printers as well as
printers manufactured by companies such as CalComp, Encad, Hewlett-Packard and
ColorgrafX. In August 1995, the Company acquired Onyx. Onyx supplies its
software to Raster Graphics and also sells its software products to OEMs, VARs,
systems integrators and other printer manufacturers. Onyx's current image
processing software product, PosterShop, was introduced in April 1996 as a
replacement for Onyx's Imagez image processing software product, which Onyx had
been shipping since May 1991. Although the Company has no current plans to
replace its PosterShop product, the Company will likely introduce new versions
of its image processing software in the future.
Raster Graphics also sells related consumables, including specialized inks
and papers which it acquires from third party suppliers and resells under the
Raster Graphics name for use in the Company's DCS printers. The sale of
consumables generates recurring revenues which the Company believes will
continue to increase to the extent that the installed base of DCS printing
systems expands. As the Company develops new printers, it may need to develop
new consumables to be used by its new printer products. See "Risk
Factors -- Competition," "-- Dependence on Sole Source Subcontractors and
Suppliers" and "-- Uncertainty Regarding Development of LFDP Market; Uncertainty
Regarding Market Acceptance of New Products."
In the United States, Raster Graphics also derives revenues from
maintenance contracts of installed DCS systems and printers, as well as the
Company's installed base of 22-inch, 24-inch and 36-inch printers. Revenue is
also generated from the sale of spare parts.
Raster Graphics' end user customers, OEMs, VARs, and international
distributors submit purchase orders that generally require product shipment
within two to eight weeks from receipt of order. Accordingly, the Company does
not use order backlog as a primary basis for management planning for longer
periods. Revenues are recognized upon shipment if there are no contingencies. If
contingencies exist, revenues are recognized only when such contingencies are
removed by the customer.
Cost of revenues includes materials, labor, overhead and software
royalties. Cost of revenues as a percentage varies depending upon the revenue
mix generated through end user, OEM, VAR and
18
<PAGE> 19
distributor revenues, and the revenue mix generated from Onyx software license
fees, DCS printing systems sales, consumables sales and service fees.
Raster Graphics expenses research and development costs as incurred.
Research and development expenses have increased from year to year, and Raster
Graphics expects further increases in research and development expenses in the
future due to the development of new products.
Raster Graphics' sales and marketing expenses and general and
administrative expenses have also increased to support the revenue growth of the
Company. The Company's strategy is to distribute its products through a direct
sales force and independent representatives in selected markets (currently the
United States and Germany), as well as through OEMs, VARs and distributors.
Raster Graphics also incurs sales and marketing expenses in connection with
product promotional activities. The Company intends to expand its domestic and
international sales and marketing organizations. See "Risk
Factors -- International Revenues" and "-- Reliance on Third-Party
Distribution." As a result, the Company believes that sales and marketing
expenses will continue to increase in absolute dollar amounts and may increase
as a percentage of revenue.
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets. To address these risks, the
Company must, among other things, respond to competitive developments, attract,
retain and motivate qualified persons, and continue to upgrade its technologies
and commercialize products and services incorporating such technologies. There
can be no assurance that the Company will be successful in addressing these
risks. As of June 30, 1996, the Company had an accumulated deficit of $17.2
million. Although the Company was profitable in 1995 and the six months ended
June 30, 1996, there can be no assurance that the Company will be profitable in
the future. See "Risk Factors -- Significant Fluctuations in Quarterly Results,"
"-- Limited History of Profitability and Uncertainty of Future Financial
Results," "-- Uncertainty Regarding LFDP Market; Uncertainty Regarding Market
Acceptance of New Products," "-- Competition," "-- Dependence on a Single
Product Line," "-- Reliance on Third-Party Distribution," "-- Dependence on Sole
Source Subcontractors and Suppliers," "-- Difficulties in Managing Growth" and
"-- Key Personnel."
19
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of
the Company's consolidated statements of operations expressed as a percentage of
its net revenues:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
------------------------------------------ --------------------
DECEMBER 31, DECEMBER 30, DECEMBER 31, JUNE 30, JUNE 30,
1993 1994 1995 1995 1996
------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 67.6 73.3 63.7 66.1 60.5
----- ----- ----- ----- -----
Gross profit........................... 32.4 26.7 36.3 33.9 39.5
Operating expenses:
Research and development............. 14.8 20.8 13.0 12.2 12.4
Sales and marketing.................. 10.8 15.5 14.0 11.8 15.1
General and administrative........... 6.1 7.2 5.5 5.2 4.7
Acquired in-process research and
development(1).................... -- -- 3.4 -- --
----- ----- ----- ----- -----
Total operating expenses............. 31.7 43.5 35.9 29.2 32.2
----- ----- ----- ----- -----
Operating income (loss)................ 0.7 (16.8) 0.4 4.7 7.3
Interest income (expense), net......... (0.4) 0.7 0.2 0.2 --
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes......................... 0.3 (16.1) 0.6 4.9 7.3
Provision for income taxes............. -- -- 0.3 2.5 0.7
----- ----- ----- ----- -----
Net income (loss)...................... 0.3% (16.1)% 0.3% 2.4% 6.6%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) In August 1995 the Company acquired Onyx and incurred a charge of $889,000
for acquired in-process research and development. See note 3 of Notes to
Consolidated Financial Statements.
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
The Company's results of operations for the six months ended June 30, 1996
include the results of operations of Onyx, which the Company acquired in August
1995. See Onyx Financial Statements appearing on page F-25.
Net Revenues. Net revenues increased from $11.7 million in the six months
ended June 30, 1995 to $18.2 million for the comparable period in 1996 for an
increase of 55.8%. The increase was primarily due to increased sales of printer
systems following introduction of the DCS 5442 printing system in January 1996,
consolidation of sales following the acquisition of Onyx, sales by the Company's
new German subsidiary and increased sales of consumables.
International sales, which include export sales and sales shipped by the
Company's German and United Kingdom subsidiaries, were $9.9 million and $6.5
million for the six months ended June 30, 1996 and 1995, respectively. These
sales represented 54.4% and 55.6% of net revenues in the respective periods. The
increases in international sales were a result of the increased international
customer acceptance of the DCS printer systems, the establishment of new
distribution arrangements and sales by the Company's German and United Kingdom
subsidiaries. Sales by the Company's German and United Kingdom subsidiaries for
the six months ended June 30, 1996, were approximately $1,329,000 and $70,000,
respectively.
Sales made by the Company's German and United Kingdom subsidiaries are
denominated in their local currencies. The Company is subject to transaction
exposure that arises from foreign exchange movements between the dates foreign
currency sales are recorded and the dates cash is received in the foreign
currency. To date, the Company has not found it appropriate to hedge the risks
associated with fluctuations in exchange rates. See "Risk
Factors -- International Revenues."
For the six months ended June 30, 1995, Oce accounted for 14.2% of net
revenues.
20
<PAGE> 21
Gross Profit. Gross profit was $4.0 million, or 33.9% of net revenues, for
the six months ended June 30, 1995, compared to gross profit of $7.2 million, or
39.5% of net revenues, for the comparable period in 1996. The absolute dollar
increase in gross profit was primarily the result of increased net revenues,
while the improvement in gross profit as a percentage of net revenues was due to
increased sales of higher margin DCS printing systems, the allocation of fixed
costs over a larger number of units sold, sales of higher margin software
products and improvements in manufacturing efficiency.
Research and Development. Research and development expenses were $1.4
million, or 12.2% of net revenues for the six months ended June 30, 1995,
compared to expenses of $2.2 million, or 12.4% of net revenues, for the
comparable period in 1996. The absolute dollar increase in research and
development expenses was primarily the result of new product development
activities.
Sales and Marketing. Sales and marketing expenses were $1.4 million, or
11.8% of net revenues, for the six months ended June 30, 1995, compared to
expenses of $2.7 million, or 15.1% of net revenues, for the comparable period in
1996. This increase was due primarily to the personnel and related costs
associated with increased sales activities, the Company's acquisition of Onyx
and the establishment of the Company's German and United Kingdom subsidiaries.
General and Administrative. General and administrative expenses were
$600,000, or 5.2% of net revenues, for the six months ended June 30, 1995,
compared to expenses of $864,000, or 4.7% of net revenues, for the comparable
period in 1996.
Provision for Income Taxes. For the six months ended June 30, 1995 and June
30, 1996, income taxes have been provided for based upon estimated annualized
effective tax rates of 51.9% and 9.4%, respectively, applied to the earnings for
the period. The provision for income taxes for the six months ended June 30,
1995 reflects unbenefited foreign losses and the tax benefits of utilizing net
operating loss carryforwards. The provision for the comparable period in 1996
reflects the tax benefits of utilizing net operating loss carryforwards.
FISCAL YEARS ENDED DECEMBER 1993, 1994 AND 1995
Net Revenues. Net revenues were $14.7 million, $13.2 million and $26.0
million in 1993, 1994 and 1995, respectively. The decrease in net revenues in
1994 primarily resulted from a decrease in sales of 24-inch and 36-inch raster
printers (which the Company no longer actively markets) in the first six months
of 1994, which the Company believes was primarily due to competitive pressures
attributed to introduction of ink jet printers by Hewlett-Packard and to
shifting the Company's product focus towards the LFDP market. In the second half
of 1994, the Company's DCS 5400 began gaining market acceptance, which partially
offset the decrease in net revenues in the first six months of 1994. In
addition, sales of consumables increased in 1994 as a result of increased orders
for DCS printing systems, further offsetting the reduction in sales of 24-inch
and 36-inch printers. The primary reason for the $12.8 million increase from
1994 to 1995 was continued growth in sales of DCS printing systems and increased
sales of consumables, the consolidation of net revenues from Onyx after August
10, 1995 and higher sales of spare parts.
Future revenue growth will depend on a number of factors, including the
Company's ability to develop, manufacture, market and sell innovative and
reliable new products, customer satisfaction, market growth, competitive
developments, product mix, vendor performance and the Company's ability to
handle growth. There can be no assurance that the Company's revenues will
continue to grow at current rates, or at all. See "Risk Factors -- International
Revenues."
International sales, which include export sales and sales shipped by the
Company's European operations, were $7.1 million, $7.4 million and $13.4 million
for 1993, 1994 and 1995, respectively. These sales represented 48.1%, 55.9% and
51.3% of net revenues. The increases in international sales were a result of the
increased international customer acceptance of the DCS printing systems, the
establishment of new distribution arrangements and sales by the Company's German
and United Kingdom subsidiaries. Sales by the Company's German and United
Kingdom subsidiaries for 1995 were
21
<PAGE> 22
approximately $351,000 and $227,000, respectively. Future international revenues
will depend on the factors set forth above, and will be subject to unexpected
changes in regulatory requirements and tariffs, longer customer payment cycles,
fluctuation in currency exchange rates, seasonal factors and risks associated
with managing business operations in geographically distant locations. No
assurance can be given that international revenues will continue to grow at
current rates, or at all. See "Risk Factors -- International Revenues."
Oce, a related party in 1993, accounted for 33.4%, 20.6% and 10.9% of net
revenues for 1993, 1994 and 1995, respectively. 3M accounted for 18.4% of net
revenues in 1993. There were no other customers which accounted for more than
10% of net revenues during these years. Any material reduction in purchases by
the first customer could have a material adverse effect on the Company and its
operations and financial condition.
Gross Profit. Gross profit was $4.8 million, $3.5 million and $9.4 million,
or 32.4%, 26.7% and 36.3% of revenues, for 1993, 1994 and 1995, respectively.
The decrease in gross margin from 1993 to 1994 was primarily due to competitive
pricing pressures from Hewlett-Packard with respect to the Company's 24-inch and
36-inch printers (which the Company no longer markets) and higher fixed overhead
costs being allocated over fewer units in the first six months of 1994. In 1994,
this decrease was partially offset by sales of the new DCS systems, which
contributed a higher margin. The improved gross margin in 1995 was primarily due
to a change in product mix to a greater percentage of relatively higher-margin
DCS printing systems, the allocation of fixed costs over a larger number of
units sold and increased sales of consumables and software products. The
Company's future level of gross profit will depend on a number of factors,
including product mix and its abilities to control variable expenses relative to
revenue levels, maintain a revenue base over which to allocate fixed costs and
continue to develop, manufacture, market and sell innovative and reliable new
products.
Research and Development. Research and development expenses were $2.2
million, $2.7 million and $3.4 million, or 14.8%, 20.8% and 13.0% of net
revenues, for 1993, 1994 and 1995, respectively. The absolute dollar increase
from 1993 to 1994 was primarily due to engineering material expenditures related
to the development of new products. The absolute dollar increase from 1994 to
1995 was primarily due to increased payroll and related expenses, including the
Onyx engineering staff, and to a lesser degree increased engineering material
expenditures and increased facility costs related to the Company's new facility.
The Company has a purchase commitment of approximately $1.0 million to a
supplier in 1996 in connection with research and development activities. The
Company intends to continue to dedicate substantial resources to research and
development activities. Accordingly, the Company believes that research and
development expenses generally will continue to increase in dollar amounts, and
may increase as a percentage of revenues, in the future.
Sales and Marketing. Sales and marketing expenses were $1.6 million, $2.1
million and $3.6 million, or 10.8%, 15.5% and 14.0% of net revenues, for 1993,
1994 and 1995, respectively. The primary causes of the absolute dollar increase
have been increases in payroll and payroll-related expenses due to increases in
personnel, and to a lesser degree, travel-related expenses. Spending also
increased in 1995 due to increased sales activities and the opening of sales
offices in Germany and the United Kingdom to support increased sales activities
in Europe. The Company believes that sales and marketing expenses will continue
to increase in dollar amounts, and may increase as a percentage of revenues, in
the future.
General and Administrative. General and administrative expenses were
$901,000, $958,000 and $1.4 million, or 6.1%, 7.2% and 5.5% of net revenues, for
1993, 1994 and 1995, respectively. The absolute dollar amounts of general and
administrative expenses were comparable in 1993 and 1994. The increase in 1995
was primarily related to increased costs related to the Company's new facility
and increased payroll and payroll-related expenses. The Company believes that
general and administrative expenses will continue to increase in dollar amounts,
and may increase as a percentage of revenues, in the future.
22
<PAGE> 23
Acquired In-Process Research and Development. In August 1995, the Company
acquired Onyx for stock and other consideration valued at $1.5 million. The
assets acquired included tangible assets valued at $866,000, intangible assets
of $454,000, less liabilities assumed of $570,000, and software in the
development stage valued at approximately $750,000 which was expensed in the
September 1995 quarter as it had not yet reached technological feasibility and
did not have alternative future uses. In addition, the Company wrote off
$139,000 in the September 1995 quarter for redundant PostScript licenses that
the Company had purchased for the Company's development of a similar image
processing software product.
Interest Income (Expense), net. The Company's net interest expense was
$60,000 in 1993, due to interest expense of $173,000 primarily related to
interest on related-party notes, which was offset in part by interest income.
Net interest income was $101,000 and $49,000 in 1994 and 1995, respectively.
Provisions for Income Taxes. The provision for income taxes was $5,000 and
$83,000 for 1993 and 1995, respectively. There was no provision for income taxes
for 1994 as the Company incurred operating losses. The provision for income
taxes for 1993 differs from the statutory federal income tax rate, primarily due
to the utilization of net operating loss carryforwards. The provision for income
taxes for 1995 differs from the statutory income tax rate, primarily due to
unbenefited foreign losses and the tax benefits of utilizing net operating loss
carryforwards.
As of December 31, 1995, the Company had federal and state net operating
loss carryforwards of approximately $13.2 million and $4.4 million,
respectively. The Company also has federal and California research and
development tax credit carryforwards of approximately $753,000 and $325,000,
respectively. The net operating loss and credit carryforwards will expire, if
not utilized, at various dates beginning in 1996 through 2010.
Utilization of the net operating losses and credits will be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended (the "Code") and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
Under Statement of Financial Accounting Standards No. 109, deferred tax
assets and liabilities are determined based on the difference between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Based on the weight of available evidence, which includes
the Company's historical operating performance, the reported loss in 1994, only
marginal profitability in 1993 and 1995, and the uncertainties regarding future
results of operations, the Company has provided a full valuation allowance
against its net deferred tax assets of $7.3 million at December 31, 1995, as it
is more likely than not that the deferred tax assets will not be realized.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for the six quarters ended June 30, 1996, as well as such data
expressed as a percentage of the Company's net revenues for the periods
indicated. In the opinion of management, the data has been prepared on a basis
consistent with the Company's audited consolidated financial statements included
elsewhere in the Prospectus and includes all necessary adjustments, consisting
only of normal recurring accruals, that management considers necessary for a
fair presentation. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for any future period.
23
<PAGE> 24
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................... $ 5,720 $5,932 $ 6,835 $7,558 $ 8,591 $9,560
Cost of revenues................. 3,792 3,909 4,315 4,582 5,305 5,681
------ ------ ------ ------ ------ ------
Gross profit..................... 1,928 2,023 2,520 2,976 3,286 3,879
Operating expenses:
Research and development....... 642 784 948 999 934 1,310
Sales and marketing............ 632 743 975 1,290 1,364 1,371
General and administrative..... 284 316 408 426 421 443
Acquired in-process research
and development(1).......... -- -- 889 -- -- --
------ ------ ------ ------ ------ ------
Total operating expenses.... 1,558 1,843 3,220 2,715 2,719 3,124
------ ------ ------ ------ ------ ------
Operating income (loss).......... 370 180 (700) 261 567 755
Interest income (expense), net... 3 19 16 11 (3) 6
------ ------ ------ ------ ------ ------
Income (loss) before provision
for income taxes............... 373 199 (684) 272 564 761
Provision for (benefit from)
income taxes................... 194 103 (355) 141 75 49
------ ------ ------ ------ ------ ------
Net Income (loss)................ $ 179 $ 96 $ (329) $ 131 $ 489 $ 712
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) In August 1995 the Company acquired Onyx and incurred a charge of $889,000
for acquired in-process research and development. See note 3 of Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................. 66.3 65.9 63.1 60.6 61.8 59.4
----- ----- ----- ----- ----- -----
Gross profit..................... 33.7 34.1 36.9 39.4 38.2 40.6
Operating expenses:
Research and development....... 11.2 13.2 13.9 13.2 10.9 13.7
Sales and marketing............ 11.0 12.5 14.2 17.1 15.8 14.4
General and administrative..... 5.0 5.4 6.0 5.6 4.9 4.6
Acquired in-process research
and development(1).......... -- -- 13.0 -- -- --
----- ----- ----- ----- ----- -----
Total operating expenses.... 27.2 31.1 47.1 35.9 31.6 32.7
----- ----- ----- ----- ----- -----
Operating income (loss).......... 6.5 3.0 (10.2) 3.5 6.6 7.9
Interest income (expense), net... -- 0.3 0.2 0.1 -- 0.1
----- ----- ----- ----- ----- -----
Income (loss) before provision
for income taxes............... 6.5 3.3 (10.0) 3.6 6.6 8.0
Provision for (benefit from)
income taxes................... 3.4 1.7 5.2 1.9 0.9 0.5
----- ----- ----- ----- ----- -----
Net Income (loss)................ 3.1% 1.6% (4.8)% 1.7% 5.7% 7.5%
===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) In August 1995 the Company acquired Onyx and incurred a charge of $889,000
for acquired in-process research and development. See note 3 of Notes to
Consolidated Financial Statements.
QUARTERLY TRENDS
Net Revenues. Net revenues increased and gross margins improved in the
third and fourth quarters of 1995 as compared with the first half of 1995
primarily due to continued growth in DCS
24
<PAGE> 25
printing systems, the higher gross margin sales associated with Onyx, which was
acquired in August 1995, and increased sales of consumables.
Fluctuations in Quarterly Results. The Company's operating results have
historically been, and will continue to be, subject to significant quarterly and
annual fluctuations due to a number of factors, including fluctuations in
capital spending domestically or internationally in one or more industries to
which the Company sells its products, new product introductions by the Company
or its competitors, changes in product mix and pricing by the Company, its
suppliers or its competitors, availability of components and raw materials,
failure to manufacture a sufficient volume of products in a timely and
cost-effective manner, any failure to introduce new products on a timely basis
or to anticipate changing customer product requirements, lack of market
acceptance or shifts in the demand for the Company's products, changes in the
mix of sales by the distribution channel, changes in the spending patterns of
the Company's customers, and extraordinary events such as litigation or
acquisitions. The Company's gross margins may vary depending on the mix of
higher margin DCS printing systems and software products.
The Company's operating results will also be affected by general economic
and other conditions affecting the timing of customer orders and capital
spending. The Company generally recognizes product revenue upon shipment. The
Company's net revenues and results of operations for a fiscal period will
therefore be affected by the timing of orders received and orders shipped during
such period. Because the purchase of a DCS printer or printing system involves a
significant capital commitment, the Company's DCS printer and printing system
sales cycle is susceptible to delays and lengthy acceptance procedures
associated with large capital expenditures. Due to the Company's high average
sales price and low unit volume per month, a delay in the sale of a few units
could have a material adverse effect on the results of operations for a
financial quarter. A delay in shipments near the end of a fiscal period, due for
example to product development delays or to delays in obtaining materials, could
materially adversely affect the Company's business, financial condition and
results of operations for such period. Moreover, continued investments in
research and development, capital equipment and ongoing customer service and
support capabilities will result in significant fixed costs which the Company
will not be able to reduce rapidly. If the Company's sales for a particular
fiscal period are below expected levels, the Company's business, financial
condition and results of operations for such fiscal period could be materially
adversely affected. There can be no assurance that the Company will be able to
increase or sustain profitability on a quarterly or annual basis in the future.
