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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3025 ORCHARD PARKWAY
SAN JOSE, CA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 232-4000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
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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 than the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [ ] NO [X]*
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $2,507,664.38 as of September 1, 1998, based upon
the closing sale price on the over-the-counter "Pink Sheets" of the National
Quotation Bureau, LLC reported for such date. Shares of Common Stock held by
each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
9,599,525 shares of the registrant's Common Stock were issued and
outstanding as of September 1, 1998.
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* Registrant has not filed its Quarterly Report on Form 10Q for the quarters
ended March 31, 1998 and June 30, 1998
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INTRODUCTORY STATEMENT
Except for the historical information contained in this Annual Report on
Form 10-K, certain of the matters discussed herein are forward-looking
statements that are subject to certain risks and uncertainties. Actual results
could differ materially from those projected. Factors that could cause actual
results to differ materially include, but are not limited to, (i) fluctuations
in quarterly results, (ii) competitive products and technologies, (iii)
ability of the Company to upgrade its technologies and commercialize its
products, and (iv) other risks detailed below under the heading "Risk Factors"
and included from time to time in the Company's other SEC reports and press
releases, copies of which are available from the Company upon request. The
Company assumes no obligation to update any forward-looking statements
contained herein.
"PiezoPrint" and "PosterShop" are trademarks of the Company, and all of the
Company's other product names are trademarks of the Company. This Report also
includes trademarks of companies other than Raster Graphics. Unless the
context indicates otherwise, reference in this Report to the "Company" refers
to Raster Graphics, Inc. and its consolidated subsidiaries.
On February 26, 1998 the Company announced its financial results for the
year ended December 31, 1997. The Company reported revenue of $54.7 million,
gross profit of $19.5 million, operating expenses of $20.6 million and a net
loss of $1.2 million for fiscal 1997. On April 1, 1998 the Company announced
that it would revise its 1997 financial results.
In March 1998, after consultation with its independent accountants, the
Board of Directors of the Company performed a review of the Company's
accounting and business practices. By mid-April the Board of Directors became
aware of pervasive errors and irregularities that ultimately affect the dollar
amount and timing of reported revenues in 1997. The Board of Directors
instructed that an analysis be conducted on these matters.
The irregularities took numerous forms and were primarily the result of a
lack of compliance with the Company's procedures and controls. The Company has
concluded that the earnings process for a significant number of printer sales
were not complete at the time of 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.
In addition, the Company has determined that its allowances for doubtful
accounts receivable balances and excess and obsolete inventory, and the
realizable value of inventory and the goodwill recorded on the acquisition of
Datagraph have been incorrectly estimated.
As a result, for the year ended December 31, 1997, the Company reversed
recorded revenues of $5.8 million, recorded additional cost of revenue of $7.6
million, and additional operating expenses of $4.6 million. In addition, the
Company has restated its previously reported results for each interim period
in the nine months ended September 30, 1997.
The Company has also restated the net assets purchased on the acquisition of
Datagraph, a distributor of large format digital printer (LFDP) systems in
France. The original figures were based on an estimate, which has since been
revised to reflect actual values. In particular, an intangible asset of
$1,420,000 was initially recorded and was revised to $1,211,000. This
intangible asset was written off in the fourth quarter of 1997 following a
revision to the Company's sales forecasts. In addition, based on recent
developments, it is likely that Datagraph will commence bankruptcy proceedings
in the near term and cease operations.
The Company's policy for recognizing revenue is as follows:
Revenue from product sales is recognized upon the later of shipment,
acceptance of the product by the customer, or when payment from the
customer is assured. In particular, where the Company has made arrangements
with customers, such as resellers, that have resulted in contingencies or
allowances after the product has shipped, revenue is recognized once the
contingency has been removed and cash collection is assured.
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Further, where a customer has obtained financing through a third party
broker, revenue is not recognized until the finance agreement is in place
and the product has been accepted by the customer.
Revenue under maintenance contracts is recognized ratably over the term
of the related contract, generally twelve months.
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. (See Notes to the Consolidated
Financial Statements for a description of amounts payable on a change in
control.)
