<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission file number 0-20933
===============================================================================
RASTER GRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3046090
(State of Incorporation) (I.R.S. Employer Identification Number)
3025 ORCHARD PARKWAY
SAN JOSE, CA 95134
(Address of principal executive office)
(408) 232-4000
(Registrant's telephone number)
===============================================================================
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [_] No [_]*
*Registrant has not filed its Annual Report on Form 10-K for the year ended
December 31, 1997 nor its Quarterly Report on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 1998, but is filing it's Form 10-K current with the
filing of this report and the 1998 10-Qs shortly thereafter.
As of September 1, 1998, there were 9,599,525 shares of Common Stock
outstanding.
1
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AMENDED FILING OF FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1997,
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
Subsequent to the filing with the Commission of its Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, the Company became aware of
errors and irregularities that ultimately affected the dollar amount and timing
of reported revenues in the nine months ended September 30, 1997, in particular
transactions involving undisclosed arrangements or agreements with customers.
As a result of its investigation into these errors and irregularities, in
February 1998, the Company announced that it would restate its financial
statements for the three and nine months ended September 30, 1997. The
financial review undertaken by the Company to determine the extent of the
restatement ultimately resulted in the restatement of the Company's financial
results for each quarter in the nine months ended September 30, 1997.
Financial Statement and related disclosures contained in this amended
filing reflect, where appropriate changes to conform to the restatement.
INDEX
-----
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed, Consolidated Financial Statements as of June 30, 1997
and December 31, 1996 (Unaudited and Restated) 3
Condensed Consolidated Statements of Operations for the three
and six month periods ended June 30, 1997 and June 30, 1996 4
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 1997 and June 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Items 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------------ -------------------
(Restated)(1) (Restated)(2)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,211 $ 2,963
Short-term investments 7,025 13,100
Accounts receivable, net of allowance for
doubtful accounts of $785 in 1997 and $606 in 1996 11,520 10,070
Inventories 8,522 6,705
Prepaid expenses 695 506
------------------ -------------------
Total current assets 29,973 33,344
Property and equipment, net 3,381 2,547
Deposits and other assets 463 687
------------------ -------------------
Total assets $ 33,817 $ 36,578
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,181 $ 4,953
Accrued payroll and related expenses 588 1,089
Accrued warranty 929 331
Other accrued liabilities 2,019 1,635
Deferred revenue 1,316 1,162
Current portion of long-term debt 150 303
------------------ -------------------
Total current liabilities 11,183 9,473
Long-term debt, less current portion 147 178
------------------ -------------------
Total liabilities 11,330 9,651
------------------ -------------------
Stockholders' equity:
Common stock 10 10
Additional paid in capital 43,065 42,746
Accumulated deficit (20,008) (15,417)
Deferred compensation (340) (392)
Notes receivable from stockholder -- (20)
Cumulative translation adjustment (240) --
------------------ -------------------
Total stockholders' equity 22,487 26,927
------------------ -------------------
Total liabilities and stockholders' equity $ 33,817 $ 36,578
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
3
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RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------ ------------------------------------------
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
(Restated)(1) (Restated)(2) (Restated)(1) (Restated)(2)
<S> <C> <C> <C> <C>
Net revenues $ 11,152 $10,205 $22,717 $19,527
Cost of revenues 10,710 6,040 18,151 11,854
----------------- ----------------- ----------------- -----------------
Gross profit 442 4,165 4,566 7,673
----------------- ----------------- ----------------- -----------------
Operating expenses:
Research and development 1,181 1,310 2,745 2,244
Sales and marketing 2,595 1,642 4,614 3,224
General and administrative 895 473 1,837 918
Merger expenses -- -- 139 --
----------------- ----------------- ----------------- -----------------
Total operating expenses 4,671 3,425 9,335 6,386
----------------- ----------------- ----------------- -----------------
Operating (loss) income (4,229) 740 (4,769) 1,287
Other income, net 108 6 265 3
----------------- ----------------- ----------------- -----------------
(Loss) income before provision
for income taxes (4,121) 746 (4,504) 1,290
Provision for income taxes 81 66 87 158