Certain seasonal factors and patterns impact the level of business
activities at different times in different regions of the world. For example,
sales in Europe are adversely affected in the third quarter of each year as many
customers and end users reduce their business activities during the summer
months. These seasonal factors, along with currency fluctuation risks, could
have an adverse impact on the Company's quarterly results of operations.
Moreover, because orders constituting the Company's backlog are subject to
changes in delivery schedules and in certain instances are subject to
cancellation without significant penalty, the Company's backlog may not be
indicative of demand for the Company's products or actual net revenues for any
future period.
In addition, a significant percentage of the Company's bookings frequently
occur in the last month of each fiscal quarter. This fact, coupled with the
relatively short lead-time associated with many of the Company's customer
orders, limits the Company's ability to determine quarterly results until
relatively late in the period.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of preferred stock and common stock of $24.2 million, private
loans, equipment lease financing, bank loans, cash provided by operations for
the quarter ended June 30, 1996 and convertible debt. Cash used in operations
was $342,000, $2.2 million and $638,000 in 1993, 1994 and 1995, respectively,
and for the six months ended June 30, 1996, $624,000 of cash was generated by
operations. For 1995, net cash used in operations was due primarily to increases
in accounts receivables and inventories associated
25
<PAGE> 26
with higher net revenues, which were partially offset by an increase in accounts
payable and net income adjusted for depreciation and amortization and acquired
in process research and development, partially offset by deferred revenue. Net
cash provided by operations for the six months ended June 30, 1996 was primarily
from net income, adjusted for depreciation and amortization and an increase in
accounts payable and other accrued liabilities, partially offset by an increase
in inventories and accounts receivables associated with higher net revenues.
Net cash used in investing activities was $813,000, $805,000, $1.0 million
and $497,000 for 1993, 1994, 1995 and the six months ended June 30, 1996,
respectively, due primarily to the purchase of capital equipment. The Company
currently has budgeted $2.4 million in 1996 for capital expenditures. The
Company has a purchase commitment of approximately $1.0 million to a supplier in
1996 in connection with research and development activities.
Financing activities provided net cash of $3.6 million, $487,000 and $1.6
million, respectively, for 1993, 1994 and 1995, due primarily to sales of equity
securities offset by payments on notes and capital lease obligations. Financing
activities provided net cash of $98,000 for the six months ended June 30, 1996,
due primarily to proceeds from the bank line of credit, partially offset by
payments on notes and capital lease obligations.
The Company has not invested in derivative securities or any other
financial instrument that involves a high level of complexity or risk.
Management expects that, in the future, cash in excess of current requirements
will be invested in investment grade, interest-bearing securities.
At June 30, 1996, the Company had $1.8 million of cash and cash
equivalents. The Company also has available a $2.0 million bank line of credit
agreement that expires on October 15, 1996, which is secured by the tangible
assets of the Company. At June 30, 1996, there was $250,000 of borrowings
outstanding under the bank line of credit. Interest is charged at the lenders
prime rate plus 0.5 percentage points. The effective interest rate at June 30,
1996 was 8.75%.
The Company believes that existing cash and cash equivalents of $1.8
million, together with anticipated net proceeds of approximately $14.0 million
from this offering, will be sufficient to finance its capital requirements
through at least the next two years. Thereafter, the Company may require
additional funds to support its working capital requirements or for other
purposes and may seek to raise such additional funds through bank borrowings and
public or private sales of its securities, including equity and debt securities.
The Company's future capital requirements, however, depend on numerous factors,
including, without limitation, the success of marketing, sales and distribution
efforts; the progress of its research and development programs; the costs
involved in preparing, filing, prosecuting, defending and enforcing intellectual
property rights; competition; competing technological and market developments;
and the effectiveness of product commercialization activities and arrangements.
There can be no assurance that additional funds, if required, will be available
to the Company on favorable terms or at all.
26
<PAGE> 27
BUSINESS
Raster Graphics develops, manufactures and markets high-performance, large
format, digital color printing systems, and sells related consumables for the
on-demand LFDP market. The Company's products are designed to meet the
short-run, on-demand production market requirements of quality, speed,
flexibility, reliability and low per copy cost. The LFDP market consists of
color print jobs with run lengths typically ranging from one to 200 copies, and
output sizes of 20-inches by 30-inches or larger. Applications include POP
signs, trade show exhibit graphics, displays, transit advertising, fleet
graphics, banners, billboards, courtroom graphics, backlit signage, posters and
sports and corporate events. The primary users of Raster Graphics' DCS printing
systems are color photo labs, reprographic houses, graphic arts service bureaus,
exhibit builders, digital color printers, screen printers and in-house print
shops. DCS printing systems allow users to print short runs of high quality
color graphics on-demand at substantial time and cost savings relative to
traditional printing methods.
INDUSTRY BACKGROUND
Graphics Market Size and Trends
The overall graphics market, consisting of offset, screen, photographic and
digital printing, is a large and mature market. According to U.S. Commerce
Daily, in 1995, the graphics market in the United States had sales of $160
billion with an estimated growth rate of 8% per year. However, according to the
1996 Electronic Hard Copy Research report by IT Strategies, a printing industry
market research firm (IT Strategies) and secondary industry sources, the LFDP
segment of this market is projected to grow more rapidly from estimated annual
sales of approximately $2.4 to $2.7 billion in 1995 to approximately $7 to $10
billion in 1998.
The anticipated growth of the LFDP market is being driven by the following
factors:
- Customization. The ability to vary content electronically on a
print-by-print basis enables companies to create highly-focused marketing
campaigns customized to market segment characteristics, such as nuances
in language, culture and geographic location.
- Demand for Color. The use of color in graphics design has become
pervasive as digital technology has made full color printing as
accessible as black and white printing. End users strongly prefer to use
full color in all forms of communications and advertising because of its
positive impact on awareness and retention.
- Available Technology. Advances in high speed, large format digital
printing technology enable cost effective, high quality, on-demand color
print jobs in run-lengths from one to 200 copies.
The Company is a leader in the development of these higher speed
production digital technologies.
- Desktop Publishing. Recent innovations in desktop publishing have
provided graphics design capabilities to thousands of users through the
use of widely available software packages such as Adobe Illustrator,
Aldus PageMaker and QuarkXPress which have revolutionized desktop
graphics design. This digital desktop publishing technology enables users
to create new designs easily and quickly and print them directly using
LFDP systems.
- Market Expansion. The installed base of thousands of low-cost, color
inkjet printers is helping to fuel the growth of many new applications
such as corporate presentations, POP displays and exhibit graphics. As
end users become accustomed to color graphics and demand higher
performance capabilities including speed, graphics size and outdoor
applications, the demand for LFDP should expand.
- Efficiency of Large Format Print Advertising. The Traffic Audit Bureau
for Media Measurement, Inc., estimates in its Planning for Out of Home
Media Report that large format print advertising is six-to-nine times
more cost effective than newspaper and television advertising. As a
result, Outdoor Services, Inc., a marketing research company, estimates
that large format print advertising is one of the fastest growing
advertising media, rising from sales of $260 million in 1970 to $3.5
billion in 1995. LFDP technology enables adoption of this cost-effective
medium by a new class of regional users desiring a smaller number of
prints.
27
<PAGE> 28
Traditional Printing Methods
Prior to the availability of LFDP technology, graphic printing methods were
limited to the following three categories: photographic enlargement, screen
printing and offset printing.
- Photographic Enlargement. The photographic enlargement process involves
imaging a digital file on a film recorder and using an enlarger to expose
large photographic paper or backlit film. While this method provides a
cost-effective solution for a small number of prints, it requires
extensive chemical-based processing, which requires special handling.
Furthermore, the image quality for line art, such as text, can lose its
sharpness as the image is enlarged. Also, the photographic process is
primarily suited for indoor applications.
- Screen Printing. In the screen print process, the image is first created
on four sets of film -- one for each of the four process colors,
representing Cyan, Magenta, Yellow and Key (black) ("CMYK"). These films
are then exposed onto four screens to produce masks for each color. Ink
pigments are applied through these masks by a squeegee to produce the
final graphics. While screen print quality is acceptable for most
distance-viewed applications, this multi-step process is expensive and
time-consuming, making it uneconomical for runs shorter than 50 to 100
copies.
- Offset Printing. Offset printing requires the creation of four films
which are then used to make printing plates. The plates are physically
mounted on a press, ink is applied to the plates, and the image is then
transferred by an intermediary blanket onto the final paper. In addition
to film and plate-making, offset printing also requires extensive press
setup. Offset printing is an expensive, time-consuming process and is
uneconomical for runs shorter than 1,000 copies. However, offset printing
offers the highest quality graphics and lowest cost per copy for runs
over 1,000 copies.
Because of the multi-step process and high set-up costs, each of these
traditional printing technologies is only cost-effective within certain ranges
of run lengths. The Company believes the following graph shows the range over
which each traditional printing method and LFDP are cost-effective, while the
succeeding table provides a comparison of the four methods' capabilities.
LOGO
* Determination of image quality is subjective, involving individual taste and
perception. The above chart indicates the Company's estimates of
generally-accepted industry perceptions of image quality.
28
<PAGE> 29
PRINTING METHODS' CAPABILITIES
<TABLE>
<S> <C> <C> <C> <C>
HIGH IMAGE ON- SHORT OUTDOOR
METHOD QUALITY* DEMAND RUNS APPLICATIONS
--------------------------------------------------------------------------------
LFDP 'X' 'X' 'X' 'X'
Photograph 'X' 'X' 'X'
Screen 'X' 'X'
Offset 'X' 'X'
--------------------------------------------------------------------------------
</TABLE>
* Determination of image quality is subjective, involving individual taste and
perception. The above chart indicates the Company's estimates of
generally-accepted industry perceptions of image quality.
Digital Printing
Digital printing fulfills the unmet demand of short-run users, as it does
not require expensive chemicals, films, screens, masks or set-up processes.
Furthermore, this technology allows graphics to be printed directly from a
variety of desktop publishing programs onto paper.
Currently, there are two primary methods of digital printing, electrostatic
and inkjet. Electrostatic print heads form images by depositing small dots of
electrical charge across the full width of the paper. The image is developed by
the attraction of the ink to the charged dots. Inkjet printers form images by
spraying very small dots of water-based inks as the print head moves
horizontally in a scanning-type process. Electrostatic printers achieve the
speeds required for runs of up to 200 copies (referred to as the production
market), whereas inkjet printers are considerably slower and are generally used
for very short runs of fewer than five copies. Furthermore, electrostatic
technology utilizes weather-durable pigment-based inks that can be used for both
indoor and outdoor applications. Inkjet technology is primarily used for indoor
applications. The following chart compares the electrostatic and inkjet methods:
LFDP TECHNOLOGIES
<TABLE>
<CAPTION>
TECHNOLOGY LIST PRICE TYPICAL PRINT TIME DURABILITY
- -------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
Inkjet $3,000 - $10,000 20 - 30 min. Currently indoor
applications only
Electrostatic $35,000 - $120,000 1 - 5 min. Indoor and outdoor
applications
</TABLE>
- ---------------
Source -- Raster Graphics, Inc.
RASTER GRAPHICS' SYSTEM SOLUTION
Raster Graphics offers a complete printing system solution to meet the
demands of the on-demand production LFDP market. Raster Graphics' solution
consists of its electrostatic DCS printers, integrated image processing software
and related consumables and services. Key benefits of the DCS printing systems
include:
High Performance. With a production printing speed of 600 to 1,000 square
feet per hour, the DCS printing systems can produce 50 to 60 full-color, 36- by
48-inch posters in one hour, which the Company believes is significantly faster
than comparable printers. Runs of up to 200 prints can be easily produced in a
single shift.
Low Cost for Short Runs. Primary job costs of DCS printing systems are
variable and are principally composed of consumables costing approximately 30c
to 50c per square foot for paper-based
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<PAGE> 30
graphics. In contrast, conventional printing methods involve relatively high
fixed overhead, set-up and labor costs for each printing job. Furthermore, the
on-demand capability of digital printing reduces the waste of surplus or
outdated copies. As a result, the Company believes that the DCS printing systems
provide the most cost-effective solution for four color printing runs up to 200
copies as illustrated below.
PRINTING METHODS COMPARISONS
<TABLE>
<CAPTION>
FEATURE OFFSET PRINTING SCREEN PRINTING DCS SYSTEM
- ------------------------------------------- --------------- --------------- ----------
<S> <C> <C> <C>
Job Turnaround Time 3 - 5 days 5 - 9 days 1 day
Estimated Total Cost for 50 copies $4,500 $900 $300
Estimated Total Cost for 200 copies $5,000 $1,100 $1,100
Quality of Output* Excellent Good Very Good
</TABLE>
- ---------------
Source -- Raster Graphics, Inc.
* Determination of image quality is subjective, involving individual taste and
perception. The above chart indicates the Company's estimates of generally
accepted industry perceptions of image quality.
Targeting and Customizing or "Narrowcasting." The DCS printing systems
allow content to be varied on a print-by-print basis. Fixed and variable data
are printed in one process at the same quality level. This permits narrowcasting
marketing campaigns that are customized to a specific market segment.
High Print Quality and Flexibility. The DCS printing systems offer two
printing resolution modes, a 200 x 200 dots per inch ("dpi") mode and a 200 x
400 dpi mode, allowing utilization of the same system for two levels of image
quality to meet the needs of both close-up graphics and distance-viewed
graphics.
Raster Graphics has received five highly acclaimed industry awards for its
contribution to digital printing technology. The Company's DCS 5400 product
received the Digital Printing and Imaging Association's 1994 Product of the Year
award; was named among the Top 10 New Repro Products for 1994 by Modern
Reprographics; was designated a Hot Product for 1994 by Electronic Publishing;
received a 1994 Editor's Choice Award from Computer Graphics World; and was
honored with the 1994 Industry Excellence Award by IEEE Computer Graphics and
Applications. See "Risk Factors -- Limited History of Product Manufacturing and
Use; Product Defects" and "-- Dependence on Single Product Line."
STRATEGY
Raster Graphics' objective is to build on its position as a market leader
in providing digital printing systems and related consumables and services for
the on-demand production LFDP market. The Company's strategy for growth includes
the following:
Provide System Solutions. In August 1995, the Company acquired Onyx, a
leader in image processing software, enabling the Company to develop highly
integrated systems solutions for its customers. Raster Graphics plans to
continue developing additional products and services to provide complete
integrated solutions to its customers. The Company believes that customers
prefer an integrated solution since most customers lack the expertise or time to
source and integrate individual and potentially incompatible components from
multiple suppliers.
Focus on Large Format Digital Segment. Raster Graphics plans to continue
to focus its efforts on producing LFDP systems with capabilities that target and
address specific needs of the production customer, such as paper graphics,
backlit graphics, vinyl graphics and textile graphics. The Company believes that
the rapid growth in small format on-demand color printing will also stimulate
demand for comparable large format solutions by raising the level of awareness
of the benefits of short-run printing.
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<PAGE> 31
Increase Recurring Revenues Base. Raster Graphics plans to continue
expanding its services and specialized consumables businesses which provide
recurring revenues to the Company. The Company currently sells various inks,
varnish, specially-coated papers, vinyls and maintenance and training services.
Leverage Core Technologies. Raster Graphics plans to leverage its
technological expertise to expand its product offerings. The Company has
expertise in a number of core technologies, including knowledge of complex print
head design and manufacturing; high speed paper transport; high speed data
transfer; and image processing software.
Pursue Acquisitions, Joint Ventures and Alliances. Raster Graphics will
seek to acquire strategic businesses and technologies and establish joint
ventures with companies offering complementary products or synergistic
distribution. For example, by utilizing Onyx's leadership position in image
processing software, Raster Graphics plans to build alliances with manufacturers
and distributors of entry level low-speed graphics printers. The Company
believes that this large base of low-speed graphics printing systems will become
upgrade prospects for the Company's high performance production systems.
Expand International Markets. Approximately half of the Company's revenues
are derived from sales in international markets. The Company believes that these
markets offer attractive growth opportunities fueled by a variety of languages
and cultural and business customs which result in the need for customization.
Raster Graphics plans to continue expanding its direct presence in international
markets by establishing additional foreign subsidiaries and forming joint
ventures.
PRODUCTS
DCS Printing System Architecture
The DCS printing system consists of two primary components: the DCS
printers and PosterShop, a client/server-based image processing system.
Raster Graphics DCS Printer. DCS printers are currently available in two
models: DCS 5400 and DCS 5442. Both models are capable of producing 54-inch wide
graphics, in lengths of up to 30 feet for the 5400 model and up to 100 feet for
the 5442 model. Raster Graphics began designing its first DCS printer, the DCS
5400, in early 1993 and began product shipments in June 1994. The Company
introduced and began shipping the DCS 5442 in January 1996. See "Risk
Factors -- Dependence on Single Product Line" and "-- Limited History of Product
Manufacturing and Use; Product Defects."
DCS PRINTER SPECIFICATIONS
<TABLE>
<CAPTION>
MODEL RESOLUTION(S) PRINTING THROUGHPUT MAX. PRINT LENGTH LIST PRICE
- -------- ------------------ ----------------------- ----------------- ----------
<C> <S> <C> <C> <C>
DCS 5400 200 x 200 dpi Up to 600 sq feet/hr. Up to 30 feet $ 99,950
DCS 5442 200 x 200 dpi and Up to 1,000 sq feet/hr. Up to 100 feet $ 109,950
200 x 400 dpi
</TABLE>
Raster Graphics, in its DCS printers, is the only manufacturer offering the
following four innovative features to satisfy the requirements of the LFDP
market:
- High Performance Using Non-Multiplexed Writing. Raster Graphics'
patented, non-multiplexed print head, the Silicon Imaging Bar,
simultaneously images across the full 54-inch width of paper allowing DCS
printers to operate at much higher speeds than traditional multiplexed
printers. In multiplexed electrostatic printing, a segmented print head
images across the width of the paper one segment at a time.
31
<PAGE> 32
LOGO
LOGO
- Five Color Capability. DCS printers utilize a unique five color process
that allows printing spot colors or applying varnish. Spot colors enable
the printing of precise corporate identity colors (e.g. Coca-Cola red or
Kodak yellow), accent metallic colors or neon colors. Varnish enables the
application of a protective finish coat. Traditional four-color printing
processes using only CMYK cannot offer these capabilities.
- Dual Resolution Printing Mode. The DCS Model 5442 printer is capable of
printing images in 200 x 200 dpi mode or 200 x 400 dpi mode without any
special printer setup. Images are processed faster in 200 x 200 dpi mode,
while 200 x 400 dpi mode provides better image definition. A user can
select the appropriate mode to match the application needs. Currently,
comparable electrostatic printers do not offer this dual resolution
printing mode.
- Seamless Integration of DCS Printers with System Software. DCS printers
permit real time interaction between the printers and the image
processing server to manage job attributes (e.g. type of media on which
to print, type of ink, rush vs. normal priority, number of inking passes
per color, etc.), and keep the operator informed of the job and print
engine status. Traditionally, printers and image processing software have
been developed independently with limited communication capabilities. As
a result, operators have been forced to manually track job attributes,
requiring additional time and causing workflow inefficiencies.
DCS System Software. The Company's PosterShop DCS system software, based
on client/server architecture, is designed to facilitate the workflow in a
graphics production shop. A typical environment consists of multiple PosterShop
clients connected to a single Digital Equipment Corporation's Alpha workstation
("Alpha workstation") or PC server. The PosterShop software allows clients to
prepare printing jobs and send them to the server. Job preparation tools include
previewing, sizing and tiling the images; color calibrating the printer;
selecting the screening dot pattern and specifying the media type and ink. The
server manages the job queues, performs the raster image processing ("RIP")
function and communicates with the printer(s) and clients. Clients can also
remotely access job and printer status from the server. In addition, the DCS
system software can concurrently process and print, thereby maximizing
throughput. See "Risk Factors -- Limited History of Product Manufacturing and
Use; Product Defects."
The list price for the PosterShop DCS system software, including an Alpha
workstation, is $39,995 and the list price for PosterShop DCS system software
without the workstation is $24,995.
32
<PAGE> 33
LOGO
Inkjet Image Processing Software. In addition to the PosterShop software
sold with the DCS printing systems, the Company offers specialized versions of
PosterShop to inkjet printer manufacturers and distributors under the Onyx brand
name. The Company also markets a hardware image processing solution for inkjet
customers called Qube, which is an integrated hardware/software product that
plugs directly into an existing Macintosh network. PosterShop software products
for inkjet printers have list prices ranging from $495 for the Lite package to
$6,995 for the Encad 50-inch server product. Qube sells for a list price of
$5,995. See "Risk Factors -- Limited History of Product Manufacturing and Use;
Product Defects."
Consumables
Color printing requires the consumption of significant quantities of inks
and papers. Raster Graphics' product offerings include a range of consumables,
such as specialized process color inks, spot color inks and varnish, vinyls and
various indoor and outdoor papers. The Company performs qualification testing on
these consumables before releasing them for customer shipment. See "Risk
Factors -- Dependence on Sole Source Subcontractors and Suppliers."
The specialized inks, concentrates and varnish are created specifically for
the DCS products to optimize image quality and printer performance. The Company
currently offers over 50 different ink, concentrate and varnish products. Ink
and concentrate consumption varies depending upon both the content and number of
rolls printed. A graphic with a primarily white background will require much
less ink than a graphic with high image content. A full four color set of inks
and concentrates lists for approximately $2,000 and can print eight to ten rolls
of paper. See "Risk Factors -- Dependence on Sole Source Subcontractors and
Suppliers."