PENDING LITIGATION
Commencing in March 1998 several class action lawsuits have been filed in
both state and federal courts purported by on behalf of stockholders 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.
PART I
ITEM 1. BUSINESS.
Overview
Raster Graphics develops, manufactures and markets high-performance, large
format, digital color printing systems, and sells related consumables and
software for the on-demand large format digital printer ("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 Point of Purchase (POP) signs, trade
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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' printing systems are
color photo labs, reprographic houses, graphic arts service bureaus, exhibit
builders, digital color printers, screen printers and in-house print shops.
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 May 1997 Wide Format Digital Color Printing report by IT Strategies, a
printing industry market research firm (IT Strategies), the production segment
of the LFDP market is projected to grow more rapidly from estimated annual
sales of approximately $1.4 billion in 1997 to approximately $3.7 billion in
2000.
The anticipated growth of the LFDP market is being driven by a variety of
factors, including:
. 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.
. Desktop Publishing. 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, Point of Purchase ("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.
TRADITIONAL PRINTING METHODS
Prior to the availability of LFDP technology, graphic printing methods were
limited to the following three categories:
. 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
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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, an 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.
PRINTING METHODS' CAPABILITIES
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.
Currently, there are two primary methods of digital printing, electrostatic
and inkjet. Electrostatic printheads 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 inks as the printhead moves horizontally in a
scanning-type process.
<TABLE>
<CAPTION>
HIGH IMAGE ON- SHORT OUTDOOR
METHOD QUALITY* DEMAND RUNS APPLICATIONS
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<S> <C> <C> <C> <C>
LFDP................................. X X X X
Photograph........................... X X X
Screen............................... X X
Offset............................... X X
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* 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.
RASTER GRAPHICS' SYSTEM SOLUTION
Raster Graphics offers complete printing system solutions to meet the
demands of the on-demand production LFDP market. RGI's 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.
Raster Graphics' product offerings consist of its electrostatic Digital
ColorStation ("DCS") printers and its PiezoPrint inkjet printers, integrated
image processing software and related consumables and services. Key benefits
of RGI's 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
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believes is significantly faster than printers in a comparable price class.
Runs of up to 200 prints can be easily produced in a single shift. The
PiezoPrint 5000, one of the fastest large-format continuous-feed inkjet
printer available, can print 340 square feet per hour in draft mode, 180
square feet per hour in standard mode and 90 square feet per hour in enhanced
mode. Its printing technology employs three printheads per color for a total
of 384 nozzles per color, which gives it the ability to print at production
speeds. In standard mode, using the PiezoPrint 5000, a user can print 120 (3-
foot by 4-foot) posters in one 8-hour shift. The PiezoPrint 1000 prints at up
to 17 square feet per hour.
Low Cost for Short Runs. Primary job costs of RGI's printing systems are
variable and are principally composed of relatively low cost consumables. 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 its printing systems provide a
cost-effective solution for color printing runs of up to 200 copies.
Targeting and Customizing or "Narrowcasting." RGI's 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. RGI's printing systems offer adjustable
printing modes allowing utilization of the same system for different levels of
image quality to meet the needs of both close-up graphics and distance-viewed
graphics.
Raster Graphics has received eight highly acclaimed industry awards for its
contribution to digital printing technology. Most recently, the Company's
PiezoPrint 5000 received the Digital Printing and Imaging Association's "1997
Product of the Year" award, a Seybold Seminars 1997 "Hot Pick" award, and
Digital Graphics Magazine 1997 "Trailblazer" award. In addition, 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.
STRATEGY
Raster Graphics' objective is to become 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 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.
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.
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Core Technologies. Raster Graphics plans to utilize its technological
expertise to expand its product offerings. The Company has expertise in a
number of core technologies, including knowledge of complex printhead 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.
PRODUCTS
Raster Graphics DCS Printer. RGI's DCS 5442 utilizes electrostatic
technology to print on roll stock and is capable of producing 54-inch wide
graphics, in lengths of up to 100 feet. 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.