----------------- ----------------- ----------------- -----------------
Net (loss) income $( 4,202) $ 680 $(4,591) $ 1,132
================= ================= ================= =================
Net (loss) income per
share - basic $( 0 .45) $0.10 $(0.49) $0.17
================= ================= ================= =================
Shares used in computing net
(loss) income per share - basic 9,392 6,566 9,338 6,525
================= ================= ================= =================
Net (loss) income per
share - diluted $( 0 .45) $0.09 $(0.49) $0.15
================= ================= ================= =================
Shares used in computing net
(loss) income per
share - diluted 9,392 7,650 9,388 7,581
================= ================= ================= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
4
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RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------------
1997 1996
----------------- ------------------
(Restated)(1) (Restated)(2)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $(4,591) $ 1,132
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation and amortization 602 464
Amortization of deferred compensation 52 --
Changes in operating assets and liabilities:
Accounts receivable (1,450) (1,086)
Inventories (1,817) (1,999)
Prepaid expenses and other assets 35 (385)
Accounts payable 1,228 2,238
Accrued payroll and related expenses (501) 186
Deferred revenue 154 88
Accrued warranty 598 119
Other accrued liabilities 384 (109)
------------- --------------
Net cash (used in) provided by operating activities (5,306) 648
------------- --------------
INVESTING ACTIVITIES
Capital expenditures (1,436) (581)
Net decrease in short-term investments 6,075 --
------------- --------------
Net cash provided by (used in) investing activities 4,639 (581)
------------- --------------
FINANCING ACTIVITIES
Proceeds from bank line of credit -- 250
Repayment of term loan (184) (180)
Repayment of note from shareholder 20 --
Proceeds from issuance of common stock 319 88
------------- --------------
Net cash provided by (used in) financing activities 155 158
------------- --------------
Effect of exchange rate changes on cash and
cash equivalents (240) --
------------- --------------
Net (decrease) increase in cash and cash equivalents (752) 225
Cash and cash equivalents at beginning of period 2,963 1,550
------------- --------------
Cash and cash equivalents at end of period $ 2,211 $ 1,775
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 56 $ 37
Cash paid for taxes $ 67 $ 80
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
5
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RASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
RESTATEMENT OF FINANCIAL STATEMENT
Subsequent to the filing with the Commission of its Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, the Company became aware of
errors and irregularities that ultimately affected the dollar amount and timing
of reported revenues in the nine months ended September 30, 1997. The
irregularities took numerous forms and were primarily the result of lack of
compliance with the Company's procedures and controls.
The Company undertook and completed extended procedures related to revenue
recorded in each of the three month periods in the nine months ended September
30, 1997. As a result of these findings and other relevant information now
disclosed, the Company has determined that a significant number and dollar
amount of revenue transactions were improperly reported as earned revenue for
these interim periods, including the three months and six ended June 30, 1997.
The Company has concluded that the earnings process for a significant
number of printer sales was not complete at the time of product shipment.
Further, the Company has determined that arrangements with a number of resellers
resulted in significant concessions or allowances that were not accounted for
when the revenue was originally reported as earned.
Because of the pervasiveness of these irregularities, for the nine months
ended September 30, 1997, the Company has determined that revenue from printer
sales should only be recognized in the quarter that shipment took place where
the Company received payment for the product by the end of the following
quarter, provided that the earnings process was complete. For transactions that
do not meet this criteria, revenue has been recognized on the receipt of payment
from the customer.
In addition, the Company has determined that its allowances for doubtful
accounts for each quarter in the nine months ended September 30, 1997 was
incorrectly estimated. The company has reviewed actual receipts since March 31,
1997 and has revised its estimated doubtful accounts.
The Company has also determined that its reserve for obsolete and excess
inventory for each quarter in the nine months ended September 30, 1997 was
incorrectly estimated. The Company has revised its estimate of expected printer
sales and accordingly has revised its estimate of excess and obsolete inventory.
As a result of this restatement, the financial statements shown under Item
1 in the Index of this Form 10-Q/A have been restated.