Raster Graphics markets seven different types of specially coated papers
for use in the DCS products. The list prices for papers range from $190 to $645
per roll. The Company also offers various types of vinyl products to complete
its product offering of consumables. The list prices for vinyls range from $435
to $800 per roll.
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<PAGE> 34
Services
The Company devotes significant resources in striving for excellence in
customer service. Service response and repair data is recorded and tracked via
an on-line customer dispatch system. Product performance and customer call
history is reviewed and updated and reports are provided to Raster Graphics
management. Complete customer history files are maintained at Raster Graphics
corporate offices in San Jose, California. Raster Graphics has also developed a
state-of-the-art maintenance manual for its DCS printers that resides on a
laptop computer and is interactive with the printer. Using the laptop computer,
the operator can diagnose and test the various components of the printer. See
"Risk Factors -- Limited History of Product Manufacturing and Use; Product
Defects."
In the United States, Raster Graphics provides installation and 90-day
on-site warranty support. After the initial warranty period, the Company offers
service maintenance contracts to its installed base of customers. The Company's
service organization consists of technical support personnel, technical
trainers, field service technicians, a customer call dispatch center and
inventory and logistics support. The field service technicians are located in 12
key locations across the United States. Internationally, Raster Graphics
provides 90-day (12 months for print head) return-to-factory parts warranty.
Maintenance service is provided by authorized dealers and distributors. See
"Risk Factors -- Reliance on Third-Party Distribution."
Raster Graphics provides classroom and on-site training for all products
sold domestically. All of the Company's training programs are listed in the
Company product/price book. The Company also trains its international dealers
and distributors at the Raster Graphics training center in San Jose, California.
MARKETS
The Company's current DCS printing systems are targeted for the high
performance electrostatic segment of the on-demand LFDP market. According to IT
Strategies, the installed base for the entire LFDP market in the United States,
consisting of both inkjet and electrostatic systems for all performance segments
of this market, is projected to be as follows in 1998:
<TABLE>
<CAPTION>
ESTIMATED NUMBER
MARKET SEGMENT OF SITES
- ---------------------------- ----------------
<S> <C>
Quick Printers 3,000 - 7,000
Sign Printers 840 - 1,680
Color Photo Labs 324 - 1,260
Exhibit Builders 2,000 - 2,000
Screen Printers 720 - 2,500
Reprographic Houses 1,105 - 1,445
In-House Print Shops 2,000 - 3,750
Graphic Arts Service Bureaus 583 - 1,590
Digital Color Printers 1,200 - 1,200
----------------
Total 11,772 - 22,425
</TABLE>
- ---------------
Source -- IT Strategies
IT Strategies also estimates that the annual sales of professional large
format color printers to these worldwide customers were 3,960 units or $126
million in 1995 and are projected to grow to 8,900 or $286 million in 1998. In
addition, sales of consumables (inks, varnish, papers, vinyls and other
substrates) to these customers were $193 million in 1995 and are projected to
grow to $1.6 billion in 1998. This growth trend is depicted by the following
chart. See "Risk Factors -- Uncertainty Regarding Development of LFDP Market;
Uncertainty Regarding Market Acceptance of New Products."
34
<PAGE> 35
HIGH-PERFORMANCE LFDP MARKET
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) PRINTERS CONSUMABLES
<S> <C> <C>
1995 126 196
1998 200 1704
</TABLE>
The major markets and applications for LFDP are as follows:
<TABLE>
<S> <C>
- - POP Displays - Museums/Galleries
- - Vinyl and Cloth Banners - Presentations/Seminars
- - Corporate Identity Graphics - Backlit and Reflective Posters
- - Mall Graphics - Courtroom Graphics
- - Exhibit/Trade Show Graphics - Seasonal/Travel Promotions
- - Billboards - Advertising/Merchandising Tie-ins
- - Sports/Concert/Event Graphics - Customer Commercial Wallpaper
</TABLE>
CUSTOMERS, SALES AND MARKETING
Raster Graphics sells complete DCS printing systems, DCS printers and
Poster Shop image processing software to customers both internationally and
domestically. See "Note 9 of Notes to Consolidated Financial Statements" and
"Risk Factors -- International Revenues." To address these customers, the
Company has adopted a dual distribution strategy that encompasses both a direct
sales organization and third-party distributors, including OEMs and VARs. For
1995 and the six months ended June 30, 1996, the Company's direct sales force
accounted for approximately 51.0% and 54.0% of the revenues of the Company,
respectively. See "Risk Factors -- Reliance on Third-Party Distribution."
In the United States, Raster Graphics employs a direct sales force and a
network of independent sales representatives as its primary sales method, each
accounting for approximately one-half of the Company's sales. These individuals
sell DCS printing systems to end user customers such as commercial photo labs,
reprographics service bureaus, exhibit builders, screen printers, digital
printing centers, pre-press trade shops and in-plant printers. Current customers
include a variety of leading companies, such as May Department Stores, Skyline
Displays, Irvine Photo and Eller Media. This sales force also assists OEMs and
VARs, such as 3M and Cactus, in reselling printers when the image processing
software system is supplied by such OEMs or VARs. 3M markets the Company's
printers under the 3M ScotchPrint system brand name and differentiates its
offerings by providing specialized, premium-priced long-durability consumables.
Internationally, the Company sells and supports its products through
non-exclusive agreements with a number of distributors. In 1995, the Company
formed a wholly-owned subsidiary in Germany to support the existing distributors
in Germany and Switzerland. As of August 1996, this subsidiary will also
directly sell DCS printing systems, DCS printers and consumables to the
Company's German customers. The Company intends to form additional subsidiaries
in major European markets to expand its direct sales efforts. See "Risk
Factors -- International Revenues" and "-- Reliance on Third-Party
Distribution."
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<PAGE> 36
Raster Graphics also sells stand-alone DCS printer products to
international OEMs and systems integrators/VARs. These customers integrate these
printers with an image processing system. Some key customers in this category
are Oce and Sign-Tronic. Oce private labels the DCS printers as Oce model 5500
and Oce model 5510. In 1995, Oce contributed 10.9% of the Company's revenues.
The OEM agreement with Oce was signed in October 1990 and expires in October
1997. See "Risk Factors -- Reliance on Third-Party Distribution."
After the United States and Europe, Japan is the third largest market for
the Company's products. The Company sells its products in Japan through four key
distributors: Sumisho, Sumitomo-3M, Marubeni and Kimoto. Raster Graphics'
Japanese sales efforts are managed by a United States-based Japanese national
who is a consultant to the Company.
In addition, the Company also distributes specialized versions of the
PosterShop image processing software to inkjet printer manufacturers and
distributors under the Onyx brand name. Some of the key distributors of these
versions of PosterShop include CIS Graphik & Bildverarbeitung GmbH, The David
Group and Access Graphics, the primary distributor of Hewlett-Packard inkjet
printers. In March 1996, Onyx signed an agreement with Encad to supply the Qube
image processing system for printing graphics from Macintosh computers onto
Encad's new 50-inch printer. The Company employs a dedicated sales force located
in Salt Lake City, Utah to work with these inkjet customers.
The Company promotes its DCS printing systems, DCS printers and PosterShop
products through public relations, direct mail, advertising, trade shows and
on-going customer communication programs. The Company utilizes telemarketing
programs to market consumables to its installed customer base. Additionally, the
PosterShop product is also promoted through the inkjet printer dealer channel by
offering free, time-limited copies of PosterShop image processing software with
the printer sales.
PRODUCT TECHNOLOGY, RESEARCH AND DEVELOPMENT
DCS Printer Technology
Raster Graphics' DCS printers utilize electrostatic technology to print on
roll stock. A paper transport system advances the paper through the printer and
the Silicon Imaging Bar printhead deposits small dots of electrical charge on
the paper. The inking system then applies the inks to develop the image. This
process is repeated for each color. Throughout the entire process, the printer
control system is responsible for all operations of the printer. See "Risk
Factors -- Risks Associated with Intellectual Property," "-- Limited History of
Product Manufacturing and Use; Product Defects" and "-- Dependence on Sole
Source Subcontractors and Suppliers."
36
<PAGE> 37
LOGO
Paper Transport System. DCS digital printers use a roll-to-roll paper
transport system. A roll up to 400 feet in length is loaded on the supply hub. A
paper transport system moves the paper across the Silicon Imaging Bar print
head, and then across a specific color inking station. A take-up reel winds the
paper up as it moves through the printer. An advanced control system, which
utilizes registration marks, cameras and an encoder provides precise
registration from one color pass to the other. Print speed can range from 10
feet per minute to 40 feet per minute (20 feet per minute maximum for 200 x 400
dpi).
Silicon Imaging Bar Print Head. Raster Graphics' patented Silicon Imaging
Bar print head consists of a full 54-inch wide circuit board assembly with
10,656 copper trace styluses spaced every 1/200th inch. Each stylus is
controlled by an individual (non-multiplexed) high-voltage driver circuit, or
"switch." In the writing stage of electrostatic printing, the styluses maintain
contact with the paper as the paper moves across the Silicon Imaging Bar. The
styluses are switched on in every location where an image is desired, resulting
in the deposition of small dots of negative electrical charge, thus creating a
latent image on the paper.
Inking System. The inking system consists of the following components:
four inking stations, one for each process color (CMYK) and one optional spot
color mounted on a sliding drawer, a 2.5 gallon container for each color of
digital ink, four 32-ounce color concentrate bottles and a color control unit.
- Digital Inks. The ink consists of solid color pigment particles
suspended in a clear petroleum base. Because the ink is made of solid
pigments, as opposed to dyes, there is greater ultraviolet and moisture
resistance over water-based inks, making these inks suitable for outdoor
applications.
- Concentrates. Concentrate bottles are used to provide color pigment to
the inking system to replenish the depleted color particles and maintain
color intensity.
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<PAGE> 38
- Color Control Unit. The color control unit is responsible for
automatically maintaining precise color density for each of the four
process colors. The ink supply from each of the color bottles is pumped
to the color control unit which optically senses the color value and, if
required, adds color concentrate to the ink, to maintain the required
color density. Spot color density is controlled manually.
LOGO
During the inking process, the paper moves across a specific inking station
and the image is developed as follows. At the start of each color printing pass,
the inking station for the desired color is positioned in place. The ink flows
through a slot called the fountain, contacts the negatively charged latent image
on the paper, and the positively charged pigment particles in the ink instantly
develop the image. As the paper continues to move across the inking station, a
spinning roller removes the excess ink from the paper and a fan assembly dries
the image. The roller is kept dry by a blade which scrapes off the excess ink
from the roller. A drain at the bottom of the inking station returns the excess
ink to the ink container. At the end of the process, the paper is rewound, the
next inking station is positioned in place, and the process is repeated three
more times, once for each of the remaining CMYK process colors with an
additional pass if a spot color or varnish is desired.
Printer Control System. Based on Intel's i960 processor with 16MB of
memory and 1GB disk (2GB optional), this system is responsible for all printer
control and diagnostic functions, as well as providing bi-directional
communications to the image processing system. The DCS printer's on-board disk
acts as temporary storage for print files. It buffers the next job while one job
is being printed. It is also used to store prints for subsequently making
additional copies. The bi-directional link to the image processing system is
used to send print files and control commands to the printer from the image
processing system. Control commands can include such attributes as number of
copies desired, resolution, print speed, number of color passes per color and
sequence of color passes. Over this link, the printer also provides status
information such as the name of the job being printed, type of media loaded,
amount of media used, amount of media left, type of ink and amount of ink. This
closed-loop operation allows the image processing system to intelligently manage
the workflow.
PosterShop Image Processing Software
PosterShop software, developed by the Company's wholly-owned subsidiary
Onyx, provides a complete set of tools for producing large-format color graphics
in a wide variety of printers. PosterShop, which is Onyx's second generation
image processing software, includes the following tools:
- Preview and Size. Preview and sizing module displays the image on the
screen, rendered with the same software that is used to create the final
print. This WYSIWYG display also provides an
38
<PAGE> 39
easy drag-and-drop cropping box to select the size and area to be
printed. The image can be enlarged to any size up to 50 feet by 50 feet.
- Tiling. Tiling enables PosterShop to automatically create panels or
tiles when an image will not fit on a single page. These tiles are
displayed on the screen with easy drag-and-drop lines so the user can
easily edit them. The user can also specify an overlap so that the image
is duplicated along the adjoining edges.
- Color Correction. Using several sliders, the color correction tool is
used to control the image appearance. These sliders are highlights,
midtones, shadows, contrast, brightness and saturation. These adjustments
are displayed both on screen and on the printout. This color tool also
has more advanced features for sophisticated users, such as set white,
set black, histograms, GCR, UCR, CMYK curves, sample point and others. Up
to four views of the image can be displayed at the same time.
- Color Calibration. Color calibration is used to provide
device-independent color when changing media, ink or dot pattern.
Calibration reads a color swatch using a densitometer to create color
tables associated with each media resolution and dot pattern.
- PostScript RIP and Font Manager. PosterShop features a full PostScript
level 2 RIP. This RIP converts the PostScript graphics files to binary
data formats specific to each printer. The RIP function utilizes a number
of specialized dot patterns including FDRP, a patented Onyx dot pattern.
A font manager is included to add special fonts to the RIP.
Research and Development
Raster Graphics plans to continue to devote substantial resources to
research and development for the continuous advancement of its proprietary
technologies to address LFDP market requirements. The Company believes the
continued enhancement of the DCS printing systems, including PosterShop image
processing software, to be vital to its future success. The Company intends to
expand its product lines, including printers, to achieve lower price points and
higher image quality. Raster Graphics will continue to design its products to be
compatible with computer systems and data standards commonly used in the
graphics industry. See "Risk Factors -- Uncertainty Regarding Development of
LFDP Market; Uncertainty Regarding Market Acceptance of New Products" and
"-- Risks Associated with Intellectual Property."
The Company's engineering team consists of over 20 engineering
professionals. The Company's research and development efforts include
significant activities in precision mechanics, paper conveyance techniques, real
time computer software development, circuit design, high speed data transfer and
software for color management, image processing and rasterization. Recent
software activities have focused on revamping the image processing software into
a family of products, including client-server versions, which run efficiently on
computers using Windows 95 and Windows NT operating systems.
Research and development expenses consist primarily of payroll and related
costs, occupancy, outside consultants, and material and consumable costs
associated with fabricating and testing of engineering prototypes. Raster
Graphics spent $2.2 million, $2.7 million and $3.4 million on research and
development for the fiscal years 1993, 1994 and 1995, respectively. Raster
Graphics expects future increases in research and development expenses as it
accelerates spending on future products.
INTELLECTUAL PROPERTY
As of May 31, 1996, the Company holds 10 issued United States patents
covering technical features and fabrication methods used in Raster Graphics'
printers and color rendering techniques used by its image processing software.
The expiration dates of these patents range from 2006 to 2010. Topics covered in
these patents include methods for fabricating electrostatic writing heads, paper
positioning and stabilizing systems, and devices for applying digital ink on
paper. The Company currently holds no
39
<PAGE> 40
foreign patents and has no foreign or United States patent applications pending.
The Company expects to continue to seek patents on innovations related to its
products under development. There can be no assurance that the Company will be
successful in obtaining necessary patents, that the Company's patent
applications will result in the issuance of patents, that the Company will
develop additional proprietary technology that is patentable, that any issued
patents will provide the Company with any competitive advantages or will
withstand challenges by third parties or that patents of others will not have an
adverse effect on the Company. In addition to patents, the Company believes its
competitive position is dependent on its unpatented industrial know-how, its
copyrighted software, and the timing of the introduction of product innovations
in advance of potential future competitors.
There can be no assurance that others will not independently develop
similar products, duplicate the Company's products or design products that
circumvent any patents used by the Company. No assurance can be given that the
Company's processes or products will not infringe patents or proprietary rights
of others or that any licenses required under any such patents or proprietary
rights would be made available on terms acceptable to the Company, if at all. If
the Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or it could find
that the development, manufacture or sale of products requiring such licenses
could be enjoined. In addition, the Company could incur substantial costs in
defending itself in suits brought against the Company on such patents or in
bringing suits to protect the Company's patents against infringement. If the
outcome of any such litigation is adverse to the Company, the Company's business
could be adversely affected. See "Risk Factors -- Risks Associated with
Intellectual Property."
MANUFACTURING
Raster Graphics' in-house manufacturing is performed in San Jose,
California. This operation consists primarily of writing head manufacturing,
electro-mechanical assembly and printer and system testing. The Company's
patented writing head manufacturing process is extremely complex and is subject
to stringent in-house controls. All other electronic components and assemblies
are subcontracted to qualified suppliers. All products are subjected to rigorous
testing prior to shipment to customers. The PosterShop image processing software
manufacturing is performed by Onyx in Salt Lake City, Utah. Raster Graphics also
contracts with a warehouse and distribution center in Rotterdam, Netherlands to
store and distribute consumables for the European markets. Consumables for the
United States and the rest of the world are supplied from the Company's San Jose
headquarters. See "Risk Factors -- Limited History of Product Manufacturing and
Use; Product Defects."
Raster Graphics' inventory delivery and control systems include MRP,
Just-In-Time and KANBAN systems. These and other systems enable the Company to
meet its manufacturing requirements while minimizing assets tied up in
inventories. The Company has embarked upon a corporate wide Total Quality
Management program which allows the Company to focus on continuous critical
process improvement. These programs include early supplier involvement on new
products, product qualification testing on new products, a qualified supplier
base, in-line statistical defect tracking systems and an outgoing and incoming
inspection capability.
Raster Graphics obtains safety certification for its products with the
assistance of Underwriters Laboratories ("UL") and TUV Product Services. This
allows Raster Graphics to affix UL and CE mark labels to its equipment. A self
certification process is employed to confirm that Raster Graphics printers
conform to the required standards for electromagnetic emissions. Testing is
typically carried out under the supervision of CKC Laboratories, who document
the results. Raster Graphics then affixes the appropriate FCC, CSA and CE mark
labels to the products. The Company also maintains a complete CE mark technical
file for each product as required by the European Economic Community.
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<PAGE> 41
SUPPLIERS
The Company maintains strong business relationships with its key suppliers,
many of whom have been with the Company since its inception. With the exception
of three key components of the DCS printers (two rubber drive rollers and
electrostatic writing head circuit boards), as well as paper transport belts for
its discontinued CAD products, all components have multiple sources. To date,
the Company has experienced no material problems or delays in dealing with its
sole source suppliers. However, in case of loss of any of the suppliers of these
parts, the Company's ability to deliver its products on a timely basis would be
adversely affected and the Company's competitive position could be otherwise
impaired. See "Risk Factors -- Dependence on Sole Source Subcontractors and
Suppliers."
The inks, concentrates and varnish currently used in DCS products are
specially developed by two suppliers, neither of which has generally marketed
these products directly to the end user. However, each of these suppliers has
agreements with one OEM each to supply the DCS inks and concentrates. There is
no assurance that these two suppliers will continue to sell to the Company or
will not distribute these consumables through additional channels. Also, there
is no assurance that a new supplier will not enter the market and provide
consumables that compete with the Company's offerings. Papers used in DCS
products are developed by two additional suppliers. A number of other companies
also acquire papers from these two suppliers and compete with the Company in the
sale of paper to end users. See "Risk Factors -- Dependence on Sole Source
Subcontractors and Suppliers."
COMPETITION
The market for LFDP equipment in general is extremely competitive. The
Company believes that the key competitive factors in the LFDP market are speed,
print quality, price and the ability to provide complete system solutions,
including service. Many of the Company's competitors, including ColorgrafX and
Lasermaster, are well established and have substantially greater resources than
Raster Graphics. See "Risk Factors -- Competition" and "-- Susceptibility of
Certain Customers to Economic and Financing Conditions."
In the printer market, ColorgrafX offers a series of four color
electrostatic printers that are priced slightly below the Company's printers.
The Company's DCS printers offer greater production speed, have the ability to
print with an additional fifth color and can be set to produce either 200 x 200
dpi or 200 x 400 dpi images. Furthermore, Raster Graphics believes that it
compares favorably against ColorgrafX by offering complete solutions and
services. A second competitor, Lasermaster, markets a solid inkjet printing
system that is less expensive than the Company's DCS printing system and allows
the user to print graphics directly onto both paper and vinyl. However,
Lasermaster's products are significantly slower than the Company's DCS printers
and have a higher per square foot cost of solid ink. In addition, Encad recently
introduced a 50-inch version of the NovaJet Pro inkjet printer for the LFDP
market at a significantly lower price which offers high image quality but is
substantially slower than the Company's DCS printers.
In the image processing software market, there are a large number of
companies that compete with the Company's PosterShop product, such as Cactus,
InfoGrafix and VisualEdge. However, with the exception of Lasermaster, Raster
Graphics is the only other manufacturer of both the printer and the software.
This allows the Company to offer a highly integrated printer and software
solution resulting in increased productivity.
In the consumables market, Oce and Cactus supply consumables, including
inks and papers, to their customers using the Company's printers. In addition,
3M markets a set of special premium-priced, long-durability inks. A number of
other companies compete with the Company for the paper business. See "Risk
Factors -- Competition," "Dependence on Sole Source Subcontractors and
Suppliers" and "Business -- Suppliers."