Raster Graphics, in its DCS 5442 printer, offers the following innovative
features to satisfy the requirements of the LFDP market:
. High Performance Using Non-Multiplexed Writing. Raster Graphics'
patented, non-multiplexed printhead, 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 printhead
images across the width of the paper one segment at a time.
. Five Color Capability. The DCS 5442 printer utilizes 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 5442 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 with System Software. The DCS 5442 permits 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.
It is the Company's intent to continue actively marketing and selling the
DCS 5442 printer.
Raster Graphics PiezoPrint Product Family. Raster Graphics markets a line of
digital color inkjet printers, supplies and accessories which are targeted at
the production-oriented digital printing environment. Both the PiezoPrint 1000
and PiezoPrint 5000 printers offer several significant features:
. Piezo Printhead Technology. The Piezo printhead technology differs from
conventional thermal inkjet technology in that heat is not used to produce
the bubble which propels the drop of ink needed for
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printing. PiezoPrint printheads utilize piezoelectric crystal technology
which produces ink droplets by force. The piezoelectric crystal changes
shape when electrically stimulated, squeezing a droplet out of the nozzle
to form a pixel.
. UV-Stable Pigmented Ink. The Piezo family of printers can utilize UV-
stable pigmented ink to produce prints which are sufficiently durable and
light resistant to be used outdoors.
. PosterShop Color Production Software. PosterShop color production
software is integrated in all PiezoPrint printers and provides users a
flexible and easy-to-use interface.
Raster Graphics PiezoPrint 1000 Inkjet Printing System. In December 1996, the
Company introduced the PiezoPrint 1000, a more affordable inkjet printer
targeted at the entry level market. In addition to its lower price point, the
PiezoPrint 1000 also offers significant performance features:
. Easy Setup and Initial Operation. The PiezoPrint 1000 and the
accompanying PosterShop Pro software are designed so that a typical user
can install the complete system and begin production printing in less than
one hour.
. Media Versatility. Users can select from a variety of media including
bond paper, photo-gloss, opaque and backlit film, banner tyvik, canvas and
adhesive-backed vinyl, for both indoor and outdoor applications. Such
media can be up to 52 inches in width, thereby providing a full 50 inches
of printable area. When using the optional take-up feeder, the available
print length of the PiezoPrint 1000 is limited only by the length of the
media.
. High Resolution. The PiezoPrint 1000 is capable of printing at
resolutions of up to 720 dpi.
It is the Company's intent to discontinue actively marketing and selling the
PiezoPrint 1000 in 1998 when existing inventory has been exhausted. The
Company has no current plans to replace the PiezoPrint 1000 with another entry
level printer. The Company intends to provide service and consumables to
existing PiezoPrint 1000 customers through a third party service provider.
Raster Graphics PiezoPrint 5000 Inkjet Printing System. In March, 1997, the
PiezoPrint 5000 joined the Raster Graphics family of production-oriented
large-format digital printing systems. Fitting comfortably in the mid-range of
price/performance between the affordable PiezoPrint 1000 inkjet printer and
the high-volume Digital ColorStation 5442 electrostatic digital press, the
PiezoPrint 5000 is a complete production system for the professional print
provider. The PiezoPrint 5000 offers the following features:
. Inking System. Ink reservoirs hold 32 ounces of UV-resistant pigment-
based colors.
. Diagnostics. Productive workflow is ensured by the printer's built-in
PiezoRx technology, which, after a misfiring nozzle is identified by the
operator, automatically allows the user to compensate for it by directing
other nozzles to fire.
. Media. Several media are available for the PiezoPrint 5000, including
high-quality bond paper for indoor applications, moisture-resistant bond
for outdoor applications, adhesive and banner vinyls, and backlit film.
Additional media will be added as they are qualified.
. Color Consistency. Piezo printing technology generally provides greater
reliability of color consistency because it is not susceptible to the heat
buildup common in thermal inkjet technology which can cause perceptible
color shifts. In addition, Piezo printheads are designed to last longer
than thermal heads and to provide increased printer reliability, which
translates into greater uptime.
. Six Color Capability. In addition to the standard four-color cyan,
magenta, yellow and black (CMYK), the PiezoPrint 5000 is capable of an
expanded color gamut by using fifth and sixth ink stations.