Three Months Ended
June 30, 1997
------------------------------------
(In thousands except per share data)
------------------------------------
As reported Restated
---------------- -------------
Net revenues $ 14,114 $ 11,152
Operating income (loss) 1,375 (4,229)
Income tax expense (benefit) 163 81
Net income (loss) 1,320 (4,202)
Net income (loss) per share $0.13 ($0.45)
Retained earnings (deficit) (13,128) (20,008)
Accounts Receivable, net 15,393 11,520
Inventory, net 10,597 8,522
Accounts payable 5,724 6,181
Other accrued liabilities 1,513 2,019
Deferred revenue 1,347 1,316
6
<PAGE>
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Raster Graphics, Inc. (the "Company" or "Raster Graphics")
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the audited financial statements included in the Company's Annual Report
and Form 10-K for the fiscal year ended December 31, 1996.
In the opinion of management the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited financial statements and include all recurring adjustments necessary for
a fair presentation of the interim periods presented. The operating results for
the six months ended June 30, 1997 are not necessarily indicative of the results
for any other interim period or the full fiscal year ending December 31, 1997.
The unaudited condensed consolidated financial statements also include
adjustments that eliminated all significant intercompany transactions and
balances between the Company and ColourPass, which was merged into the Company's
wholly owned subsidiary, Raster Graphics Systems Limited effective March 18,
1997, for relevant periods prior to the merger (see Note 7). All periods
presented have been restated to reflect the merger which has been accounted for
as a pooling of interests.
2. 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.
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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.
The Company classifies all of its investments as "available-for-sale" in
accordance with the provisions of Financial Accounting Standards Board Statement
No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, the Company states its investments at estimated fair value, with
material unrealized gains and losses reported in stockholders' equity. The cost
of securities sold is based on the specific identification method. Such
securities are anticipated to be used for current operations and are, therefore,
classified as current assets, even though maturities may extend beyond one year.
As of June 30, 1997, the Company has $7.0 million of investments in state
and municipal bonds. These state and municipal bonds bear interest at a rate
that automatically resets to the prevailing market interest rate at
approximately 35-day intervals. At June 30, 1997, substantially all the
available-for-sale securities have principal maturity dates of over ten years.
The gross unrealized gains and gross unrealized losses at June 30, 1997 were
immaterial to the Company and, therefore, no amounts were recorded to
stockholders' equity.
7
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4. 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>
June 30, 1997 (1) December 31, 1996 (2)
-------------------- -------------------------
<S> <C> <C>
Raw materials $5,344 $ 956
Work-in-progress 1,969 1,708
Finished goods 1,209 4,041
------------- ----------------
$8,522 $6,705
============= ================
</TABLE>
5. NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods presented have been
restated to conform to the Statement 128 requirements.
Pro forma net income (loss) per share for the six months ended June 30,
1997 and 1996 have been computed as described above and also gives effect, even
if antidilutive, to common equivalent shares from preferred stock that
automatically converted upon the closing of the Company's initial public
offering (using the as-if-converted method).
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------------------------
in thousands, except share data
-------------------------------------------------------------------------
1997 (1) 1996 (2) 1997 (1) 1996 (2)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share $ (4,202) $ 680 $ (4,591) $ 1,132
===================================================================
Denominator for basic earnings per share:
Weighted average common stock 9,392 663 9,338 632
Convertible preferred stock (pro forma 1996) -- 5,893 5,893
-------------------------------------------------------------------
Shares used in computing basic earnings per share
(pro forma 1996) 9,392 6,566 9,338 6,525
===================================================================
Basic earnings per share (pro forma 1996) $ (0.45) $ 0.10 $ (0.49) $ 0.17
Denominator for diluted earnings per share:
Weighted average common shares 9,392 663 9,338 632
Convertible preferred stock -- 5,893 5,893
Stock options and warrants 1,094 1,056
-------------------------------------------------------------------
Shares used in computing diluted earnings per share 9,392 7,650 9,338 7,581
===================================================================
Diluted earnings per share $ (0.45) $ 0.09 $ (0.49) $ 0.15
===================================================================
</TABLE>
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
8
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6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
Number 130, "Reporting of Comprehensive Income". This Statement requires that
all items that are to be required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
Statement is effective for fiscal years beginning after December 15, 1997, and
will be adopted by the Company for the year ended December 31, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
Number 131, "Disclosures About Segments of an Enterprise and Related
Information". This Statement replaces Statement Number 14 and changes the way
public companies report segment information. This Statement is effective for
fiscal years beginning after December 15, 1997 and will be adopted by the
Company for the year ended December 31, 1998.