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<PAGE> 42
EMPLOYEES
As of May 31, 1996, Raster Graphics had 146 full-time employees in the
following areas: 49 in manufacturing; 28 in customer support; 26 in research and
development; 26 in sales and marketing; and 17 in general and administrative
functions. The Company's employees are not represented by any collective
bargaining organization, and the Company has never experienced a work stoppage.
The Company believes that its relations with employees are good. See "Risk
Factors -- Key Personnel" and "-- Difficulties in Managing Growth."
FACILITIES
Raster Graphics has leased facilities in three locations. Its main
headquarters of approximately 62,000 square feet is located in San Jose,
California, of which approximately 26.0% is used for administration and sales
and marketing, approximately 12.0% is used as a storage facility, and
approximately 62.0% is used for research and development, manufacturing, and
assembly. The Company's other facilities are comprised of 11,000 square feet in
Salt Lake City, Utah, 3,000 square feet in Union City, California, and 4,000
square feet in Germany, used primarily for administration and sales and
marketing. The lease on the Company's main facility expires in December 31,
2001. The Company believes its facilities are adequate to support its operations
through 1996. The Company anticipates that it will need additional space as
business expands and believes that it will be able to obtain suitable space as
needed. See "Risk Factors -- Difficulties in Managing Growth."
LITIGATION
Raster Graphics is not currently involved in any material litigation.
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<PAGE> 43
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company and their ages as of May 31, 1996
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------ --- -----------------------------------------------------
<S> <C> <C>
Rakesh Kumar.................. 51 President, Chief Executive Officer
and Chairman of the Board
Dennis R. Mahoney............. 42 Vice President and Chief Financial Officer
James L. Harre................ 38 Vice President, Sales and Marketing
Robert W. Johnson Ph.D. ...... 57 Vice President, Engineering
Sebastian J. Nardecchia....... 54 Vice President, Operations
Michael Willingham............ 48 Vice President, Customer Service
Chuck Edwards................. 37 Director and President of Onyx
Frank J. Caufield............. 56 Director
Promod Haque(1)............... 48 Director
Lucio L. Lanza(2)............. 51 Director
W. Jeffers Pickard(1)(2)...... 53 Director
Delbert W. Yocam(2)........... 52 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Kumar joined the Company in 1991 as President and Chief Executive
Officer. From 1988 to 1991, he was Group Marketing Manager, Engineering Systems,
for Digital Equipment Corporation, where he was responsible for worldwide
marketing to technical customers. From 1985 to 1987, he was Vice President of
Sales and Marketing for Precision Image Corporation, a manufacturer of
electrostatic printers. Prior to 1985, Mr. Kumar held a number of management
positions with Phoenix Data Systems, an electronic design automation software
company, Applicon, Inc., a CAD systems company, and Digital Equipment
Corporation.
Mr. Mahoney joined the Company in 1996 as Vice President and Chief
Financial Officer. From 1995 to 1996, he was Vice President and Chief Financial
Officer for Electronics For Imaging, Inc., a manufacturer of hardware and
software products for on-demand, small format color printing. From 1993 to 1995,
he was Vice President, Chief Financial Officer and Corporate Secretary for ADAC
Laboratories, a nuclear medical diagnostic imaging and healthcare information
systems company. From 1991 to 1993, he was Vice President, Finance and
Administration and Chief Financial Officer for Pharmetrix Corporation, a drug
delivery technology company. Prior to 1991, Mr. Mahoney was Vice President,
Internal Operations and Control for Triton Container International Ltd. and held
several senior financial management positions at Syntex Corporation. Mr. Mahoney
is a certified public accountant.
Mr. Harre joined the Company in 1994 as Vice President of Sales and
Marketing. From 1990 to 1994, he was Executive Vice President of Onyx,
responsible for the sales and marketing of Onyx software products worldwide.
Prior to 1990, Mr. Harre held various sales and marketing positions in the
computer industry.
Dr. Johnson joined the Company in November 1994 as Vice President of
Engineering. From 1984 to 1994, he was Vice President of Engineering at
Versatec, Inc., a subsidiary of Xerox Corporation, where he was responsible for
printer and systems development. Prior to 1984, Dr. Johnson held various
research and management positions at Control Data Corporation. Dr. Johnson is
currently on medical leave for an undetermined period of time. His return date
is uncertain.
Mr. Nardecchia joined the Company in 1993 as Vice President of Operations.
From 1990 to 1993, he was Vice President of Product Operations for Barneyscan
Corporation, a manufacturer of color scanners. Prior to 1990, he held various
management positions in manufacturing, operations and product development at
Xerox.
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<PAGE> 44
Mr. Willingham joined the Company in 1993 as Vice President of Customer
Service. From 1991 to 1993, he was a Vice President for Phoenix Service, a
provider of supplies and service for electrostatic printers. From 1986 to 1991,
he held positions as Vice President, Sales and Service and Director of Field
Engineering for Precision Image, a manufacturer of electrostatic printers. Prior
to 1986, Mr. Willingham held various field service positions for semiconductor
and computer manufacturers.
Mr. Edwards has served as a director of the Company since August 1995. In
1989, he founded Onyx where he continues to serve as President. From 1987 to
1989, he served as Product Marketing Manager for Logic Automation, an electronic
design automation software company. From 1985 to 1987, he was a partner of ALS,
Inc., where he developed software design tools for GE Semiconductor. Prior to
1985, Mr. Edwards was an engineer at Intel Corporation.
Mr. Caufield has served as a director of the Company since November 1988.
Since 1978, Mr. Caufield has been a general partner of Kleiner, Perkins,
Caufield & Byers. Prior to the formation of Kleiner, Perkins, Caufield & Byers,
he was a General Partner and Manager of Oak Grove Ventures, a venture capital
firm. Mr. Caufield also serves as director of Quickturn Design Systems and
America Online.
Mr. Haque has served as a director of the Company since May 1993. Since
1990, he has served as Vice President of Norwest Venture Capital Management
Inc., a venture capital firm. He also is a general partner of Itasca Partners,
which is a general partner of Norwest Equity Partners IV, a Minnesota limited
partnership. He also serves as director of Forte Software, Inc.; Optical
Sensors, Inc.; Prism Solutions, Inc.; and Transaction Systems Architect, Inc.
Mr. Lanza has served as a director of the Company since May 1993. Since
1990, Mr. Lanza has been a partner of U.S. Venture Partners, a venture capital
firm, and an independent consultant to semiconductor and software companies. In
1986, Mr. Lanza founded EDA Systems, and served as Chief Executive Officer until
1989 when EDA was acquired by Digital Equipment Corporation. Prior to 1986, he
served in a number of marketing, engineering and general management positions in
the electronics industry. Mr. Lanza also serves as director of Landmark Graphics
Corporation.
Mr. Pickard has served as a director of the Company since November 1988.
Since 1980, Mr. Pickard has been general partner of Merrill, Pickard, Anderson &
Eyre, a venture capital firm.
Mr. Yocam has served as a director of the Company since April 1995. Since
1994, he has been an independent consultant. From 1992 to 1994, he served as
President, Chief Operating Officer and director of Tektronix, Inc. Prior to
1992, he was an independent consultant and from 1979 to 1989 served in a variety
of executive management positions at Apple Computer, Inc. Mr. Yocam is also a
director of Adobe Systems, Inc.; Castelle, Inc.; Integrated Measurement Systems,
Inc.; Oracle Corporation; Sapiens International Corporation; and several
privately held technology companies.
DIRECTOR COMPENSATION AND OTHER INFORMATION
Directors are reimbursed for certain reasonable expenses incurred in
attending Board meetings. In addition, Mr. Yocam receives $1,000 for each Board
of Directors meeting attended and receives an annual consulting fee of $30,000.
In October 1993, Mr. Lanza received an option to purchase 2,500 shares of Common
Stock at an exercise price of $0.50 per share. In April 1995, Mr. Yocam was
granted an option to purchase 40,000 shares of Common Stock at an exercise price
$0.50 of per share. In May 1996, Mr. Edwards, President of Onyx, was granted an
option to purchase 20,000 shares of Common Stock at an exercise price of $7.00
per share. Nonemployee directors of the Company are eligible to participate in
the Company's 1996 Directors' Stock Option Plan. See "-- Stock Option and
Incentive Plans -- 1996 Directors' Stock Option Plan."
There are no family relationships among the directors or officers of the
Company.
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<PAGE> 45
TERM OF OFFICE OF DIRECTORS AND OFFICERS
The Company's Bylaws currently provide for a Board of Directors consisting
of seven members. All directors hold office until the next annual meeting of
stockholders or until their successors are duly elected and qualified. However,
the Company's Bylaws provide that upon qualification of the Company as a "listed
corporation," as defined in Section 301.5(d) of the California Corporations Code
(hereinafter referred to as a "Listed Corporation"), the Board of Directors will
be divided into three classes with the directors of each class serving staggered
terms. The Class I directors are Messrs. Caufield and Pickard, whose current
terms will end in fiscal 1997, the Class II directors are Messrs. Haque and
Lanza, whose current terms will end in fiscal 1998 and the Class III directors
are Messrs. Kumar, Edwards and Yocam, whose current terms end in fiscal 1999.
Upon the expiration of the term of each class of directors, members constituting
such class of directors will be elected for a three-year term at the next
succeeding annual meeting of stockholders. The Board of Directors elects the
Company's officers, and such officers serve at the discretion of the Board of
Directors of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
There are currently two standing committees of the Board of Directors, the
Audit Committee and the Compensation Committee. The Audit Committee reviews the
Company's annual audit and meets with the Company's independent auditors to
review the Company's internal controls and financial management practices. The
Board's Audit Committee currently consists of Promod Haque and W. Jeffers
Pickard. The Compensation Committee recommends compensation for certain of the
Company's personnel to the Board and, together with the Board of Directors,
administers the Company's stock and option plans. The Compensation Committee
currently consists of Lucio L. Lanza, W. Jeffers Pickard and Del Yocam.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid to the Company's Chief Executive Officer and each of the other
four most highly compensated officers who were serving as officers on December
31, 1995 (the "Named Officers") whose aggregate annual compensation exceeded
$100,000 for the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
-------------------------------- SECURITIES
NAME AND PRINCIPAL POSITION SALARY BONUS AND COMMISSION UNDERLYING OPTIONS
- -------------------------------------------- -------- --------------------- ------------------
<S> <C> <C> <C>
Rakesh Kumar................................ $161,539 -- 60,000
President and Chief Executive Officer
James Buckley............................... 107,923 -- 20,000
Vice President and Chief Financial
Officer(1)
James L. Harre.............................. 100,000 $45,293 20,000
Vice President, Sales and Marketing
Robert W. Johnson........................... 130,000 -- 20,000
Vice President, Engineering
Sebastian J. Nardecchia..................... 111,539 -- 30,000
Vice President, Operations
</TABLE>
- ---------------
(1) Mr. Buckley resigned from the Company in January 1996. Dennis R. Mahoney,
the Company's current Vice President and Chief Financial Officer, began
employment with the Company in May 1996.
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<PAGE> 46
The following table provides certain summary information concerning options
granted during the fiscal year ended December 31, 1995 to the Named Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1) POTENTIAL
-------------------------------------------------------- REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF STOCK
SECURITIES GRANTED IN PRICE APPRECIATION
UNDERLYING FISCAL YEAR EXERCISE OR FOR OPTION TERM(3)
OPTIONS ENDED DECEMBER BASE PRICE EXPIRATION ------------------
NAME GRANTED(2) 29, 1995 ($ PER SHARE) DATE 5% 10%
- -------------------------- ---------- -------------- ------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Rakesh Kumar.............. 60,000 11.9% $ 0.50 3/14/2005 $18,867 $47,811
James R. Buckley.......... 20,000 4.0% 0.50 3/14/2005 6,289 15,937
James L. Harre............ 20,000 4.0% 0.50 3/14/2005 6,289 15.937
Robert W. Johnson......... 20,000 4.0% 0.50 3/14/2005 6,289 15,937
Sebastian J. Nardecchia... 30,000 6.0% 0.50 3/14/2005 9,434 23,906
</TABLE>
- ---------------
(1) Consists of stock options granted pursuant to the Company's 1988 Stock
Option Plan. The Company's options generally become exercisable at a rate of
12.5% after six months following the date of grant and approximately 2% per
month thereafter, as long as the optionee remains an employee with,
consultant to or director of the Company. The maximum term of each option
granted is ten years from the date of grant. The exercise price is equal to
the fair market value of the stock on the grant date as determined by the
Board of Directors. See "-- Stock Option and Incentive Plans."
(2) On May 16, 1996, Messrs. Harre, Johnson, Kumar and Nardecchia were granted
options to purchase 20,000, 10,000, 100,000 and 10,000 shares of Common
Stock at an exercise price of $7.00 per share under the Company's 1988 Stock
Option Plan.
(3) The 5% and 10% assumed compounded annual rates of stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price appreciation over the ten-year
option term will be at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the Common Stock appreciates over the
option term, no value will be realized from the option grants made to the
persons named in the Summary Compensation Table.
The following table provides certain summary information concerning the
shares of Common Stock represented by outstanding stock options held by each of
the Named Officers as of December 31, 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Rakesh Kumar.................................. 172,750 77,250 $ 172,750 $77,250
James R. Buckley.............................. 47,250 28,750 47,250 28,750
James L. Harre................................ 28,750 51,250 28,750 51,250
Robert W. Johnson............................. 20,000 60,000 20,000 60,000
Sebastian J. Nardecchia....................... 23,750 36,250 23,750 36,250
</TABLE>
The Company has an employment agreement with its Chief Executive Officer
which terms provide for a six-month severance in the event of termination of
employment. In addition, the Company has an employment agreement with its Chief
Financial Officer which terms provide for a six-month severance and continued
vesting of outstanding options for a period of 26 weeks in the event of
termination of employment.
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<PAGE> 47
STOCK OPTION AND INCENTIVE PLANS
1996 Stock Plan
The Company's 1996 Stock Plan (the "1996 Stock Plan") was adopted by the
Board of Directors in June 1996 and will be submitted for approval by the
Company's stockholders in July 1996. An aggregate of 800,000 shares of the
Company's Common Stock are reserved for issuance under the 1996 Stock Plan. Upon
adoption of the 1996 Stock Plan, the Company's Board of Directors determined to
make no further grants under the 1988 Option Plan.
The 1996 Stock Plan provides for the granting to employees (including
officers and employee directors) of "incentive stock options" within the meaning
of Section 422 of the Code, for the granting to employees, consultants and
nonemployee directors of nonstatutory stock options and for the granting to
employees of stock purchase rights. The 1996 Stock Plan may be administered by
the Board of Directors or a committee of the Board (the "1996 Administrator").
The 1996 Administrator determines the terms of options and stock purchase rights
granted under the 1996 Stock Plan, including the number of shares subject to the
option or right, exercise price, term and exercisability. The maximum number of
shares which may be subject to options or stock purchase rights granted to any
one employee under the 1996 Stock Plan for any fiscal year of the Company shall
be 500,000. The exercise price of all options granted under the 1996 Stock Plan
must be at least equal to the fair market value of the Common Stock of the
Company on the date of grant. The exercise price of any option granted to an
optionee who owns stock representing more than 10% of the voting power of the
Company's outstanding capital stock must equal at least 110% of the fair market
value of the Common Stock on the date of grant. The minimum purchase price of
shares acquired by exercising stock purchase rights is 85% of the fair market
value of the Common Stock on the date of grant. Payment of the exercise price
may be made in cash, promissory notes, shares or other consideration determined
by the 1996 Administrator. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of stock of the
Company, the maximum term of an incentive stock option must not exceed five
years. The term of all other options may not exceed ten years.
If the Company consolidates or merges with or into another corporation,
then each option will be either assumed or an equivalent option substituted by
the successor corporation or, if not assumed or substituted, the unvested
portion of each option will be accelerated. If not terminated earlier, the 1996
Stock Plan will terminate in 2006. The 1996 Administrator has the authority to
amend or terminate the 1996 Stock Plan as long as such action does not adversely
affect any outstanding option.
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in June 1996 and will be submitted for
approval by the Company's stockholders in July 1996. An aggregate of 400,000
shares of the Company's Common Stock are reserved for issuance under the
Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of overlapping offering periods of 12
months' duration, with new offering periods other than the first offering period
commencing on or about January 1 and July 1 of each year. Each offering period
will consist of two consecutive purchase periods of six months duration with the
last day of such period being designated a purchase date. The initial offering
period is expected to commence on the date of this offering and continue through
June 30, 1997, with the first purchase date occurring on December 31, 1997 and
subsequent purchase dates to occur every six months thereafter. The Purchase
Plan will be administered by the Board of Directors or by a committee appointed
by the Board. Employees (including officers and employee directors) of the
Company, or of any majority-owned subsidiary designated by the Board, are
eligible to participate in the Purchase Plan if they are employed by the Company
or any such subsidiary. The Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions, which may not exceed 10% of an
employee's compensation, at a price equal to the lower of 85% of the fair market
value of the Company's Common Stock at the beginning of the offering period or
on the purchase date. If the fair market value of the Common Stock on a purchase
date is less than the fair market value at the beginning of the offering
47
<PAGE> 48
period. Employees may end their participation in the offering at any time during
the offering period, and participation ends automatically on termination of
employment with the Company.
The Purchase Plan provides that in the event of a merger of the Company
with or into another corporation or a sale of substantially all of the Company's
assets, each right to purchase stock under the Purchase Plan will be assumed or
an equivalent right substituted by the successor corporation, unless the Board
of Directors shortens the offering period so that employees' rights to purchase
stock under the Purchase Plan will be exercised prior to the merger or sale of
assets. The Board of Directors has the power to amend or terminate the Purchase
Plan as long as such action does not adversely affect any outstanding rights to
purchase stock thereunder. If not terminated earlier, the Purchase Plan will
have a term of 20 years.
1996 Directors' Stock Option Plan
The 1996 Directors' Stock Option Plan (the "Directors' Plan") was adopted
by the Board of Directors on June 1996 and will be submitted for approval by the
Company's stockholders in July 1996. An aggregate of 150,000 shares of the
Company's Common Stock are reserved for issuance under the Directors' Plan. The
Directors' Plan provides for the grant of nonstatutory stock options to
nonemployee directors of the Company. The Directors' Plan is designed to work
automatically without administration; however, to the extent administration is
necessary, it will be performed by the Board of Directors. To the extent they
arise, it is expected that conflicts of interest will be addressed by abstention
of the interested director from both deliberations and voting regarding matters
in which he or she has a personal interest.
The Directors' Plan provides that each person who is or becomes a
nonemployee director of the Company shall be granted a nonstatutory stock option
to purchase 10,000 shares of Common Stock (the "First Option") on the date on
which the optionee first becomes a nonemployee director of the Company or for
current directors on the date of this offering. Commencing in 1997, on the first
calendar day of each fiscal year each nonemployee director shall be granted an
additional option to purchase 5,000 shares of Common Stock (a "Subsequent
Option") if, on such date, he or she shall have served on the Company's Board of
Directors for at least six months.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method of
making a grant. No option granted under the Directors' Plan is transferable by
the optionee other than by will or the laws of descent or distribution, and each
option is exercisable, during the lifetime of the optionee, only by such
optionee. The Directors' Plan provides that the First Option shall become
exercisable in installments as to 33% of the total number of shares subject to
the First Option on each of the first, second and third anniversaries of the
date of grant of the First Option, and each Subsequent Option shall become
exercisable in full on the first anniversary of the date of grant of such
Subsequent Option. If a nonemployee director ceases to serve as a director for
any reason, he or she may, but only within 90 days after the date he or she
ceases to be a director of the Company, exercise options granted under the
Directors' Plan to the extent that he or she was entitled to exercise such
options at the date of such termination. To the extent he or she was not
entitled to exercise any such option at the date of such termination, or if he
or she does not exercise such option (which he or she was entitled to exercise)
within such 90-day period, such option shall terminate. The exercise price of
all stock options granted under the Directors' Plan shall be equal to the fair
market value of a share of the Common Stock on the date of grant of the option.
Options granted under the Directors' Plan have a term of ten years.
In the event of a merger of the Company with or into another corporation or
a sale of substantially all of the Company's assets, each option will be assumed
or an equivalent option substituted by the successor corporation. The Board of
Directors may amend or terminate the Directors' Plan; provided, however, that no
such action may adversely affect any outstanding option, and the provisions
regarding the grant of options under the Directors' Plan may be amended only
once in any six-month period, other than to comport with changes in the Code. If
not terminated earlier, the Directors' Plan will have a term of ten years.
48
<PAGE> 49
1988 Stock Option Plan
A total of 1,560,000 shares of Common Stock has been reserved for issuance
under the Company's 1988 Stock Option Plan (the "1988 Option Plan"). The 1988
Option Plan was adopted by the Board of Directors in November 1988 and approved
by the stockholders in April 1989. As of June 30, 1996, options to purchase
165,150 shares of Common Stock had been exercised and options to purchase a
total of 1,355,652 shares at a weighted average exercise price of $2.33 per
share were outstanding.
The Board of Directors has determined that no further options will be
granted under the 1988 Option Plan after the offerings. Outstanding options
granted under the 1988 Option Plan generally become exercisable at a rate of
12.5% of the shares subject to the option six months after the date of the grant
and approximately 2% per share thereafter, as long as an optionee remains an
employee with, consultant to or director of the Company. The term of each
outstanding stock option is ten years. The exercise price of all options granted
under the 1988 Option Plan is equal to the fair market value of the Common Stock
of the Company on the date of the grant as authorized by the Board of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation and Bylaws provide that the
Company shall indemnify its directors and officers against any damages arising
from their actions as an agent of the Company to the fullest extent permitted by
Delaware law. The Bylaws further provide that the Company may similarly
indemnify its other employees and agents. In addition, each director has entered
into an indemnification agreement with the Company, pursuant to which the
Company has agreed to indemnify such director to the fullest extent permitted by
Delaware law.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification would
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which might result in a claim for such indemnification.