The Company and its customers have experienced operational issues with the
PiezoPrint 5000. The Company received printheads from its sole-source supplier
which displayed quality problems after shipment of the printer to customer
sites. During 1997, it was necessary for the Company to correct the problems
by
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replacement of faulty printheads as a field upgrade as well as returning
printers to Raster Graphics for a factory upgrade. The Company believes that
the upgrade of faulty printheads will continue into 1998.
In addition, during the development of consumables for the PiezoPrint 5000,
the Company found that oil-based inks used in this printer had certain
limitations which did not allow the Company to develop a photogloss media
which was compatible with the printer. This lack of a photogloss media limited
the market acceptance of the printer.
Print System Software. The Company's PosterShop printer 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 PC server. The PosterShop software allows
clients to prepare printing jobs and send them to the server. 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.
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 "What You See is What You Get" ("WYSIWYG") display also
provides an 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, 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 Fixed Dot Random Placement (FDRP), a
patented Onyx dot pattern. A font manager is included to add special fonts
to the RIP.
Inkjet Image Processing Software. In addition to the PosterShop software
sold with RGI's printing systems, the Company offers specialized versions of
PosterShop to other inkjet printer manufacturers and distributors under the
Onyx brand name.
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,
films, indoor and outdoor papers and laminates.
The specialized toners and inks, concentrates and varnish are created
specifically for the DCS and PiezoPrint products to optimize image quality and
printer performance. The Company currently offers over 200 different
9
<PAGE>
configurations of toner and ink, concentrate and varnish products. Toner, 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.
Raster Graphics markets 30 different types of specially coated medias for
use in its electrostatic and inkjet printer products, some of which are
offered in various widths to meet market applications requirements. The
Company also continues to supply paper and ink products for its discontinued
printer products.
In addition, during the development of consumables for the PiezoPrint 5000,
the Company found that oil-based inks used in this printer had certain
limitations which did not allow the Company to develop a photogloss media
which was compatible with the printer. This lack of a photogloss media limited
the market acceptance of the printer.
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 Raster Graphics has also developed a
state-of-the-art maintenance manual for its printers that resides on a laptop
computer and is interactive with the printer. Using the laptop computer, the
field engineer or trained distributor can diagnose and test the various
components of the printer.
In the United States, Raster Graphics provides installation and 90-day on-
site warranty support for the DCS 5442 and PiezoPrint 5000, and a one year
parts warranty for the PiezoPrint 1000. 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 13 key locations across the United States.
Internationally, Raster Graphics provides 90-day (12 months for printhead)
return-to-factory parts warranty. Maintenance service is provided by
authorized dealers and distributors.
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 printing systems are targeted for the high performance
production electrostatic and inkjet segment of the on-demand large format
digital printing market. According to IT Strategies, in June, 1998, the
potential professional channels which produce and supply wide format digital
printing to business customers on a print-for-pay basis are:
<TABLE>
<CAPTION>
ESTIMATED
NUMBER OF
MARKET SEGMENT SITES
-------------- -------------
<S> <C>
Quick Printers.............................................. 3,000-7,000
Sign Shops.................................................. 2,000-4,000
Screen Printers............................................. 6,640-10,240
Color Photo Labs............................................ 975-1,040
Exhibit Builders............................................ 1,600
Digital Color Print Shops................................... 2,500
Graphic Arts Service Bureaus................................ 2,160-2,880
-------------
Total..................................................... 14,775-29,260
</TABLE>
IT Strategies estimates the worldwide annual sales of professional large
format color printers (professional inkjet and electrostatic) were 21,140
units or $308 million in 1997 and are projected to grow to 48,079 units or
10
<PAGE>
$290 million in 2002. In addition, sales of consumables (inks, varnish,
papers, vinyls, and other substrates) were $287 million in 1997 and are
projected to grow to $5.3 billion in 2002. IT Strategies estimates the retail
valuation of print output in 1997 was $11.4 billion, and is projected to grow
to $18.5 billion in 2002.