In June 1988, the Financial Accounting Standards Board issued Statement
Number 133, "Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
inducing certain derivative instruments embedded in other contracts
(collectively referred to as derivative) and for hedging activities. This
statement is effective for fiscal years beginning after June 30, 1999 and will
be adopted by the Company for the year ended December 31, 2000.
7. MERGER
On March 18, 1997, the Company completed a merger with ColourPass, a
business in the United Kingdom, in which ColourPass was merged into Raster
Graphics System Limited, a wholly owned subsidiary of the Company.
The combination was accounted for as a pooling of interests. Accordingly,
the condensed consolidated statements of operations for the three and six months
ended June 30, 1997, and June 30, 1996, respectively, the balance sheets as of
June 30, 1997 and December 31, 1996, respectively, and all related footnotes
presented herein have been restated to include the accounts of Raster Graphics,
Inc. and ColourPass.
The table below sets forth the composition of combined revenues and net
income (loss) for the periods indicated (in thousands). Merger related expenses
of $105,000 and $34,000 incurred in the first quarter of 1997 were included in
the Raster Graphics, Inc. and ColourPass net income, respectively.
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------------------- -----------------------------------
June 30, June 30, June 30, June 30,
1997 (1) 1996 1997 (1) 1996
--------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Revenues
Raster Graphics, Inc $10,325 $ 9,560 $21,316 $18,151
ColourPass 827 645 1,401 1,376
--------------------------------- -----------------------------------
Combined $11,152 $10,205 $22,717 $19,527
================================== ===================================
Net Income (loss)
Raster Graphics, Inc $(4,312) $ 712 $(4,804) $ 1,201
ColourPass 110 (32) 213 (69)
--------------------------------- -----------------------------------
Combined $(4,202) $ 680 $(4,591) $ 1,132
================================== ===================================
</TABLE>
(1) see footnote 1
8. PENDING LITIGATION
Commencing in March 1998 several class action lawsuits were filed in both
state and federal courts purportedly on behalf of shareholders who purchased the
Company's stock during various periods in 1997 through early 1998. The
complaints name as defendants the Company and its Chairman, Chief Executive
Officer and President, and certain other officers and directors. The complaints
allege, among other things, violation of federal securities laws and that
defendants made false and misleading statements in press releases, SEC filings
and/or other public statements and seek unspecified damages. The litigation
could result in substantial costs and a diversion of management's attention and
9
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resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is a party to a number of legal claims arising in the ordinary
course of business. The Company believes the ultimate resolution of the claims
will not have a material adverse effect on its financial position, results of
operation, or cash flow.
9. SUBSEQUENT EVENTS
The Company has entered into an Agreement and Plan of Merger with Gretag
Imaging Group, Inc. ("Gretag") for the acquisition of the Company for
approximately $1.30 per share (the "Merger"). The Company has also entered
into a Loan and Pledge Agreement and Asset and Subsidiary Stock Option
Agreement and certain of its stockholders have entered into a Stockholders
Agreement with Gretag. Pursuant to the Loan and Pledge Agreement, Gretag is
providing the Company a loan facility secured by 100% of the issued stock of
Onyx, a wholly owned subsidiary of the Company. The Company may draw down
amounts together with accrued interest of up to $5,000,000. The first
installment of $500,000 was received by the Company on September 23, 1998. In
addition, Gretag has the option to purchase up to $5,000,000 of the Company's
Common Stock in exchange for forgiving the loan and paying the balance in
cash. Pursuant to the Asset and Subsidiary Stock Option Agreement, (i) if the
Agreement and Plan of Merger is terminated, Gretag has the option to acquire
Onyx for $5,000,000 less the amount drawn down under the loan facility, or
(ii) if the Company's stockholders do not vote in favor of the Merger, if the
Company accepts a superior offer to sell the Company or upon certain other
events, Gretag has the option to acquire the Company's inkjet technology for
$6,000,000 less the amount drawn down under the loan facility. Pursuant to the
terms of the Stockholders Agreement, stockholders of the Company holding
approximately 20% of the Company's outstanding Common Stock have agreed to
vote in favor of the Merger and against any other proposal to acquire the
Company. The Merger and the Agreement and Plan of Merger requires stockholder
approval and consummation of the Merger is conditioned upon settlement of the
class action lawsuits against the Company.