CERTAIN TRANSACTIONS
In February 1995, shares of the Company's Series C Preferred Stock,
convertible into an aggregate of 595,363 shares of Common Stock, were sold at an
as converted price of $2.50 per share to investors that included, among others,
Norwest Equity Partners IV, a Minnesota limited partnership, 117,584 shares;
U.S. Venture Partners III, 114,056 shares (which includes 1,175 shares sold to
U.S.V. Entrepreneur Partners); Kleiner Perkins Caufield & Byers IV, 76,271
shares; Associated Venture Investors II, 58,766 shares (which includes 970
shares sold to Associated Venture Investors - PGF); Merrill, Pickard, Anderson &
Eyre IV, 54,660 shares; and Bay Partners IV, 47,669 shares (which includes 3,813
shares sold to California BPIV, L.P.).
In August 1995, the Company acquired Onyx in exchange for shares of the
Company's Series C Preferred Stock, convertible into an aggregate of 443,360
shares of Common Stock. In December 1995, the Company amended the Agreement and
Plan of Reorganization with Onyx to provide for the release from escrow to the
former Onyx stockholders in January 1996 of the Company's Series C Preferred
Stock convertible into 133,008 shares of Common Stock.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested directors on the Board of Directors, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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<PAGE> 50
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of June 30, 1996, and as adjusted to reflect
the sale by the Company of the shares of Common Stock offered by this
Prospectus, (i) by each person who is known by the Company to beneficially own
5% or more of the Common Stock, (ii) by each of the Company's directors and
Named Officers, (iii) by all current executive officers and directors as a group
and (iv) by the Selling Stockholders. Unless otherwise indicated below, to the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED SHARES TO OWNED
PRIOR TO THE OFFERING BE SOLD AFTER THE OFFERING**
--------------------- IN OFFERING ---------------------
NAME AND ADDRESS NUMBER PERCENT (1,000,000) NUMBER PERCENT
- ---------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Norwest Equity Partners IV, 857,584 13.5 0 857,584 10.3
a Minnesota Limited Partnership
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
U.S. Venture Partners III(1) 857,583 13.5 0 857,583 10.3
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Kleiner Perkins Caufield & Byers IV(2) 653,519 10.3 0 653,519 7.8
Four Embarcadero Center
San Francisco, CA 94111
Entities Managed by 581,583 9.1 329,064 252,519 3.0
Hancock Venture Partners, Inc.(3)
One Financial Center, 44th Floor
Boston, MA 02111
Associated Venture Investors II(4) 490,131 7.7 0 490,131 5.9
One First Street, No. 12
Los Altos, CA 94022
Merrill, Pickard, Anderson & Eyre IV(5) 463,724 7.3 0 463,724 5.5
2480 Sand Hill Road, Suite 200
Menlo Park, CA 94025
Electronic Marketing Ltd.(6) 431,834 6.8 232,591 199,243 2.4
5/F., General Electronics Building
FSSTL 96, Sheung Shui
New Territories, Hong Kong
Walden Ventures(7) 387,669 6.1 32,000 355,669 4.3
750 Battery Street, 7th Floor
San Francisco, CA 94111
Bay Partners IV(8) 347,669 5.5 0 347,669 4.2
10600 North DeAnza Blvd., Suite 100
Cupertino, CA 95014
OFFICERS AND DIRECTORS
Lucio L. Lanza(9) 860,083 13.6 0 860,083 10.3
Promod Haque(10) 857,584 13.5 0 857,584 10.3
Frank J. Caufield(11) 653,519 10.3 0 653,519 7.8
W. Jeffers Pickard(12) 463,724 7.3 0 463,724 5.5
Rakesh Kumar(13) 211,250 3.2 0 211,250 2.5
Chuck Edwards(14) 162,560 2.5 0 162,560 1.9
James L. Harre(15) 42,083 * 0 42,083 *
Sebastian J. Nardecchia(16) 33,750 * 0 33,750 *
Robert W. Johnson(17) 33,333 * 0 33,333 *
Delbert W. Yocam(18) 13,333 * 0 13,333 *
1264 North Shore Road
Lake Oswego, OR 97034
All executive officers and directors 2,700,200 39.4 0 2,700,200 30.5
as a group (11 persons)(9), (10), (11),
(12), (13), (14), (15), (16), (17), (18),
(19)
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED SHARES TO OWNED
PRIOR TO THE OFFERING BE SOLD AFTER THE OFFERING**
--------------------- IN OFFERING ---------------------
NAME AND ADDRESS NUMBER PERCENT (1,000,000) NUMBER PERCENT
- ---------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
OTHER SELLING STOCKHOLDERS
Hilltop Enterprises Ltd.(20) 191,834 3.0 100,000 91,834 1.1
Malcolm Burne 136,576 2.2 77,277 59,299 *
Mitsui Comtek Corp. 80,000 1.3 45,265 34,735 *
NKK U.S.A. Corporation 80,000 1.3 45,265 34,735 *
Shimizu Corporation 80,000 1.3 45,265 34,735 *
9 stockholders each beneficially owning less 144,957 2.3 93,273 51,684 *
than 1% of the Company's Common Stock(21)
</TABLE>
- ---------------
* Less than 1%.
** Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of shares, the
Common Stock options or warrants held by that person that are currently
exercisable, or become exercisable within 60 days following May 31, 1996,
are deemed outstanding. However, such shares are not deemed outstanding for
purposes of computing the percentage ownership of any other person.
(1) Includes 25,727 shares held by Second Ventures Limited Partnership and
8,575 shares held by U.S.V. Entrepreneur Partners.
(2) Includes 23,679 shares held by KPCB Zaibatsu Fund I. Also includes 23,668
shares issuable pursuant to presently exercisable warrants.
(3) Includes 52,577 shares held by Falcon Ventures, L.P., 242,314 shares held
by Hancock Venture Partners III L.P. and 242,314 shares held by Mayflower
Fund Limited Partnership. Also includes an aggregate of 44,378 shares
issuable pursuant to presently exercisable warrants (includes 4,142 shares
held by Falcon Ventures, L.P., 20,118 shares held by Hancock Venture
Partners III L.P. and 20,118 shares held by Mayflower Fund Limited
Partnership). Assumes exercise of such warrants after June 30, 1996.
(4) Includes 7,079 shares held by Associated Venture Investors-PGF and 37,270
shares held by AVI Partners II, N.V. Also includes an aggregate of 24,257
shares issuable pursuant to presently exercisable warrants (includes 367
shares held by Associated Venture Investors-PGF and 1,940 shares held by
AVI Partners II, N.V.).
(5) Includes 2,937 shares held by MPAE Technology Partners. Includes 14,201
shares issuable pursuant to presently exercisable warrants.
(6) Includes 120,000 shares held by Luzon Investments Ltd. Also includes 11,834
shares issuable pursuant to presently exercisable warrants. Assumes
exercise of such warrants after June 30, 1996.
(7) Includes 80,000 shares held by O, W & W Pacrim Investments Limited, 24,332
shares held by Walden Capital Partners, 97,334 shares held by Walden
International III, C.V. and 117,334 shares held by Walden Investors.
(8) Includes 27,813 shares held by California BPIV, L.P.
(9) Includes 823,281 shares held by U.S. Venture Partners III, 25,727 shares
held be Second Ventures Limited Partnership and 8,575 shares held by U.S.V.
Entrepreneur Partners. Because Mr. Lanza is a general partner of U.S.
Venture Partners, the general partner of these entities, he may be deemed
to be a beneficial owner of such shares. Mr. Lanza disclaims beneficial
ownership of such 857,583 shares except to the extent of his interest in
such shares arising from his interest in U.S. Venture Partners. Also
includes 2,500 shares issuable upon exercise of options exercisable within
60 days of June 30, 1996.
(10) Includes 857,584 shares held by Norwest Equity Partners IV. Because Mr.
Haque is a general partner of Norwest Equity Partners, the general partner
of Norwest Equity Partners IV, he may be deemed to be a beneficial owner of
such shares. Mr. Hague disclaims beneficial ownership of such shares except
to the extent of his interest in such shares arising from his interest in
Norwest Equity Partners.
51
<PAGE> 52
(11) Includes 606,172 shares held by Kleiner Perkins Caufield & Byers IV and
23,679 shares held by KPCB Zaibatsu Fund I. Also includes 23,668 shares
issuable to Kleiner Perkins Caufield & Byers IV pursuant to presently
exercisable warrants. Because Mr. Caufield is a general partner of Kleiner
Perkins Caufield & Byers, which is the general partner of Kleiner Perkins
Caufield & Byers IV and KPCB Zaibatsu Fund I, he may be deemed to be a
beneficial owner of such shares. Mr. Caufield disclaims beneficial
ownership of such shares except to the extent of his interest in such
shares arising from his interest in Kleiner Perkins Caufield & Byers.
(12) Includes 446,586 shares held by Merrill, Pickard, Anderson & Eyre IV and
2,937 shares held by MPAE Technology Partners. Also includes 14,201 shares
issuable pursuant to presently exercisable warrants. Because Mr. Pickard is
a general partner of Merrill, Pickard, Anderson & Eyre, the general partner
of these entities, he may be deemed to be a beneficial owner of such
shares. Mr. Pickard disclaims beneficial ownership of such shares except to
the extent of his interest in such shares arising from his interest in
Merrill, Pickard, Anderson & Eyre.
(13) Includes 201,250 shares issuable upon exercise of options exercisable
within 60 days of June 30, 1996.
(14) Includes 148,560 shares issuable upon exercise of options exercisable
within 60 days of June 30, 1996.
(15) Includes 42,083 shares issuable upon exercise of options exercisable within
60 days of June 30, 1996.
(16) Includes 33,750 shares issuable upon exercise of options exercisable within
60 days of June 30, 1996.
(17) Includes 38,333 shares issuable upon exercise of options exercisable within
60 days of June 30, 1996.
(18) Includes 13,333 shares issuable upon exercise of options exercisable within
60 days of June 30, 1996.
(19) Includes 22,500 shares issuable upon exercise of options exercisable within
60 days of June 30, 1996.
(20) Includes 11,834 shares issuable pursuant to presently exercisable warrants.
Assumes exercise of such warrants after June 30, 1996.
(21) Includes an aggregate of 20,117 shares issuable pursuant to presently
exercisable warrants. Assumes exercise of such warrants after June 30,
1996.
52
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, par value $0.001 per
share, and 2,000,000 shares of undesignated Preferred Stock, par value $0.001
per share, after giving effect to the amendment and restatement of the Company's
Certificate of Incorporation to delete references to the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock and increase the
authorized number of shares of Common Stock, which will occur upon conversion of
such Preferred Stock into Common Stock upon the closing of this offering.
COMMON STOCK
As of June 30, 1996, there were 6,341,350 shares of Common Stock
outstanding that were held of record by approximately 99 stockholders (as
adjusted to reflect the conversion of all outstanding shares of the Company's
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
into Common Stock at a one-to-one ratio upon the completion of this offering).
Stock options to purchase an aggregate of 1,355,652 shares of Common Stock were
outstanding as of June 30, 1996. Warrants to purchase an aggregate of 167,789
shares of Common Stock were also outstanding (as adjusted to reflect the
conversion of all outstanding shares of Preferred Stock). There will be
8,341,350 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' overallotment option or exercise of outstanding options under the
Company's stock and option plans after June 30, 1996) after giving effect to the
sale of the shares of Common Stock to the public offered hereby at an offering
price of $8 per share.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferential rights with respect to any outstanding Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and satisfaction of preferential rights
of any outstanding Preferred Stock. The Common Stock has no preemptive or
conversion rights or other subscription rights and there are no redemption or
sinking fund provisions available to the Common Stock. The outstanding shares of
Common Stock are, and the shares of Common Stock to be issued upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon completion of this offering, the Board of Directors will be authorized
to issue 2,000,000 shares of undesignated Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of Preferred Stock may
have the effect of delaying, deterring or preventing a change in control of the
Company without further action by the stockholders. The issuance of Preferred
Stock with voting and conversion rights may adversely affect the voting power of
the holders of Common Stock, including the loss of voting control to others. At
present, the Company has no plans to issue any shares of Preferred Stock. See
"Risk Factors -- Blank Check Preferred Stock; Anti-Takeover Provisions."
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 4,478,786 shares of Common Stock or warrants exercisable for
Common Stock (the "Registrable Securities") or their transferees are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of an
53
<PAGE> 54
investors' rights agreement (the "Rights Agreement") between the Company and the
holders of Registrable Securities. The holders of at least 20% of the
Registrable Securities may require, on two occasions at any time after six
months following the effective date of this offering, that the Company use its
best efforts to register the Registrable Securities for public resale; provided,
among other limitations, that the proposed aggregate selling price, prior to
deductions for underwriting discounts and commissions, is at least $10 million.
The Company may delay such registration by up to 90 days for business reasons
(but not more than once in any 12-month period). If the Company registers any of
its Common Stock either for its own account or for the account of other security
holders, the holders of Registrable Securities are entitled to include their
shares of Common Stock in the registration. A holder's right to include shares
is subject to certain conditions and limitations, including lock-up agreements
restricting the sale of such shares for 180 days after the effective date of the
registration statement filed in connection with this offering and the right of
the underwriters to limit the number of shares included in such registration.
Holders of Registrable Securities may also require the Company, on no more than
two occasions over any 12-month period, to register all or a portion of their
Registrable Securities on Form S-3 when use of such form becomes available to
the Company, provided, among other limitations, that the proposed aggregate
selling price is at least $500,000. The right of holders of Registrable
Securities to have such shares registered on Form S-3 is subject to the right of
the underwriters participating therein to limit the number of shares included in
such registration. The Company may delay such registration on Form S-3 by up to
90 days for business reasons. Subject to certain limitations contained in the
Rights Agreement and subject to the following sentence, all fees, costs and
expenses of registrations effected pursuant to the Rights Agreement must be
borne by the Company and all selling expenses (including underwriting discounts
and selling commissions) relating to Registrable Securities must be borne by the
holders of the securities being registered.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company's Certificate of Incorporation provides that any action
required or permitted to be taken by the stockholders of the Company may be
taken only at a duly called annual or special meeting of the stockholders and
eliminates cumulative voting in the election of directors upon qualification of
the Company as a Listed Corporation. The Certificate of Incorporation and Bylaws
also restrict the right of stockholders to change the size of the Board of
Directors and to fill vacancies on the Board of Directors. The Bylaws also
establish procedures, including advance notice procedures, with regard to the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors or for stockholder proposals to be
submitted at stockholder meetings. In addition, the Company's Certificate of
Incorporation provides that the Board of Directors will be divided into three
classes of directors, with each class serving a staggered three-year term, upon
qualification of the Company as a Listed Corporation. A classified board may
maintain the incumbency of the Board of Directors, as it generally makes it more
difficult for stockholders to replace a majority of the directors. The amendment
of any of these provisions would require approval by holders of 66.67% or more
of the outstanding Common Stock. The Certificate of Incorporation also
authorizes the issuance of up to 2,000,000 shares of Preferred Stock. The rights
of the holders of the Common Stock will be subject to, and may be subordinated
to, the rights of the holders of any Preferred Stock that may be issued in the
future and, as a result, the issuance of such Preferred Stock could have a
material adverse effect on the market value of the Common Stock. The Company has
no present plan to issue shares of Preferred Stock.
These and other provisions could have the effect of making it more
difficult for a third party to effect a change in the control of the Board of
Directors and therefore may discourage another person or entity from making a
tender offer for the Company's Common Stock, including offers at a premium over
the market price of the Common Stock, and might result in a delay in changes in
control of management. In addition, these provisions could have the effect of
making it more difficult for proposals favored by the stockholders to be
presented for stockholder consideration.
54
<PAGE> 55
The Company has also included in its Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by the Delaware Law and to indemnify its directors and officers to the fullest
extent permitted by Section 145 of the Delaware Law.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporate Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale or other transaction
resulting in a financial benefit to the stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders. In addition, upon completion of this offering, certain provisions
of the Company's charter documents, including a provision eliminating the
ability of stockholders to take actions by written consent, may have the effect
of delaying or preventing changes in control or management of the Company, which
could have an adverse effect on the market price of the Company's Common Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer Corporation. Its address is 1745 Gardena Avenue, Glendale, CA 91204,
and its telephone number is (818) 502-1404.
55
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
8,341,350 shares of Common Stock, assuming no exercise of options or warrants
after June 30, 1996. Of these shares, 3,007,500 shares (including the 3,000,000
shares sold in this offering and assuming no exercise of the underwriters'
overallotment option) will be freely tradable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 of the Securities Act. The remaining
5,333,850 shares will be "restricted securities" as that term is defined under
Rule 144 (the "Restricted Shares"). Sales of Restricted Shares in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the Common Stock.
In addition to the 3,000,000 shares sold in this offering, 7,500 shares of
Common Stock held by current stockholders will be immediately eligible for sale
in the public market without restriction pursuant to Rule 144(k) of the
Securities Act. An additional 120,000 shares of Common Stock will be eligible
for sale after expiration of a contractual lock-up beginning 91 days after the
effective date of the Registration Statement, unless earlier released, in whole
or in part, by Hambrecht & Quist LLC. An additional 4,844,744 shares of Common
Stock (including approximately 687,033 shares issuable upon exercise of vested
options) will be eligible for sale after expiration of a contractual lock-up
beginning 181 days after the date of this Prospectus, unless earlier released,
in whole or in part, by Hambrecht & Quist LLC. In addition, at various times
after 181 days from the date of this Prospectus, 1,056,139 shares will become
eligible for sale in the public market upon expiration of their respective
two-year holding periods, subject to certain volume and resale restrictions set
forth in Rule 144. In addition, holders of warrants exercisable for an aggregate
of 79,626 shares of Common Stock will be eligible to sell such shares beginning
181 days after the date of this Prospectus unless earlier released, in whole or
in part, by Hambrecht & Quist LLC.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of one percent of the number of
shares of Common Stock then outstanding or the average weekly trading volume of
the Common Stock as reported through the Nasdaq National Market during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. In addition, a person who is not deemed to have been an "affiliate"
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned for at least three years the shares proposed to be sold,
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. The Securities and Exchange Commission has
recently proposed to reduce the Rule 144 holding periods. If enacted, such
modification will have a material effect on the timing of when shares of the
Common Stock become eligible for resale.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended, in reliance upon Rule 144 but without compliance with certain
restrictions, including the holding period requirements, contained in Rule 144.
The Company intends to register on a Form S-8 registration statement under the
Securities Act, during the 180-day lockup period, (i) assuming no exercise of
options after June 30, 1996, a total of 1,355,652 shares of Common Stock
issuable upon exercise of outstanding options under the 1988 Option Plan, (ii)
800,000 shares of Common Stock reserved for issuance under the 1996 Stock Plan,
(iii) 150,000 shares of Common Stock reserved for issuance under the Directors'
Plan and (iv) 400,000 shares of Common Stock reserved for issuance under the
Purchase Plan. Such registration will permit the resale of shares so registered
by non-affiliates in the public market without restriction under the Securities
Act.
Prior to this offering, there has been no public market for the Common
Stock of the Company, and any sale of substantial amounts of Common Stock in the
open market may adversely affect the market
56
<PAGE> 57
price of the Common Stock offered hereby. In addition, after this offering, the
holders of 4,478,786 shares of Common Stock (assuming exercise of outstanding
warrants for 79,626 shares of Common Stock) are entitled to certain demand and
piggyback rights with respect to registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradable without restriction under the
Securities Act (except for shares purchased by affiliates of the Company)
immediately upon the effectiveness of such registration. See "Description of
Capital Stock -- Registration Rights of Certain Holders." If such holders, by
exercising their demand registration rights, cause a large number of securities
to be registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. If the Company were
to include in a Company initiated registration any Registrable Securities
pursuant to the exercise of piggyback registration rights, such sales may have
an adverse effect on the Company's ability to raise needed capital.
57
<PAGE> 58
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC
and Prudential Securities Incorporated, have severally agreed to purchase from
the Company and the Selling Stockholders the following respective numbers of
shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---------------------------------------------------------------- ---------
<S> <C>
Hambrecht & Quist LLC........................................... 1,125,000
Prudential Securities Incorporated.............................. 1,125,000
Brean Murray, Foster Securities Inc. ........................... 150,000
The Buckingham Research Group Incorporated...................... 150,000
Furman Selz LLC................................................. 150,000
Needham & Company, Inc. ........................................ 150,000
Unterberg Harris ............................................... 150,000
----
Total................................................. 3,000,000
====
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.30 per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $0.10 per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Selling Stockholders and certain other stockholders of the Company,
including the officers and directors of the Company, who will own in the
aggregate 5,202,350 shares of Common Stock after the offering have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock owned by them during the 180-day period
following the date of this Prospectus. Stockholders of the Company who will own
in the aggregate 120,000 shares of Common Stock after the offering have agreed
they will not, without the prior written consent of Hambrecht & Quitst LLC,
offer, sell or
58
<PAGE> 59
otherwise dispose of any shares of Common Stock owned by them during the 90-day
period following the date of this Registration Statement. The Company has agreed
that it will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock during the 180-day period following the
date of this Prospectus, except that the Company (i) may issue shares upon the
exercise of stock options granted prior to the date hereof under the Company's
stock option plans and may grant additional options under the Company's stock
option plans, and (ii) may issue shares under the Company's 1996 Employee Stock
Purchase Plan. The Underwriting Agreement prohibits the Company from releasing
shares from any lock-up agreements with stockholders of the Company without the
prior written consent of Hambrecht & Quist LLC.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company, the Selling Stockholders and the
Representatives. Among the factors to be considered in determining the initial
public offering price are prevailing market conditions, revenues and earnings of
the Company, market valuations of other companies engaged in activities similar
to the Company, estimates of the business potential and prospects of the
Company, the present state of the Company's business operations, the Company's
management and other factors deemed relevant. The estimated initial public
offering price range set forth on the cover page of the preliminary prospectus
is subject to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Venture Law Group, A Professional Corporation, Menlo Park,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Gunderson Dettmer Stough Villeneuve Franklin
& Hachigian LLP, Palo Alto, California.