In August 1998 the Company entered into a mutual release agreement with
Marc Willard, an officer of the Company. In consideration for Mr. Willard's
full release relating to the Company's acquisition of ColourPass (of which Mr.
Willard was an 80% partner), the parties agreed to a cash bonus of $70,000, a
cash payment of $200,000 upon the acquisition of the Company, and a stock option
grant of 175,000 shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in Part I -- Item 1
of this Quarterly Report and the audited financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report and Form 10-K for the fiscal
year ended December 31, 1996.
As a result of the restatement of the Company's financial statements for
each quarter in the nine months ended September 30, 1997 certain information
contained in this item has been changed from that which appeared in the
Company's originally filed form 10-Q for the quarterly period ended June 30,
1997.
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 large format
digital printing ("LFDP") market as a new opportunity to develop a product based
on its proprietary high-speed printhead technology. As a result, in 1993 the
Company shifted its product focus and began to develop the DCS 5400, an
electrostatic printer, specifically for the LFDP market. The Company began
shipping the DCS 5400 in July 1994. The Company began commercial production of
the DCS 5442 in January 1996 as a second generation to the DCS 5400. By
September 1996, the DCS 5442 substantially replaced the DCS 5400. In December
1996, the Company introduced the PiezoPrint(TM) 1000, an inkjet printer
manufactured by a third party, that is targeted at the lower priced entry level
production market. In March 1997, the Company introduced the PiezoPrint(TM) 5000
as a mid-range, price/performance inkjet printer to complement the affordable
PiezoPrint(TM) 1000 inkjet printer and the high production DCS 5442. Although
the Company has no current plans to replace any printer in its current line of
products, the future success of the Company will likely depend on its ability to
continue to develop market leading products for the production segment of the
LFDP market.
In order to provide a complete digital printing solution to its customers,
the Company began shipping Onyx's image processing software with its digital
printers in July 1994. Onyx develops and markets image processing software for
the Company's digital 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
10
<PAGE>
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 that it acquires from third party suppliers and resells under the
Raster Graphics name for use in the Company's digital printers. The sale of
consumables generates recurring revenues, which the Company believes will
continue to increase to the extent that the installed base of printing systems
expands. As the Company develops new printers, it may need to develop new
consumables to be used by its new printer products.
In the United States, Raster Graphics also derives revenues from
maintenance contracts on installed systems and printers, including 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 not recognized until products have been shipped and all
contingencies have been removed. As a result of the discovery of irregularities,
the Company has assumed that for the three months ended in March 31, 1997, such
contingencies exist on printer shipments unless payment was received by the end
of the following quarter, provided that the earning process was completed. For
transactions that do not meet this criteria, revenue has been recognized on the
receipt of payment (see footnote to the Condensed Consolidated Financial
Statements).
Cost of revenues includes materials, labor, overhead and software
royalties. Cost of revenues as a percentage of revenue varies depending upon
the revenue mix generated through end user, OEM, VAR and distributor sales, and
the revenue mix generated from Onyx software license fees, 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. Raster
Graphics believes that research and development expenses will continue to
increase in absolute dollar amounts and may increase as a percentage of
revenues.
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, 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 continue to develop its domestic and international sales and
marketing organizations. 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 revenues.
The Company has established a customer finance program to provide customers
with financing options for Raster Graphics printing systems. Third party
financial partners will take title of the equipment and manage the financial
portfolio.
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, 1997, the Company had an accumulated deficit of $20.0
million. Although the Company was marginally profitable in 1995 and 1996, there
can be no assurance that the Company will be profitable in the future.
RESULTS OF OPERATIONS
11
<PAGE>
ColourPass merged into Raster Graphics Systems Limited, a wholly owned
subsidiary of the Company, on March 18, 1997. The merger has been accounted for
as a pooling of interest, and accordingly, the financial results presented have
been restated to include ColourPass.
The following table sets forth certain restated consolidated statements of
operation data as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 96.0 59.2 79.9 60.7
-------------- -------------- --------------- --------------
Gross profit 4.0 40.8 20.1 39.3
-------------- -------------- --------------- --------------
Operating expenses:
Research and development 10.6 12.8 12.1 11.5
Sales and marketing 23.3 16.1 20.3 16.5
General and administrative 8.0 4.6 8.1 4.7
Merger expenses - - 0.6 -
-------------- -------------- --------------- --------------
Total operating expenses 41.9 33.5 41.1 32.7
-------------- -------------- --------------- --------------
Operating (loss) income (37.9) 7.3 (21.0) 6.6
Other income, net 0.9 - 1.2 -
-------------- -------------- --------------- --------------
(Loss) income before provision for income (37.0) 7.3 (19.8) 6.6
taxes
Provision for income taxes 0.7 0.6 0.4 0.8
-------------- -------------- --------------- --------------
Net (loss) income (37.7) 6.7 (20.2) 5.8
============== ============== =============== ==============
</TABLE>
Net Revenues. Net revenues for the three and six months ended June 30,
1997 were $11.2 million and $22.7 million, respectively, an increase of 9.3% and
16.3%, respectively, over the comparable periods of fiscal 1996. The increase
can be attributed to the growth in sales of printer systems following the
introduction of the PiezoPrint(TM) 1000 in December 1996, and the PiezoPrint(TM)
5000 in March 1997, increased sales by the Company's United Kingdom and German
subsidiaries, and the increase in sales of consumables.
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
manage growth, if any.
International sales, which include export sales and direct sales of the
Company's German and United Kingdom operations, were $6.0 million and $13.0
million for the three and six months ended June 30, 1997, respectively. These
sales represented 53.6% and 57.3% of net revenue for the three and six months
ended June 30, 1997, respectively. The increase in international sales was a
result of increased international customer acceptance of the Company's printer
systems, and increased sales made by the Company's German and United Kingdom
subsidiaries. Sales made by the Company's German and United Kingdom
subsidiaries are denominated in 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 of foreign sales subject to fluctuations in exchange rates.
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.
Gross Profit. The Company's gross profit for the three and six months
ended June 30, 1997 was $442,000 and $4.6 million, respectively, a decrease of
89.4% for the three month period and a decrease of 40.5% over the comparable
periods of fiscal 1996. The decrease in gross profit for the three and six
months ended June 30, 1997 as compared to the same period in 1996 was primarily
the result of an increase in obsolete and excess inventory reserve balances
following a revision in the Company's estimate of future printer sales. Gross
profit represented 4.0% and 20.1% of net revenue for
12
<PAGE>
the three and six months ended June 30, 1997, respectively, decreasing from
40.8% and 39.3% for the comparable periods of fiscal 1996, respectively.
The Company's future level of gross profit will depend on a number of
factors, including its ability to manage product mix, 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 for the three
months ended June 30, 1997 were $1.2 million, a decrease of 9.8% in comparison
to the three months ended June 30, 1996. This decrease is attributed to a
significant level of material purchases for prototype development of the
PiezoPrint(TM) products during the second quarter of fiscal 1996. Research and
development expenses for the six months ended June 30, 1997 were $2.7 million,
an increase of 22.3% in comparison to the six months ended June 30, 1996. This
increase in research and development expenses for the first six months was
primarily due to product development expenses associated with the launch of the
new PiezoPrint(TM) 5000 inkjet printer during the first quarter of fiscal 1997.
The Company intends to continue to dedicate substantial resources to research
and development activities to maintain its leadership in the LFDP market. The
Company intends to expand its product lines, including printers, to achieve
lower price points and higher image quality, and to enhance its PosterShop image
processing software. Accordingly, the Company believes that research and
development expenses will continue to increase in the future.