EXPERTS
The Consolidated Financial Statements and schedule of the Company as of
December 30, 1994 and December 31, 1995, and for each of the three years in the
period ended December 31, 1995 appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein and in the
Registration Statement and are included in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
The statements of operations and cash flows of Onyx for the year ended
September 30, 1994 included herein and elsewhere in the Registration Statement
have been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
59
<PAGE> 60
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Certain items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and, in each instance, if such contract or
document is filed as an exhibit, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the North Western Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, NY 10048, and copies of all or any part
thereof may be obtained from such office after payment of fees prescribed by the
Commission.
60
<PAGE> 61
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
RASTER GRAPHICS, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
RASTER GRAPHICS, INC. AND ONYX GRAPHICS CORPORATION
Unaudited Pro Forma Condensed Combined Financial Statements
Unaudited Pro Forma Condensed Combined Financial Information.......................... F-22
Unaudited Pro forma Condensed Combined Statement of Operations........................ F-23
Notes to Unaudited Pro Forma Condensed Combined Statement of Operations............... F-24
ONYX GRAPHICS CORPORATION
Report of KPMG Peat Marwick LLP Independent Auditors.................................. F-25
Statement of Operations............................................................... F-26
Statement of Cash Flows............................................................... F-27
Notes to Financial Statements......................................................... F-28
</TABLE>
F-1
<PAGE> 62
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Raster Graphics, Inc.
We have audited the accompanying consolidated balance sheets of Raster
Graphics, Inc. as of December 30, 1994 and December 31, 1995, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Raster Graphics, Inc. at December 30, 1994 and December 31, 1995, and the
consolidated results of its operations and its cash flows for the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Jose, California
February 23, 1996, except as to
Note 12, as to which the
date is August 5, 1996,
F-2
<PAGE> 63
RASTER GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1994 1995
------------ ------------ JUNE 30, PRO FORMA
1996 STOCKHOLDERS'
------------ EQUITY
JUNE 30,
(UNAUDITED) 1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 1,607 $ 1,550 $ 1,775
Accounts receivable, net of allowance for
doubtful accounts of $246 in 1994, $467 in
1995 and $562 in 1996......................... 2,201 5,567 6,884
Amounts receivable from related parties......... 666 -- --
Inventories..................................... 1,893 3,248 5,097
Prepaid expenses................................ 223 132 379
-------- -------- --------
Total current assets.............................. 6,590 10,497 14,135
Property and equipment, net....................... 1,049 1,452 1,491
Deposits and other assets......................... 273 136 300
Intangible assets related to the acquisition of
Onyx Graphics Corporation....................... -- 258 126
-------- -------- --------
Total assets...................................... $ 7,912 $ 12,343 $ 16,052
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit............................. $ -- $ -- $ 250
Accounts payable................................ 414 1,817 3,944
Accrued payroll and related expenses............ 416 583 671
Accrued warranty................................ 347 287 252
Other accrued liabilities....................... 453 970 1,112
Deferred revenues from related parties.......... 152 -- --
Other deferred revenues......................... 1,845 1,114 1,202
Current portion of long-term debt............... 146 355 361
-------- -------- --------
Total current liabilities......................... 3,773 5,126 7,792
Long-term debt.................................... 338 504 318
Commitments
Stockholders' equity:
Preferred stock:
Authorized shares -- 2,000,000 pro forma
Issued and outstanding shares -- none pro
forma....................................... -- -- -- $ --
Convertible preferred stock, $0.001 par value:
Series A, authorized, issued and outstanding
shares -- 320,000 in 1994, 1995 and 1996,
none pro forma.............................. -- -- -- --
Series B, authorized shares -- 1,050,000 in
1996, none pro forma issued and outstanding
shares -- 1,023,998 in 1994, 1995 and 1996,
none pro forma.............................. 1 1 1 --
Series C, authorized shares -- 4,660,000 in
1996, none pro forma issued and outstanding
shares -- 3,509,990 in 1994, 4,548,718 in
1995 and 1996, none pro forma............... 4 5 5 --
Common stock, $0.001 par value:
Authorized shares -- 8,000,000 in 1996,
50,000,000 pro forma
Issued and outstanding shares -- 200,426 in
1994, 344,657 in 1995, 448,634 in 1996 and
6,341,350 pro forma......................... -- -- -- 6
Additional paid-in capital.................... 22,296 25,130 25,596 25,596
Accumulated deficit........................... (18,500) (18,423) (17,222) (17,222)
Deferred compensation......................... -- -- (418) (418)
Notes receivable from stockholders............ -- -- (20) (20)
-------- -------- -------- --------
Total stockholders' equity........................ 3,801 6,713 7,942 $ 7,942
========
-------- -------- --------
Total liabilities and stockholders' equity........ $ 7,912 $ 12,343 $ 16,052
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 64
RASTER GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
YEAR ENDED
------------------------------------------ JUNE 30,
DECEMBER 31, DECEMBER 30, DECEMBER 31, -----------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues (includes related
party revenues of $6,206 in
1993 and $123 in 1994)......... $ 14,719 $ 13,235 $ 26,045 $ 11,652 $ 18,151
Cost of revenues................. 9,942 9,704 16,598 7,701 10,986
------- ------- ---------- ---------- ----------
Gross profit..................... 4,777 3,531 9,447 3,951 7,165
Operating expenses:
Research and development....... 2,179 2,748 3,373 1,426 2,244
Sales and marketing............ 1,591 2,054 3,640 1,375 2,735
General and administrative..... 901 958 1,434 600 864
Acquired in-process research
and development............. -- -- 889 -- --
------- ------- ---------- ---------- ----------
Total operating expenses......... 4,671 5,760 9,336 3,401 5,843
------- ------- ---------- ---------- ----------
Operating income (loss).......... 106 (2,229) 111 550 1,322
Interest income.................. 113 106 106 59 37
Interest expense................. (173) (5) (57) (37) (34)
------- ------- ---------- ---------- ----------
Income (loss) before provision
for income taxes............... 46 (2,128) 160 572 1,325
Provision for income taxes....... 5 -- 83 297 124
------- ------- ---------- ---------- ----------
Net income (loss)................ $ 41 $ (2,128) $ 77 $ 275 $ 1,201
======= ======= ========== ========== ==========
Pro forma net income per share... $ 0.01 $ 0.04 $ 0.16
========== ========== ==========
Shares used in computing pro
forma net income per share..... 7,187,423 7,095,141 7,411,659
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 65
RASTER GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------------------------
SERIES A SERIES B SERIES C COMMON STOCK
------------------ ------------------ ------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ------ ----------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 25, 1992........ 320,000 $ -- 1,023,998 $1 -- $ -- 368,808 $ --
Issuance of Series C preferred
stock, net of issuance costs..... -- -- -- -- 3,509,990 4 -- --
Repurchase of common stock......... -- -- -- -- -- -- (28,000) --
Issuance of common stock under
stock option plan................ -- -- -- -- -- -- 10,533 --
Forgiveness of interest on notes
receivable from stockholders..... -- -- -- -- -- -- -- --
Accrued interest on notes
receivable....................... -- -- -- -- -- -- -- --
Net income......................... -- -- -- -- -- -- -- --
-- --
--------- --------- ---------- --- --------- ---
Balance at December 31, 1993........ 320,000 -- 1,023,998 1 3,509,990 4 351,341 --
Repurchase of common stock......... -- -- -- -- -- -- (154,000) --
Issuance of common stock under
stock option plan and upon
exercise of warrants............. -- -- -- -- -- -- 3,085 --
Forgiveness of interest on notes
receivable from stockholders..... -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- --
-- --
--------- --------- ---------- --- --------- ---
Balance at December 30, 1994........ 320,000 -- 1,023,998 1 3,509,990 4 200,426 --
Issuance of Series C preferred
stock, net of issuance costs..... -- -- -- -- 595,368 1 -- --
Issuance of Series C preferred
stock for Onyx Acquisition....... -- -- -- -- 443,360 -- -- --
Issuance of common stock under
stock option plan and upon
exercise
of warrants...................... -- -- -- -- -- -- 144,231 --
Net income......................... -- -- -- -- -- -- -- --
-- --
--------- --------- ---------- --- --------- ---
Balance at December 31, 1995........ 320,000 -- 1,023,998 1 4,548,718 5 344,657 --
Unearned compensation related to
stock options (unaudited)........ -- -- -- -- -- -- -- --
Issuance of common stock under
stock option plan and upon
exercise of warrants
(unaudited)...................... -- -- -- -- -- -- 103,977 --
Note receivable from stockholder
(unaudited)...................... -- -- -- -- -- -- -- --
Net income (unaudited)............. -- -- -- -- -- -- -- --
-- --
--------- --------- ---------- --- --------- ---
Balance at June 30, 1996
(unaudited)...................... 320,000 $ -- 1,023,998 $1 4,548,718 $ 5 448,634 $ --
========= == ========= == ========== === ========= ===
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE TOTAL
PAID-IN ACCUMULATED DEFERRED FROM STOCKHOLDERS'
CAPITAL DEFICIT COMPENSATION STOCKHOLDERS EQUITY
---------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 25, 1992........ $ 13,689 $ (16,413) $ -- $ (138) $(2,861)
Issuance of Series C preferred
stock, net of issuance costs..... 8,706 -- -- -- 8,710
Repurchase of common stock......... (42) -- -- 42 --
Issuance of common stock under
stock option plan................ 6 -- -- -- 6
Forgiveness of interest on notes
receivable from stockholders..... -- -- -- 12 12
Accrued interest on notes
receivable....................... -- -- -- (8) (8)
Net income......................... -- 41 -- -- 41
------- -------- ----- -------
Balance at December 31, 1993........ 22,359 (16,372) -- (92) 5,900
Repurchase of common stock......... (66) -- -- 66 --
Issuance of common stock under
stock option plan and upon
exercise of warrants............. 3 -- -- -- 3
Forgiveness of interest on notes
receivable from stockholders..... -- -- -- 26 26
Net loss........................... -- (2,128) -- -- (2,128)
------- -------- ----- -------
Balance at December 30, 1994........ 22,296 (18,500) -- -- 3,801
Issuance of Series C preferred
stock, net of issuance costs..... 1,476 -- -- -- 1,477
Issuance of Series C preferred
stock for Onyx Acquisition....... 1,098 -- -- -- 1,098
Issuance of common stock under
stock option plan and upon
exercise
of warrants...................... 260 -- -- -- 260
Net income......................... -- 77 -- -- 77
------- -------- ----- -------
Balance at December 31, 1995........ 25,130 (18,423) -- -- 6,713
Unearned compensation related to
stock options (unaudited)........ 418 -- (418) -- --
Issuance of common stock under
stock option plan and upon
exercise of warrants
(unaudited)...................... 48 -- -- -- 48
Note receivable from stockholder
(unaudited)...................... -- -- -- (20) (20)
Net income (unaudited)............. -- 1,201 -- -- 1,201
------- -------- ----- -------
Balance at June 30, 1996
(unaudited)...................... $ 25,596 $ (17,222) (418) $ (20) $ 7,942
======= ======== ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 66
RASTER GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
------------------------------------------ JUNE 30,
DECEMBER 31, DECEMBER 30, DECEMBER 31, ---------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................... $ 41 $ (2,128) $ 77 $ 275 $ 1,201
Adjustments to reconcile net income (loss)
to net cash used in operating
activities:
Deferred revenue from related
parties............................. (810) (267) (152) -- --
Other deferred revenue................ 436 951 (760) (1,010) 88
Depreciation and amortization......... 672 731 893 267 590
Acquired in-process research and
development......................... -- -- 889 -- --
Forgiveness of interest on
shareholders' notes receivable...... 12 26 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable................. 575 (1,558) (2,169) (547) (1,317)
Inventories......................... (803) 318 (1,283) (697) (1,849)
Prepaid expenses and other assets... (289) (129) 280 77 (411)
Accounts payable.................... (95) (19) 1,035 418 2,127
Accrued payroll and related
expenses......................... 70 88 123 195 88
Other accrued liabilities........... (151) (236) 429 98 107
------- ------- ------- ------ ------
Net cash provided by (used in) operating
activities.............................. (342) (2,223) (638) (924) 624
INVESTING ACTIVITIES
Capital expenditures...................... (813) (805) (1,082) (449) (497)
Cash acquired in acquisition.............. -- -- 55 -- --
------- ------- ------- ------ ------
Net cash used in investing activities..... (813) (805) (1,027) (449) (497)
FINANCING ACTIVITIES
Proceeds from notes payable............... -- 484 418 -- --
Proceeds from the bank line of credit..... -- -- -- -- 250
Repayment of note......................... -- -- (468) (67) (175)
Repayment of note to related party........ (5,000) -- -- -- --
Payments on capital leases................ (108) -- (5) -- (5)
Issuance of note receivable............... -- -- -- (255) --
Proceeds from issuance of common stock.... 6 3 196 -- 28
Proceeds from issuance of Series C
preferred stock......................... 8,710 -- 1,467 1,467 --
------- ------- ------- ------ ------
Net cash provided by financing
activities.............................. 3,608 487 1,608 1,145 98
------- ------- ------- ------ ------
Net increase (decrease) in cash and cash
equivalents............................. 2,453 (2,541) (57) (228) 225
Cash and cash equivalents at beginning of
year.................................... 1,695 4,148 1,607 1,607 1,550
------- ------- ------- ------ ------
Cash and cash equivalents at end of
year.................................... $ 4,148 $ 1,607 $ 1,550 $ 1,379 $ 1,775
======= ======= ======= ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest.................... $ 650 $ 5 $ 57 $ 37 $ 34
Cash paid for taxes....................... $ 19 $ 15 $ 28 $ 2 $ 83
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Forgiveness of note receivable on return
of common stock......................... $ 42 $ 66 $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-6
<PAGE> 67
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Raster Graphics, Inc. (the Company) was incorporated on July 27, 1987 in
the State of California. The Company designs, manufactures, and markets large
format digital printing systems.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Onyx Graphics Corporation, Raster Graphics
GmbH, a German Corporation, and Raster Graphics Limited, a company incorporated
in England and Wales.
Fiscal Year
In 1993 and 1994, the Company reported on a fiscal year ending on the last
Friday in December. Effective in 1995, the Company changed its fiscal year-end
to the calendar year-end. In addition, the quarter ends were changed to the
calendar quarters.
Interim Financial Information
The interim financial information at June 30, 1996 and for the six months
ended June 30, 1995 and 1996 is unaudited but, in the opinion of management,
includes all adjustments, consisting only of normal recurring accruals, which
the Company considers necessary for a fair presentation of the financial
position and results of operations for the interim period. The results of
operations for the six months ended June 30, 1996 are not necessarily indicative
of results for the full year.
Cash Equivalents
For financial statement purposes, the Company considers all highly liquid
debt instruments with original maturities of ninety days or less and with
insignificant interest rate risk to be cash equivalents.
At December 31, 1995 and June 30, 1996, cash equivalents consisted of
commercial paper and money market funds.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115). The adoption of FAS 115 had no material effect on
the Company's results of operations or financial position. The Company considers
its applicable cash equivalents as held-to-maturity investments in accordance
with FAS 115. Any unrealized gains or losses were immaterial.
F-7
<PAGE> 68
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or fair
market value and consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ ---------
<S> <C> <C> <C>
Raw materials................................. $ 578 $ 784 $ 549
Work-in-process............................... 205 588 1,061
Finished goods................................ 1,110 1,876 3,487
------ ------ ------
$1,893 $3,248 $ 5,097
====== ====== ======
</TABLE>
Property and Equipment
Property and equipment is stated at cost and depreciated, using the
straight-line method, over the shorter of the estimated useful life (one to five
years) or, if applicable, the term of the related lease.
Long-Lived Assets
In 1995 the Financial Accounting Standards Board released the Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of " (FAS 121). FAS 121
requires recognition of impairment of long-lived assets in the event that the
net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. FAS 121 is effective for fiscal years beginning
after December 15, 1995. The adoption of FAS 121 is not expected to have a
material impact on the Company's financial position or results of operations.
Revenue Recognition
The Company generally recognizes revenue at the time of shipment and
provides for the estimated cost to repair or replace products under warranty
provisions in effect at the time of sale. Revenue under maintenance contracts is
recognized ratably over the term of the related contract, generally twelve
months. The Company does not warrant its software products.
Income Taxes
The Company accounts for income taxes using the liability method as
required by the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (FAS 109).
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of shares of common stock and dilutive common equivalent shares from convertible
preferred stock (using the if-converted method) and from stock options and
warrants (using the modified treasury stock method). Pursuant to the Securities
and Exchange Commission Staff Accounting Bulletins, common stock and common
equivalent shares issued by the Company at prices below the assumed public
offering price during the twelve-month period prior to the proposed offering
have been included in the calculation as if they were outstanding for all
periods presented regardless of whether they are dilutive (using the modified
treasury stock method at an assumed public offering price).
F-8
<PAGE> 69
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Per share information calculated on the above noted basis is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
------------------------------------------ JUNE 30,
DECEMBER 31, DECEMBER 30, DECEMBER 31, -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net income (loss) per share.... $ 0.01 $ (1.88) $ 0.01 $ 0.04 $ 0.16
=========== ========== =========== =========== ===========
Shares used in computing net
income (loss) per share...... 5,181,236 1,131,744 7,187,423 7,095,141 7,411,659
=========== ========== =========== =========== ===========
</TABLE>
Pro Forma Net Income Per Share
Pro forma net income per share has been computed as described above and
also gives effect, even if antidilutive, to common equivalent shares from
convertible preferred stock that will convert upon the closing of the Company's
initial public offering (using the if-converted method).
Pro Forma Shareholders' Equity (Unaudited)
If the offering contemplated by this Prospectus is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of approximately 5,893,000 shares
of common stock. Unaudited pro forma stockholders' equity at June 30, 1996, as
adjusted for the conversion of preferred stock, is disclosed on the consolidated
balance sheet.
Employee Stock Plans
The Company accounts for its stock option and employee stock purchase plan
in accordance with the provisions of the Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25). In 1995,
the Financial Accounting Standards Board released Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (FAS
123). FAS 123 provides an alternative to APB Opinion No. 25 and is effective for
fiscal years beginning after December 15, 1995. The Company expects to continue
to account for its employee stock plans in accordance with the provisions of APB
Opinion No. 25. Accordingly, FAS 123 is not expected to have any material impact
on the Company's financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. CONCENTRATIONS
Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of investments in cash
equivalents and receivables from customers. The Company invests in
F-9
<PAGE> 70
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
cash equivalents, primarily commercial paper of A1 or P1 grade, placed in
high-credit quality financial institutions. The Company is exposed to credit
risks in the event of default by the financial institutions to the extent of the
amount recorded on the balance sheet. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses, and such losses have
been within management's expectations.
Dependence on Major Subcontractors and Suppliers
The Company relies on subcontractors and suppliers to manufacture,
subassemble, and perform first-stage testing of DCS printer components. The
Company relies on single suppliers for certain critical components. The loss of
certain subcontractors or suppliers or the failure of subcontractors or
suppliers to meet the Company's price, quality, quantity, and delivery
requirements could have a material adverse effect on the Company's business,
financial condition, and results of operations.
Dependence on a Single Product
The majority of the Company's sales are derived from one principal product
line, the DCS printing systems, printers and related consumables, and the
Company anticipates that it will derive the bulk of its revenues in the next
several years from sales of these products. If the Company is unable to generate
sufficient sales of the DSC product line due to competitive factors,
manufacturing difficulties, or other reasons, it may be unable to continue its
business.
Major Customers
One customer, a related party in 1993, accounted for 33.4%, 20.6%, 10.9%
and 14.2% of net revenues for 1993, 1994, 1995 and the six months ended June 30,
1995, respectively. Another customer acounted for 18.4% of net revenues in 1993.
3. ACQUISITION
On August 10, 1995, the Company acquired Onyx Graphics Corporation (Onyx)
for the following amounts (dollars in thousands):
<TABLE>
<S> <C>
443,359 shares of Series C preferred stock of the Company for all the
issued common stock of Onyx............................................... $1,108
Assumption by the Company of options to purchase Onyx common stock.......... 63
Note due from Onyx.......................................................... 259
Acquisition costs........................................................... 70
------
$1,500
======
</TABLE>
F-10
<PAGE> 71
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
The purchase price was allocated, based on an independent appraisal
obtained by the Company, to the tangible and intangible assets acquired and
liabilities assumed based on their respective fair values on the date of
acquisition as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................................. $ 709
Equipment................................................................... 157
Intangibles................................................................. 454
Liabilities assumed......................................................... (570)
In-process research and development......................................... 750
------
$1,500
======
</TABLE>
To determine the value of completed software, the expected future cash
flows of each existing software product were discounted, taking into account
risks related to the characteristics and applications of each product, existing
and future markets, and assessments of the life cycle stage of each product.