Sales and Marketing. Sales and marketing expenses for the three months
ended June 30, 1997 were $2.6 million, an increase of 58.0% in comparison to the
three months ended June 30, 1996. Sales and marketing expenses for the six
months ended June 30, 1997 were $4.6 million, an increase of 43.1% in comparison
to the six months ended June 30, 1996. As a percentage of net revenues, sales
and marketing expenses were 23.3% and 20.3% for the three and six months ended
June 30, 1997, respectively, as compared to 16.1% and 16.5% for the comparable
period of fiscal 1996. The increase in sales and marketing expenses was
primarily a result of tradeshow expenses associated with the promotion of the
new PiezoPrint(TM) products and the expansion of the Company's domestic and
international sales force. The Company expects to continue to increase its sales
and marketing expenses in an effort to expand domestic and international
markets, introduce new products, and establish and expand new distribution
channels.
General and Administrative. General and administrative expenses for the
three months ended June 30, 1997 were $895,000, an increase of 89.2% in
comparison to the three months ended June 30, 1996. General and administrative
expenses for the six months ended June 30, 1997 were $1.8 million, an increase
of 100.1% in comparison to the six months ended June 30, 1996. As a percentage
of net revenues, general and administrative expenses were 8.0% and 8.1% for the
three and six months ended June 30, 1997, respectively, as compared to 4.6% and
4.7% for the three and six months ended June 30, 1996. The increase in absolute
dollars reflected the increased cost of operating as a public company, an
increased reserve for bad debt, and an increase in staffing. The Company
believes that its general and administrative expenses will increase as the
Company continues to build its infrastructure.
Merger Expenses. On March 18, 1997, the Company completed a merger with
ColourPass, a business in the United Kingdom. Approximately $139,000 of expense
was incurred in connection with this transaction.
Provision for Income Taxes. The Company's effective tax rate on the
consolidated pretax loss for the three and six month periods ended June 30, 1997
is (2%), compared to an effective rate of 9% and 12% on consolidated pretax
income for the three and six month periods ended June 30, 1996, respectively.
The tax provision for the three and six months ended June 30, 1997 results from
taxes on income in foreign jurisdictions despite an overall loss. The effective
tax rates for the three and six months ended June 30, 1996 differ from the
statutory rate primarily due to the tax benefit of utilizing net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
its initial public offering of common stock, private sales of preferred stock
and common stock, issuance of convertible debt, bank loans, equipment lease
financing and private loans. At June 30, 1997, the Company had $9.2 million of
cash, cash equivalents and short-term investments, a decrease of $6.9 million
from the December 31, 1996 balance of $16.1 million. The Company also had
available a $5.0 million bank line of credit that expires on December 14, 1997,
which is secured by the tangible assets of the Company. At June 30, 1997, there
were no borrowings outstanding under the bank line of credit.
13
<PAGE>
Net cash used in operating activities during the first six months of fiscal
1997 was $5.3 million due primarily to increases in accounts receivable of $1.5
million and inventory of $1.8 million. Accounts receivable increased because of
the high volume of shipments made towards the end of the quarter. Inventory
levels, specifically consumables and finished goods, were increased to support
the potential shift in product mix following the introduction of the
PiezoPrint(TM) 1000 in December 1996 and the PiezoPrint(TM) 5000 in March 1997.
During the six month period ended June 30, 1997 the Company paid
approximately $1.4 million for capital expenditures compared to $581,000 for the
same period of the prior year.
To finance the working capital needs and the purchase of capital equipment,
the Company reduced its short-term investments. Other financing activities
principally consisted of cash received from the exercises of incentive stock
options and employee stock purchase plan in the amount of $319,000 offset by the
repayment of term loans in the amount of $184,000 for the six months ended June
30, 1997.
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 is also evaluating other options
including mergers and acquisitions. 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.
As part of its business strategy, the Company expects to make acquisitions
of businesses that offer complementary products, services and technologies.
Future acquisitions will be accompanied by the risks commonly encountered in
acquisitions of businesses. Such risks include, among other things, the
difficulty of assimilating the operations and personnel of the acquired
businesses, the potential disruption of the Company's ongoing business, the
inability of management to maximize the financial and strategic position of the
Company, the maintenance of uniform standards, controls, procedures and policies
and the impairment of relationships with employees and clients as a result of
any integration of new management personnel. These factors could have a material
adverse effect on the Company's business, results of operations or financial
condition. Consideration paid for future acquisitions, if any, could be in the
form of cash, stock, rights to purchase stock or a combination thereof.
Dilution to existing stockholders and to earnings per share may result to the
extent that shares of stock or other rights to purchase stock are issued in
connection with any such future acquisitions.
FORWARD LOOKING STATEMENTS
The Company notes that certain of the foregoing statements in this report
are forward-looking, the accuracy of which is necessarily subject to risks and
uncertainties. Actual results may differ materially from the statements made
due to a variety of factors including, but not limited to, (i) fluctuations in
quarterly results, (ii) risk related to international operations, (iii)
competitive products and technologies, (iv) ability of the Company to upgrade
its technologies and commercialize products, and (v) other risk factors
described in the Company's Annual Report and Form 10-K for the year ended
December 31, 1996, and such other documents that are filed from time to time
with the Securities and Exchange Commission.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Commencing in March 1998 several class action lawsuits were filed in
both state and federal courts purportedly on behalf of shareholders who
purchased the Company's stock during various periods in 1997 through early 1998.
The complaints name as defendants the Company and its Chairman, Chief Executive
Officer and President, and certain other officers and directors. The complaints
allege, among other things, violation of federal securities laws and that
defendants made false and misleading statements in press releases, SEC filings
and/or other public statements and seek unspecified damages. The 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.
The Company is a party to a number of legal claims arising in the
ordinary course of business. The Company believes the ultimate resolution of
the claims will not have a material adverse effect on its financial position,
results of operation, or cash flow.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1. The 1997 Annual Meeting of Stockholders of the Company was held pursuant to
notice at 1:30 p.m., Pacific time on June 3, 1997 at the Company's offices in
San Jose, California. There were present at the meeting, in person or
represented by the proxy, the holders of 6,620,244 shares of Common Stock. The
matters voted on at the meeting and the votes cast are as follows:
(a) As listed below, all the Management's nominees for Class I Directors
were elected at the meeting:
No. of Common No. of Common
Name of Nominee Votes in Favor Votes Withheld
--------------- -------------- --------------
Rakesh Kumar 6,600,944 19,300
Delbert W. Yocam 6,600,889 19,355
(b) The appointment of Ernst & Young LLP as independent public accountants
of the company for the fiscal year ending December 31, 1997 was ratified and
approved with 6,610,635 Common shares voting in favor, 2,600 Common shares
voting against and 7,009 Common shares abstaining.
ITEM 5. OTHER ITEMS
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See exhibit index on page 17
(b) Reports on Form 8-K: None
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RASTER GRAPHICS, INC.
By: /s/ Rak Kumar
---------------------------------
Rak Kumar
Chief Executive Officer
Date: October 2, 1998
16
<PAGE>
EXHIBIT INDEX
-------------
EXHIBITS
- --------
10.14 Assignment of Lease, dated June 27, 1997, by and between Kaman
Music Corporation, Coast Wholesale Music Division, and the
Registrant (1)
27.1 Financial Data Statement
___________
(1) Incorporated by reference to exhibits of the Registrant 10-Q for the
quarter ended June 30,1997.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,211
<SECURITIES> 7,025
<RECEIVABLES> 12,305
<ALLOWANCES> 785
<INVENTORY> 8,522
<CURRENT-ASSETS> 29,973
<PP&E> 7,969
<DEPRECIATION> 4,588
<TOTAL-ASSETS> 33,817
<CURRENT-LIABILITIES> 11,183
<BONDS> 147
43,075
0
<COMMON> 0
<OTHER-SE> 20,588
<TOTAL-LIABILITY-AND-EQUITY> 33,817
<SALES> 11,152
<TOTAL-REVENUES> 11,152
<CGS> 10,710
<TOTAL-COSTS> 10,710
<OTHER-EXPENSES> 4,671
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,121)
<INCOME-TAX> 81
<INCOME-CONTINUING> (4,202)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,202)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