This analysis resulted in a valuation of $280,000 for completed software, which
had reached technological feasibility and therefore was capitalizable. This
software was amortized on a straight-line basis over an eight-month period.
To determine the value of the software in the development stage, the
Company considered, among other factors, the stage of development of each
project, the time and resources needed to complete each project, expected
income, and associated risks. Associated risks include the inherent difficulties
and uncertainties in completing each project, thereby achieving technological
feasibility, and risks related to the viability of potential changes in future
target markets. This analysis resulted in a valuation of $750,000 for software
in the development stage that had not yet reached technological feasibility and
did not have alternative future uses. In accordance with generally accepted
accounting principles, the software in the development stage was expensed in
August 1995 as acquired in-process research and development. In addition, the
Company wrote off $139,000 in the September 1995 quarter for redundant
PostScript licenses that the Company had purchased for the Company's development
of a similar image processing software product.
Other intangible assets will be amortized on a straight-line basis over
estimated useful lives ranging from three to five years.
As part of the Agreement and Plan of Reorganization, 30% of the Series C
preferred stock included in the consideration was deposited into an escrow
account. The escrow shares were to be distributed to Onyx stockholders on August
1, 1996 and were for the full satisfaction of losses to the Company resulting
from misrepresentations or omissions in the Agreement that totaled greater than
$50,000. Management of the Company believed that on the date of acquisition that
it was certain that all escrow shares were going to be distributed to Onyx
shareholders, and in fact, the Company did distribute the escrow shares early to
Onyx stockholders as the Company did not find any misrepresentations or
omissions during the August through November 1995 monthly closes of Onyx's
financial statements.
The following unaudited pro forma combined results of operations of the
Company and Onyx for the years ended December 30, 1994 and December 31, 1995
have been prepared assuming that the acquisition of Onyx had occurred at the
beginning of the period presented. The following pro forma information results
(in thousands, except per share data) are not necessarily indicative of the
results
F-11
<PAGE> 72
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
that would have occurred had the transaction been completed at the beginning of
the period indicated nor is it indicative of future operating results:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Net revenues.............................................. $ 15,829 $ 27,709
Income (loss) from operations............................. $ (2,057) $ 1,364
Net income (loss)......................................... $ (2,027) $ 1,170
Net income (loss) per share............................... $ (0.28) $ 0.16
</TABLE>
The results of the operations of the acquired business have been included
in the consolidated results of operations for the period subsequent to the
acquisition date.
4. BALANCE SHEET COMPONENTS
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ --------
<S> <C> <C> <C>
Machinery and equipment......................... $4,501 $3,869 $4,274
Furniture and fixtures.......................... 187 303 355
Leasehold improvements.......................... 147 162 202
------ ------ ------
4,835 4,334 4,831
Accumulated depreciation........................ 3,786 2,882 3,340
------ ------ ------
$1,049 $1,452 $1,491
====== ====== ======
</TABLE>
Fully depreciated fixed assets with an original cost of approximately
$2,000,000 were written off in 1995.
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Assembled work force.......................................... $ 80 $ 80
Trademarks and tradenames..................................... 54 54
Developed technology.......................................... 280 280
Distributor relationships..................................... 40 40
---- ----
454 454
Accumulated amortization...................................... 196 328
---- ----
Net intangible assets......................................... $258 $126
==== ====
</TABLE>
5. BORROWINGS
In June 1996 the Company's bank line of credit credit agreement was
amended. The facility was extended to $2,000,000, and the term to October 15,
1996. Interest is charged at the lenders prime rate plus 0.5 percentage points.
At June 30, 1996, $250,000 was outstanding under the bank line of credit.
F-12
<PAGE> 73
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
The Company's long-term debt includes two notes payable. The first note
issued on August 29, 1994 had a principal balance of $336,056 at December 31,
1995 with interest being charged at 0.75% above the lenders prime rate. An
additional note issued on June 5, 1995 had a principal balance of $418,835 at
December 31, 1995 with interest being charged at a rate of 0.5% above the
lenders prime rate. Such prime rate was 8.5% at December 31, 1995.
The notes are secured by the tangible assets of the Company. The notes
include various financial covenants which make reference to the Company's
profitability and liquidity. If the Company fails to satisfy these covenants,
all outstanding amounts of the principal and unpaid interest immediately become
due and payable.
In addition, the Company's subsidiary, Onyx, has two notes payable (the
"Onyx Notes"). The first note issued in August 1992 had a principal balance of
$33,342 at December 31, 1995 with interest being paid at the lenders prime rate
plus six percentage points. A second note issued in August 1993 had a principal
balance of $58,023 at December 31, 1995 and incurs interest at a rate equal to
the lenders prime rate plus eight percentage points. Both notes expire in August
1997. The lenders prime rate at December 31, 1995 was 8.5%.
The Onyx Notes are secured by all equipment of the borrower and all
finished goods, materials, and other personal tangible property purchased with
the proceeds of the notes.
Future principal maturities on the notes payable at December 31, 1995,
which includes capital lease obligations of $12,000, for the years ended
December 31 are as follows (in thousands):
<TABLE>
<S> <C>
1996.......................................................................... $355
1997.......................................................................... 347
1998.......................................................................... 157
----
$859
====
</TABLE>
6. COMMITMENTS
The Company leases its principal facilities under an operating lease
arrangement. The future minimum annual rental payments are as follows for the
years ended December 31 (in thousands):
<TABLE>
<S> <C>
1996........................................................................ $ 585
1997........................................................................ 589
1998........................................................................ 589
1999........................................................................ 541
2000........................................................................ 548
Thereafter.................................................................. 548
------
$3,400
======
</TABLE>
Rent expense for the fiscal years ended 1993, 1994, and 1995 was
approximately $317,000, $358,000, and $507,000, respectively, and approximately
$243,000 and $286,000, respectively, for the six months ended June 30, 1995 and
1996, respectively.
The Company has a purchase commitment of approximately $1,000,000 to a
supplier in 1996 in connection with research and development activities.
F-13
<PAGE> 74
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
7. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Each share of Series A, B, and C preferred stock may be converted at the
option of the holder into shares of common stock on a one-for-one basis, subject
to adjustment for certain antidilution provisions. The preferred stock
automatically converts into common stock upon the consummation of an
underwritten public offering for the Company's common stock at not less than
$7.50 per share and the gross aggregate offering price is not less than
$10,000,000. The holders of preferred shares are entitled to one vote for each
share of common stock into which the preferred stock is convertible.
The holders of Series C preferred stock are entitled to receive dividends,
when and as declared by the Board of Directors, at a rate of $0.15 per share,
per annum. After the payment of dividends to the Series C preferred
stockholders, the holders of Series A and B preferred stock are entitled to
receive dividends, when and as declared by the Board of Directors, at a rate of
$0.20 per share, per annum. Dividends are noncumulative, and to date, no
dividends have been declared or paid by the Company. In addition, the Company's
existing bank line of credit currently prohibits the payment of cash dividends
to stockholders without the prior consent of the bank.
The Series C preferred stock has a liquidation preference of $2.50 per
share, plus all declared and unpaid dividends, and is payable prior and in
preference to any distribution to the holders of Series A and B preferred stock
and common stock. After the Series C stockholders receive their liquidation
preference, the holders of Series A and B preferred stock will be entitled to
receive an amount per share equal to $560,000 and $2,800,000 divided by the
number of outstanding Series A and B shares, respectively, plus all declared and
unpaid dividends. After full preferential payments have been made to Series A,
B, and C stockholders, the holders of Series A, B, and C preferred stock are
entitled to receive up to an additional $6,750,000. After the Series A, B, and C
preferred stockholders receive their full liquidation preferences, the holders
of common and preferred stock will be entitled to share in the remaining
proceeds based on the number of shares held.
Stock Option Plan
The Company has a stock option plan (the Plan) under which consultants and
key employees may be granted incentive or nonstatutory stock options for the
purchase of common stock.
There are 1,460,000 shares authorized under the Plan. Under the Plan,
incentive and nonstatutory options may be granted at an exercise price of not
less than 100% and 85%, respectively, of the fair value as determined by the
Board of Directors. The options are exercisable at the discretion of the Board
of Directors and generally vest at the rate of 12.5% of the original grant,
commencing six months after the date of grant or employment, and in monthly
increments of approximately 2% of the total grant thereafter. Expiration dates
are determined by the Board of Directors, but in no event will they
F-14
<PAGE> 75
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
exceed ten years from the date of grant. Unexercised options are cancelable
thirty days after the date of termination of employment. A summary of activity
in this plan is as follows:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
Options outstanding at December 25, 1992......................... 207,720 $0.25 - $1.50
Granted........................................................ 688,170 $0.50
Exercised...................................................... (10,533) $0.50 - $1.50
Canceled....................................................... (204,587) $0.25 - $1.50
----------
Options outstanding at December 31, 1993......................... 680,770 $0.25 - $1.50
Granted........................................................ 160,100 $0.50
Exercised...................................................... (1,902) $0.50
Canceled....................................................... (215,198) $1.50
----------
Options outstanding at December 30, 1994......................... 623,770 $0.25 - $0.50
Granted........................................................ 513,280 $0.025 - $1.50
Exercised...................................................... (19,787) $0.50
Canceled....................................................... (4,913) $0.50
----------
Options outstanding at December 31, 1995......................... 1,112,350 $0.025 - $1.50
Granted........................................................ 394,239 $1.50 - $8.00
Exercised...................................................... (101,611) $0.25 - $0.80
Canceled....................................................... (49,326) $0.50 - $6.00
----------
Options outstanding at June 30, 1996............................. 1,355,652 $0.025 - $8.00
==========
</TABLE>
At December 31, 1995, there were 709,411 options exercisable under the Plan
at $0.025 -- $1.50 per share, and options for 284,113 shares of common stock
were available for grant.
In July 1993, 175,670 options were repriced. Options originally granted at
$1.50 per share were canceled and new options were issued at $0.50 per share.
Deferred Compensation
The Company recorded aggregate compensation of $418,000 during the six
months ended June 30, 1996. The amount recorded represents the difference
between the grant price and the deemed fair value of the Company's common stock
for shares subject to options granted during the first six months of 1996. The
amortization of deferred compensation will be charged to operations and will be
amortized over the vesting period of the options, which is typically four years.
Stock Purchase Plan
In 1988, the Company adopted a stock purchase plan for consultants and key
employees of the Company. There are 90,000 shares authorized for issuance under
the plan. Under the plan, consultants and key employees may be granted the right
to purchase shares of the Company's common stock at not less than 100% of the
fair value on the date of grant as determined by the Board of Directors. As of
December 30, 1994, December 31, 1995 and June 30, 1996, 24,000 shares have been
issued under the Plan and 66,000 shares are reserved for issuance.
F-15
<PAGE> 76
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Warrants
The Company has issued the following warrants:
(a) Warrants were issued in November 1988 to certain Series B investors to
purchase 124,444 shares of common stock at $1.50 per share, subject to
adjustment for dilution. These warrants were exercised in 1995.
(b) During 1989, the Company entered into an equipment lease line with a
financing institution. In conjunction with the lease line, the Company
issued warrants to purchase 10,400 shares of Series B preferred stock at
$12.50 per share. The warrants expire in 1998 and are currently
exercisable.
(c) Warrants were issued in December 1989 in connection with the issuance
of Series B preferred stock. Investors received warrants to purchase
124,257 shares of common stock at $1.50 per share, subject to adjustment
for dilution. These warrants expire in December 1996, or upon the
occurrence of an initial public offering of common stock of not less
than $10,000,000 and at least $25.00 per share, or upon the sale of
substantially all of the Company's assets. The warrants are currently
exercisable.
(d) In conjunction with the issuance of Series B preferred stock and
additions to the Company's lease line, warrants were issued in March
1990 to various stockholders to purchase 38,227 shares of common stock
at $1.50 per share, subject to adjustment for dilution. During 1994,
warrants were exercised to purchase 1,183 shares of common stock leaving
warrants to purchase 37,044 shares of common stock outstanding at
December 30, 1994. In March 1995, 1,546 warrants expired leaving
warrants to purchase 35,498 shares of common stock outstanding at
December 31, 1995. In the six months ended June 30, 1996, 2,366 warrants
were exercised leaving warrants to purchase 33,132 shares of common
stock outstanding at June 30, 1996.
Common Stock Reserved
The Company has reserved shares of common stock for future issuance as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
Series A convertible preferred stock....................... 320,000 320,000
Series B convertible preferred stock (including
warrants)................................................ 1,034,398 1,034,398
Conversion of warrants..................................... 159,755 157,389
Series C convertible preferred stock....................... 4,548,718 4,548,718
Stock Option Plan.......................................... 1,396,433 1,394,851
Stock Purchase Plan........................................ 66,000 66,000
---------- ----------
7,525,304 7,521,356
========== ==========
</TABLE>
Notes Receivable From Stockholders
The Company had accepted long-term promissory notes for the issuance of
common stock to employees and certain consultants. These notes incurred interest
between 6% and 9.4% per annum
F-16
<PAGE> 77
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
with principal and interest payable on demand. In 1994, the notes and related
interest were forgiven in exchange for the return of the common stock.
On February 28, 1996, the Company issued a note receivable for $20,000 to a
consultant. The note incurs interest at a rate of 5.25% per annum and is payable
in full on January 31, 1998. The borrower pledged 40,000 shares of common stock
in the Company as security against nonpayment of the loan.
8. TAXES ON INCOME
The tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1995
------------ ------------
<S> <C> <C>
Current:
Federal..................................................... $ 5 $ 40
State....................................................... -- 28
Foreign..................................................... -- 15
--- ---
$ 5 $ 83
=== ===
</TABLE>
There was no provision for income taxes for 1994 due to the net loss.
The difference between the tax provision and the amount computed by
applying the federal statutory income tax rate to income before the provision
for income taxes is explained below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Expected provision (benefit) at statutory
rate......................................... $ 16 $ (745) $ 56
State taxes.................................... -- -- 28
Federal alternative minimum tax................ 5 -- 40
Net operating losses (utilized) not utilized... (16) 745 (103)
Foreign income taxes at a rate greater than
the federal statutory rate................... -- -- 2
Unbenefited foreign loss....................... -- -- 60
---- ----- -----
Provision for income taxes..................... $ 5 $ -- $ 83
==== ===== =====
</TABLE>
Pretax loss from foreign operations was $135,000 in 1995. There were no
foreign operations in 1993 or 1994.
For the six-month periods ended June 30, 1995 and 1996, income taxes have
been provided based upon estimated annualized effective tax rates of 51.9% and
9.4%, respectively, applied to the earnings for the period. The provision for
income taxes for the six months ended June 30, 1995 reflects unbenefited foreign
losses and the tax benefits of utilizing net operating loss carryforwards. The
provision for the six months ended June 30, 1996 reflects the tax benefits of
utilizing net operating loss carryforwards.
F-17
<PAGE> 78
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
deferred tax assets for federal and state income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Net operating loss carryforwards............................ $ 5,647 $ 4,757
Tax credits................................................. 731 1,015
Inventory reserve........................................... 466 552
Other accruals and reserves not deductible for tax
purposes.................................................. 415 688
Other, net.................................................. 335 282
------- -------
Total deferred tax assets................................... 7,594 7,294
Valuation allowance for deferred tax assets................. (7,594) (7,294)
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
</TABLE>
Under FAS 109, deferred tax assets and liabilities are determined based on
the difference between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Based on the weight of
available evidence, which includes the Company's historical operating
performance, the reported loss in 1994, only marginal profitability in 1993 and
1995, and the uncertainties regarding future results of operations, the Company
has provided a full valuation allowance against its net deferred tax assets as
it is more likely than not that the deferred tax assets will not be realized.
The valuation allowance established upon adoption of FAS 109 in 1993 was
$6,406,000 and was increased by $1,188,000 in 1994 and decreased by $300,000
during 1995.
As of December 31, 1995, the Company had federal and state net operating
loss carryforwards of approximately $13,200,000 and $4,400,000, respectively.
The Company also has federal and California research and development tax credit
carryforwards of approximately $753,000 and $325,000, respectively. The net
operating loss and credit carryforwards will expire at various dates beginning
in 1996 through 2010, if not utilized.
Utilization of the net operating losses and credits will be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 (the Code) and similar state provisions. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.
F-18
<PAGE> 79
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
9. EXPORT AND INTERNATIONAL SALES
Total export sales by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
------------------------------------------ JUNE 30,
DECEMBER 31, DECEMBER 30, DECEMBER 31, ---------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Europe............................... $4,615 $5,221 $ 7,252 $ 3,583 $ 4,470
Far East............................. 1,884 1,041 3,184 1,448 2,101
Other................................ 586 1,141 2,358 1,451 1,893
------ ------ ------- ------ ------
$7,085 $7,403 $ 12,794 $ 6,482 $ 8,464
====== ====== ======= ====== ======
</TABLE>
International sales, including export sales and sales of the Company's UK
and German subsidiaries, were $13,372,000 and $9,863,000 for 1995 and the six
months ended June 30, 1996, respectively. These subsidiaries had no sales prior
to 1995.
The Company is subject to transaction exposure that arises from foreign
exchange movements between the dates foreign currency sales are recorded and the
dates cash is received in the foreign currency. To date, the Company has not
undertaken hedging transactions to cover this exposure.
10. RELATED PARTY TRANSACTIONS
In December 1989, the Company entered into a distribution agreement with a
stockholder of the Company. As partial consideration for the distribution
rights, the distributor/stockholder paid a distribution fee of $1,050,000. The
distribution fee was nonrefundable except upon termination in accordance with
the distribution agreement. In September 1990, the Company began recognizing the
distribution fee on a monthly basis over a five-year period. The Company
recognized $139,000 and $210,000 of distribution revenue during fiscal 1995 and
1994, respectively, and $52,500 in the six months ended June 30, 1995.
At December 30, 1994, the Company has $140,000 in deferred revenue from the
related party (none at December 31, 1995 and June 30, 1996).
In 1993, sales of $6,206,000 were made to two companies that had made loans
totaling $5,000,000 to the Company. In 1993, interest expense on the loans was
$163,000. The loans were repaid in 1993. Gross margins on these sales were not
materially different from the gross margins realized on similar sales to
unaffiliated customers.
11. EMPLOYEE BENEFIT PLAN
The Company has adopted a salary deferral plan (the Plan) covering
substantially all employees. The Company has made no contributions to the Plan
as of December 31, 1995 or June 30, 1996.
12. SUBSEQUENT EVENTS
In August 1996, the Board of Directors and stockholders approved an
increase in the number of shares reserved for issuance under the Company's 1988
Stock Option Plan by 100,000 to 1,560,000 shares.
In June 1996, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public.
Upon completion of the offering, the Board of Directors will be authorized
to issue 2,000,000 shares of undesignated preferred stock in one or more series
and to fix the rights, preferences,
F-19
<PAGE> 80
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences, and number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
The Company's 1996 Employee Stock Purchase Plan (the Purchase Plan) was
adopted by the Board of Directors and approved by the stockholders in August
1996. A total of 400,000 shares of common stock has been reserved for issuance
under the Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of twelve month offering periods other
than the first offering period commencing on or about January 1 and July 1 of
each year. The first such offering period is expected to commence on the date of
this offering. The Purchase Plan will be administered by the Board of Directors
or by a committee appointed by the Board of Directors. Employees (including
officers and employee directors) of the Company, or of any majority owned
subsidiary designated by the Board of Directors, are eligible to participate in
the Purchase Plan if they are employed by the Company or any such subsidiary for
at least 20 hours per week and more than five months per year. The Purchase Plan
permits eligible employees to purchase common stock through payroll deductions,
which may not exceed 10% of an employee's compensation at a price equal to the
lower of 85% of the fair market value of the Company's common stock at the
beginning or end of the offering period.
The Company's 1996 Stock Plan (the 1996 Stock Plan) was adopted by the
Board of Directors and approved by the stockholders in August 1996. An aggregate
of 800,000 shares of the Company's common stock are reserved for issuance under
the 1996 Stock Plan. Upon adoption of the 1996 Stock Plan, the Company's Board
of Directors determined to make no further grants under the 1988 Option Plan.
The 1996 Stock Plan provides for the granting to employees (including officers
and employee directors) of "incentive stock options" within the meaning of
Section 422 of the Code, for the granting to employees and consultants of
nonstatutory stock options and for the granting to employees of stock purchase
rights. The 1996 Stock Plan may be administered by the Board of Directors or a
committee of the Board (the 1996 Administrator). The 1996 Administrator
determines the terms of options and stock purchase rights granted under the 1996
Stock Plan, including the number of shares subject to the option or right,
exercise price, term and exercisability.
The 1996 Directors' Stock Option Plan (the Directors' Plan) was adopted by
the Board of Directors and approved by the stockholders in August 1996. A total
of 150,000 shares of common stock has been reserved for issuance under the
Directors' Plan. The Directors' Plan provides for the grant of nonstatutory
stock options to nonemployee directors of the Company. The Directors' Plan is
designed to work automatically without administration; however, to the extent
administration is necessary, it will be performed by the Board of Directors. To
the extent they arise, it is expected that conflicts of interest will be
addressed by abstention of the interested director from both deliberations and
voting regarding matters in which he or she has a personal interest.
The Directors' Plan provides that each person who is or becomes a
nonemployee director of the Company shall be granted a nonstatutory stock option
to purchase 10,000 shares of common stock on the date on which the optionee
first becomes a nonemployee director of the Company. Thereafter, on the first
calendar day of the Company's fiscal year commencing in 1997, each nonemployee
director shall be granted an additional option to purchase 5,000 shares of
common stock if, on such date, he or she shall have served on the Company's
Board of Directors for at least six months.
F-20
<PAGE> 81
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
In August 1996, the Board of Directors and stockholders approved a
one-for-five reverse split of the Company's common and preferred stock and
reincorporation of the Company into the State of Delaware. All share and per
share amounts in the accompanying consolidated financial statements have been
adjusted retroactively.
In August 1996, the Board of Directors and stockholders approved an
increase in the number of authorized Common Shares from 8,000,000 to 50,000,000.
The Company has given notice to all of its German distributors of its
intent to begin selling its DCS printing systems directly to end-users and
through its recently established German subsidiary. As a consequence of this
action, CIS Graphik, a German distributor, has indicated to the Company that it
may not continue selling the Company's DCS printers. A reduction in sales by CIS
Graphik could have a material adverse effect on the Company's business,
financial condition and results of operations.
F-21
<PAGE> 82
RASTER GRAPHICS
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On August 10, 1995, Raster Graphics, Inc. (the Company) acquired Onyx
Graphics Corporation (Onyx) in a transaction being accounted for as a purchase.
The total purchase price of approximately $1.5 million included the issuance of
443,360 shares of Series C preferred stock of the Company, options to purchase
220,120 shares of Company stock, cancelation of a $259,000 note receivable and
related acquisition costs of $70,000. The net assets acquired included tangible
assets valued at $866,000, developed technology and other intangible assets
totaling $454,000 and $750,000 for acquired in-process research and development
less assumed liabilities of $570,000.
The accompanying unaudited pro forma condensed combined statement of
operations gives effect to the transaction as if it occurred on January 1, 1995,
the beginning of the Company's most recently completed fiscal year. The
Company's year ended December 31, 1995 consolidated statement of operations
include Onyx's results of operations for the period from August 10, 1995 to
December 31, 1995. The pro forma condensed combined statement of operations for
the year ended December 31, 1995 combines the Company's consolidated statement
of operations for the year ended December 31, 1995 with Onyx's results of
operations for the period from January 1, 1995 to August 9, 1995.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results that would have occurred
had the transaction been completed at the beginning of the period indicated nor
is it necessarily indicative of future operating results.
F-22
<PAGE> 83
RASTER GRAPHICS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------
ONYX
RASTER GRAPHICS
GRAPHICS CORPORATION
INC. ---------------
------------ PERIOD FROM PRO FORMA
YEAR ENDED JANUARY 1, 1995 YEAR ENDED
DECEMBER 31, TO AUGUST 9, PRO FORMA DECEMBER 31,
1995 1995 ADJUSTMENTS 1995
------------ --------------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues........................ $ 26,045 $ 2,004 $(340)(A) $ 27,709
Cost of revenues.................... 16,598 401 (229)(A)(B) 16,770
--------- ----- ----------
Gross margin........................ 9,447 1,603 (111) 10,939
Operating expenses:
Research and development.......... 3,373 282 4(B)(C) 3,659
Sales and marketing............... 3,640 695 8(B) 4,343
General and administration........ 1,434 139 -- 1,573
Charge for acquired in-process
research and development....... 889 -- (889)(C)(D) --
--------- ----- ----------
Total operating
expenses................ 9,336 1,116 (877) 9,575
--------- ----- ----------
Income from operations.............. 111 487 766 1,364
Other income (expense).............. 49 (140) 20(E) (71)
--------- ----- ----------
Income from operations.............. 160 347 786 1,293
Provision for income taxes.......... 83 40 -- 123
--------- ----- ----------
Net income.......................... $ 77 $ 307 $ 786 $ 1,170
========= ===== ==========
Net income per share...... $ 0.01 $ 0.22 $ 0.16
========= ==========
Shares used in computing net income
per share......................... 7,187,423 1,364,983 7,187,423(F)
========= ==========
</TABLE>
F-23
<PAGE> 84
RASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
1. BASIS OF PRESENTATION
The pro forma information presented is theoretical in nature and not
necessarily indicative of the future consolidated results of operations of the
Company or the consolidated results of operations which would have resulted had
the Company purchased Onyx Graphics Corporation (Onyx) during the period
presented. The pro forma condensed combined statement of operations reflects the
effects of the acquisition, assuming the acquisition and related events occurred
as of January 1, 1995.
2. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENT ADJUSTMENTS
(A) To eliminate sales from Onyx to the Company prior to the acquisition.
(B) Amortization of acquired workforce, trademarks, developed technology,
and distribution networks being amortized over their estimated useful
lives ranging from eight months to five years.
(C) The pro forma statement of operations excludes charges of $151,000
related to software licenses and product support, including $139,000 of
redundant Post Script licenses that the Company had purchased for the
Company's development of a similar image processing software product.
(D) The pro forma statement of operations excludes the charge of $750,000
for purchased in-process research and development which arose from the
acquisition as it represents a nonrecurring item directly related to
the transaction.
The purchase price was allocated to the tangible and intangible assets
of Onyx based on the fair market value of those assets using a risk
adjusted discounted cash flows approach. The evaluation of the
underlying technology acquired considered the inherent difficulties
and the uncertainties in completing the development, thereby achieving
technological feasibility, and the risks related to the viability of
and potential changes in future target markets. The underlying
technology and patent rights had no alternative use (in other research
and development projects or otherwise).
(E) To reverse Onyx's interest expense to third parties satisfied in the
acquisition.
(F) The preferred stock and options issued as part of the Onyx acquisition
are included in the historical weighted average number of shares for
all periods as they relate to SAB Nos. 55, 64 and 83. As a result,
there is no pro forma effect upon the weighted average number of
shares.
F-24
<PAGE> 85
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Onyx Graphics Corporation:
We have audited the accompanying statements of operations and cash flows of
Onyx Graphics Corporation for the year ended September 30, 1994. 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 audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Onyx
Graphics Corporation for the year ended September 30, 1994, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
November 11, 1994
F-25
<PAGE> 86
ONYX GRAPHICS CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1994
TO AUGUST 9,
YEAR ENDED 1995
SEPTEMBER 30, 1994 ---------------
------------------ (UNAUDITED)
<S> <C> <C>
Revenues:
Software sales............................................ $1,621,170 $ 2,042,033
Hardware sales............................................ 677,713 211,671
Other revenues............................................ 294,992 364,985
---------- ----------
Total revenues.................................... 2,593,875 2,618,689
Cost of sales............................................... 856,301 511,423
---------- ----------
Gross profit...................................... 1,737,574 2,107,266
Operating expenses:
Research and development.................................. 347,368 363,035
General and administrative................................ 424,183 179,926
Sales and marketing....................................... 793,937 928,729
---------- ----------
Total operating expenses.......................... 1,565,488 1,471,690
Income from operations............................ 172,086 635,576
Other income (expense):
Interest expense.......................................... (95,528) (33,747)
Other expenses............................................ -- (137,064)
Other income.............................................. 26,141 25,968
---------- ----------
Total other expense............................... (69,387) (144,843)
---------- ----------
Income before income taxes.................................. 102,699 490,733
Income tax expense (note 4)................................. 1,939 40,000
---------- ----------
Net income........................................ $ 100,760 $ 450,733
========== ==========
Earnings per share.......................................... $ 0.07 $ 0.33
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 87
ONYX GRAPHICS CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1994
------------------ PERIOD FROM
OCTOBER 1,
1994
TO
AUGUST 9, 1995
--------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 100,760 $ 450,733
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................ 52,312 45,434
Amortization............................................ 25,354 29,742
Provision for loss on accounts receivable............... 2,000 35,189
Decrease (increase) in operating assets:
Trade accounts receivable............................. (44,227) (223,270)
Inventories........................................... 19,614 (18,257)
Prepaid expenses...................................... (13,080) (22,605)
Other assets.......................................... 4,116 --
Increase (decrease) in operating liabilities:
Accounts payable...................................... (30,426) (98,549)
Accrued expenses...................................... 9,663 53,019
Deferred revenue...................................... (24,047) 21,353
--------- ---------
Net cash provided by operating activities.......... 102,039 272,789
--------- ---------
Cash flows from investing activities:
Purchase of equipment...................................... (17,627) (77,369)
Purchase of software....................................... (87,295) (13,753)
--------- ---------
Net cash used in investing activities................... (104,922) (91,122)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt............. 71,121 255,861
Repayment of notes payable and long-term debt.............. (83,545) (360,267)
Principal repayments of capital lease obligations.......... (7,990) (7,656)
Proceeds from issuance of common stock..................... -- (100)
Repurchase of common stock................................. -- (25,025)
--------- ---------
Net cash used in financing activities................... (20,414) (137,187)
--------- ---------
Net (decrease)/increase in cash.............................. (23,297) 44,480
Cash at beginning of year.................................... 33,879 10,582
--------- ---------
Cash at end of year.......................................... $ 10,582 $ 55,062
========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest................................................... $ 89,551 $ 33,747
Income taxes............................................... 1,939 875
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 88
ONYX GRAPHICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1994.
INFORMATION FOR THE PERIOD
FROM OCTOBER 1, 1994 TO AUGUST 9, 1995 IS UNAUDITED.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
ONYX Graphics Corporation (the Company) is primarily involved in the
business of developing and marketing software products that produce
large format high-quality color images. The Company also sells hardware
products related to its software. The Company's headquarters are in
Salt Lake City, Utah.
(b) Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid financial instruments with original maturities to the
Company of three months or less to be cash equivalents.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
(d) Equipment
Equipment is stated at cost. Equipment under capital leases is stated
at the present value of minimum lease payments at the inception of the
lease.
Depreciation on equipment is calculated on the straight-line method
over their estimated useful lives of three to five years. Equipment
held under capital leases and leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or
estimated useful life of the asset.
(e) Revenue Recognition
The Company recognizes revenue from software licenses at the time the
software is delivered. Revenue from software license agreements with
original equipment manufacturers (OEM) for redistribution to end-user
customers is recognized when the equipment incorporating the Company's
software is delivered to the end-user. Revenue received from software
maintenance contracts is deferred and recognized ratably over the term
of the maintenance contract, which is typically 90 days.
(f) Research and Development Costs
Research and development costs are expensed as incurred.
(g) Capitalization of Software
Under the criteria set forth in Statement of Financial Accounting
Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed," the Company capitalizes
software development costs upon the establishment of technological
feasibility for the product and the cost of software purchased for
subsequent resale, leasing, or otherwise marketed. The gross amount of
software capitalized totaled $182,200 as of September 30, 1994. The
Company is amortizing these costs on the straight-line method over a
period of three years. Related amortization was $25,354 for the year
ended September 30, 1994 and $29,742 for the period from October 1,
1994 to August 9, 1995.
F-28
<PAGE> 89
ONYX GRAPHICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED SEPTEMBER 30, 1994.
INFORMATION FOR THE PERIOD
FROM OCTOBER 1, 1994 TO AUGUST 9, 1995 IS UNAUDITED.
(h) Income Taxes
Income taxes are recorded using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
(i) Earnings Per Share
Earnings per share of common shares are computed on the basis of the
weighted average shares outstanding plus any common stock equivalents
which would arise from the exercise of stock options. The weighted
average number of shares used in computing earnings per share was
1,508,000 for the year ended September 30, 1994 and 1,376,000 for the
period from October 1, 1994 to August 9, 1995.
(j) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the preparation of these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(k) Interim Financial Information
The interim financial information for the period from October 1, 1994
to August 9, 1995 is unaudited but, in the opinion of management,
includes all adjustments, consisting only of normal recurring accruals,
which the Company considers necessary for a fair presentation of the
results of operations. The results of operations for the period October
1, 1994 to August 9, 1995 are not necessarily indicative of results for
the full year.
(2) LIQUIDITY
As indicated in the accompanying financial statements, the Company
recognized net income of $100,760 for the year ended September 30, 1994, and
generated cash from operating activities. However, due to prior operating
losses, the Company's net stockholders' deficit is $296,465 and current
liabilities exceed current assets by $223,910 at September 30, 1994. This has
resulted in the Company having cash shortages at September 30, 1994 and delayed
payment of certain obligations when they became due. The Company is in the
process of renegotiating the timing of certain debt payments. Management
believes that cash generated from product sales will provide adequate cash to
meet the Company's debt and operating requirements. The Company is subject to
uncertainties and competitive pressures, any of which could adversely affect the
Company's operating cash flow and create liquidity problems for the Company.
(3) LEASES
The Company is obligated under capital leases for equipment that expire
over the next three years. Amortization of assets held under capital leases is
included with depreciation expense.
F-29
<PAGE> 90
ONYX GRAPHICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED SEPTEMBER 30, 1994.
INFORMATION FOR THE PERIOD
FROM OCTOBER 1, 1994 TO AUGUST 9, 1995 IS UNAUDITED.
The Company has a five year, noncancelable operating lease for its office
building. Rent expense for operating leases was $83,931 for the year ended
September 30, 1994 and $68,752 for the period from October 1, 1994 to August 9,
1995.
Future noncancelable, minimum lease payments as of September 30, 1994 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending September 30:
1995................................................................ $12,026 $ 69,024
1996................................................................ 12,026 72,160
1997................................................................ 8,638 73,416
1998................................................................ -- 24,612
----- ------
Total minimum lease payments..................................... 32,690 $239,212
======
Less amount representing interest (15.1%)............................. 7,363
-----
Present value of minimum lease payments.......................... 25,327
Less current installments of obligations under capital leases......... 8,041
-----
Obligations under capital leases, excluding current
installments.................................................... $17,286
=====
</TABLE>
(4) INCOME TAXES
Income tax expense for the year ended September 30, 1994 amounted to $1,939
all of which is current and represents state minimum taxes. There is no federal
income tax expense or federal income tax payable in 1994 principally due to
utilization of net operating loss carryforwards.
The actual tax expense related to income from continuing operations differs
from the "expected" tax expense (computed by applying the U.S. corporate tax
rate of 34 percent) as follows:
<TABLE>
<S> <C>
Computed "expected" tax expense............................................ $34,918
Change in the beginning of the year balance of the valuation allowance for
deferred tax assets...................................................... (36,728)
Meals and entertainment.................................................... 1,810
State taxes, net of federal income tax benefit............................. 1,939
--------
$ 1,939
========
</TABLE>
At September 30, 1994, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $600,000, which are available to
offset future federal taxable income through 2009.
Under the rules of the Tax Reform Act of 1986, the Company has undergone a
greater than 50 percent change of ownership. Consequently, use of substantially
all of the Company's net operating loss carryforwards against future taxable
income in any one year will be limited. The maximum amount of net operating loss
carryforwards available in a given year is limited to the product of the
Company's value on the date of ownership change and the federal long-term
tax-exempt bond rate, plus any limited carryforwards not utilized in prior
years.
Subsequently recognized tax benefits, if any, relating to the valuation
allowance for deferred tax assets as of September 30, 1994, in the amount of
$253,600 will be allocated as an income tax benefit to be reported in the
statement of operations.
F-30
<PAGE> 91
APPENDIX -- DESCRIPTION OF GRAPHICS
OUTSIDE FLAP OF CENTERFOLD
Heading: Raster Graphics is dedicated to providing large-format, on-demand,
short-run printing systems.
Top left of page has the Rastergraphics logo.
Top right of page has a photo of a DCS printer.
Caption: DCS Digital Press
Center of page has photo of a computer.
Caption: PosterShop Image Processing Software
Middle left of page has a photo of ink bottles.
Bottom of page has five symbols depicting awards earned by the Company.
Captions: Editors' Choice Award, Modern Reprographics Top 10 of 1994, DPI
Product of the Year 1994, Hot Product 1994 in Electronic Publishing, and IEEE
Computer Society's 1994 CG&A Excellence Award
INSIDE FLAP OF GATEFOLD FRONT COVER
Heading: The Raster Graphics Solution
Subheadings: Fast Turnaround, Low Cost for Short Runs, Customized Graphics,
High Print Quality and Flexibility
Page contains two (2) photos: Center photo is of a stage display. Bottom
left photo is of a banner above a conference facility.
Captions: Innovative uses for large-format digital printing are emerging as
desk-top publishing users become aware of its cost-effectiveness and high
impact; Key Applications: Point-of-Purchase Displays, Vinyl and Cloth Banners,
Corporate Indentity Graphics, Mall Graphics, Exhibit/Trade Show Graphics,
Billboards, Sports/Concert/Event Graphics; and Key Customer Segments: Color
Photo Labs, Reprographic Houses, Graphic Arts Service Bureaus, Exhibit Builders,
Digital Color Printers, Screen Printers, In-House Print Shops
INSIDE FRONT COVER
Heading: Key Applications
Page contains three (3) photos. Upper right photo is of a point of purchase
display. Bottom left is of a bus stand poster. Bottom right is of a banner and
exhibit in the lobby of a building.
Caption: Point of purchase; posters; exhibits.
PROSPECTUS COVER
Page contains logo of Rastergraphics on center top of page.
PAGE 28
Bottom of page contains graph with Print Quantity on the x-axis and Image
Quality on the y-axis. The graph includes four rectangular boxes which depict
the range of print quantities over which Photographic, LFDP, Screen and offset
printing is cost effective and the corresponding level of image quality.
<PAGE> 92
Caption: Printing Technologies' Cost Effective Range
PAGE 29
Center top of page contains chart with four columns.
Column Titles: High Image Quality, On-Demand, Short Runs, Outdoor
Applications
Row Titles: LFDP, Photograph, Screen, Offset. Check marks depict each
printing technology's capabilities.
Caption: Printing Methods Capabilities
PAGE 32
Center top of page contains two drawings of print heads pointing to the
media, writing nibs, data source and print head segments.
Captions: Raster Graphics Non-Multiplexed Writing Print Head; Multiplexed
Writing Print Head.
PAGE 33
Center of page contains drawing of six computers, two inkjet printers and a
DCS5442 printer. Lines between the computers and printers depict the
architecture of the client/server system.
Caption: Postershop Client/Server Architecture
PAGE 35
Center top of page contains a graph which has two vertical bars which show
the total size of the LFDP market in 1995 and 1998 and the split between
consumables and printers.
Caption: High Performance LFDP Market
PAGE 37
Center top of page contains a depiction of the Printer paper transport
system showing the ink bottle, inking station, silicon imaging bar print head,
paper roll, transport, supply motor, takeup motor and paper roll.
Caption: Raster Graphics' Paper Transport System
PAGE 38
Center top of page contains a depiction of the printer inking system
showing the ink containers, color concentrate, color control unit, inking
stations and ink tray.
Caption: Raster Graphics' Inking System
BACK INSIDE COVER
Heading: Raster Graphics Products
Page contains three graphics: Top right of page has a photo of a printer.
Middle left of page has a drawing of (copy from page 31 description). Bottom
left has a photo of ink bottles.
Captions: INNOVATIVE FEATURES OF DCS PRINTERS
- HIGH PERFORMANCE USING NON-MULTIPLEXED WRITING
Print at high speeds -- up to 1,000 square feet per hour -- using
the patented print head, the Silicon Imaging Bar.
- FIVE-COLOR CAPABILITY
<PAGE> 93
Print special spot colors or apply varnish finish using the
fifth color station.
- DUAL RESOLUTION PRINTING MODE
Select appropriate 200 x 200 dpi or 200 x 400 dpi mode to match
application and performance needs.
- INTEGRATED PRINTER AND SERVER
Improve work flow with real-time interaction between the printer
and server.
ADVANCED IMAGE-PROCESSING SOFTWARE
DCS SYSTEM SOFTWARE
PosterShop(TM) image-processing software, a true client/server
architecture, allows clients anywhere on the network to prepare
and preview jobs. High-performance server manages printer(s)
queues and RIPs files. PosterShop tools include:
- IMAGE SIZE AND PREVIEW
Size and preview the large-format digital image before printing.
- COLOR ADJUSTMENT
Review and adjust colors on the screen and printer.
- COLOR CALIBRATION
Provide device-independent color when changing media, ink or dot
pattern.
- FULL SUPPORT FOR POSTSCRIPT LEVEL-2 RIP
Screen multiple dot patterns with high speed RIP.
CONSUMABLES
Raster Graphics' product offering also includes a range of
consumables, including specialized process color inks, spot-color
inks, varnish, specialized indoor and outdoor papers and vinyls.
Most of these consumable products are manufactured specifically
for DCS systems, resulting in high-quality printed images.
<PAGE> 94
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- ------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary.................................... 3
Risk Factors............................... 5
The Company................................ 14
Use of Proceeds............................ 14
Dividend Policy............................ 14
Capitalization............................. 15
Dilution................................... 16
Selected Consolidated Financial Data....... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 18
Business................................... 27
Management................................. 43
Certain Transactions....................... 49
Principal and Selling Stockholders......... 50
Description of Capital Stock............... 53
Shares Eligible for Future Sale............ 56
Underwriting............................... 58
Legal Matters.............................. 59
Experts.................................... 59
Additional Information..................... 60
Index to Financial Statements.............. F-1
- ------------------
</TABLE>
UNTIL SEPTEMBER 2, 1996 (25 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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- ------------------------------------------------------------
- ------------------------------------------------------------
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3,000,000 SHARES
LOGO
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
HAMBRECHT & QUIST
PRUDENTIAL SECURITIES INCORPORATED
AUGUST 8, 1996
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