The major markets and applications for LFDP are as follows:
--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-
--Sports/Concert/Event Graphics ins
--Custom Commercial Wallpaper
CUSTOMERS, SALES AND MARKETING
Raster Graphics sells complete printing systems, printers and PosterShop
image processing software to customers both internationally and domestically.
To address these customers, the Company has adopted a dual distribution
strategy that encompasses both a direct sales organization and third-party
distributors, including original equipment manufacturers ("OEMs") and value
added resellers ("VARs").
In the United States, Raster Graphics has traditionally employed a direct
sales force. These individuals sold DCS and PiezoPrint 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. This sales force also assisted 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.
More recently, the Company has changed its sales strategy to increased focus
on the indirect sales channel and has begun to recruit a select number of
dealers and distributors to market its inkjet products in the United States.
Internationally, the Company sells and supports its products through the
direct sales efforts of its European subsidiaries and through non-exclusive
agreements with a number of distributors. In 1995, the Company formed a
wholly-owned subsidiary in Germany to support the existing German
distributors. As of August 1996, this subsidiary began to directly sell DCS
printing systems, DCS printers and consumables to the Company's German
customers. In March 1997, the Company merged with ColourPass Technologies, a
leading distributor of printing systems for the LFDP market in the United
Kingdom. In September 1997, the Company acquired Datagraph, a distributor in
France of LFDP systems. In addition, based on recent developments, it is
likely that Datagraph will commence bankruptcy proceedings in the near term
and cease operations.
In addition to marketing its products in the United States and Europe,
Raster Graphics also sells its products in a number of other countries through
distributors and VARs. Raster Graphics also sells stand-alone printer products
to international OEMs and systems integrators/VARs. These customers integrate
these printers with an image processing system.
In addition, the Company 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 Ahearn & Soper and Casey Johnson. The Company employs a
dedicated sales force located in Salt Lake City, Utah to work with these
inkjet customers.
The Company promotes its products through public relations, direct mail,
advertising, trade shows and on-going customer communication programs. The
Company utilizes telemarketing programs to market consumables
11
<PAGE>
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.
Uncertainty Regarding Asian and Latin American Markets
A significant number of the Company's customers and suppliers are based in
Asia and Latin America. The financial instability in these regions has and may
have an adverse impact on the financial position of customers and suppliers in
the region, which could impact the Company's future revenues and operations,
including the ability of customers to pay the Company. As a result of
experiencing collection problems from its Asian and Latin American customers
in 1997 as the Company did not require letters of credit, the Company is
planning to require sales to these regions to be secured by letters of credit
or transacted on a prepaid wire transfer basis. Should the current volatility
in Asia and Latin America continue, either the Company or the Company's
customers may be unable to sell its products in the region. The inability to
generate revenue in this region, or the inability to collect amounts due,
could have a material adverse impact on the Company's business, financial
condition and results of operations.
INTELLECTUAL PROPERTY
As of December 31, 1997, the Company has seven pending patent applications
and has been awarded nine 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 foreign patents. 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 change the design of the product,
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. The Company's business could be adversely affected by
these actions.
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
printhead assembly process for the PiezoPrint 5000 inkjet printer and the
patented electrostatic writing head manufacturing process are extremely
complex. All other electronic components and assemblies are subcontracted to
qualified suppliers. All products are tested 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
12
<PAGE>
for the European markets. Consumables for the United States and the rest of
the world are supplied from the Company's San Jose headquarters, a warehouse
and distribution facility in Newark, California and a contracted warehouse
distribution center in New Jersey.
Raster Graphics' inventory delivery and control systems include MRP, Just-
In-Time and KANBAN systems. The Company focuses 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.
SUPPLIERS
The Company maintains strong business relationships with its key suppliers,
several of whom have been with the Company since its inception. With the
exception of the PiezoPrint 1000, the printhead for the PiezoPrint 5000 and
three key components of the Company's line of printers, as well as paper
transport belts for its discontinued CAD products, all components have
multiple sources. To date, the Company has experienced only minor material
problems or delays in dealing with its sole source suppliers, with the
exception of the supplier of the printhead for the PiezoPrint 5000. During
1997, the Company received PiezoPrint 5000 printheads from its supplier which
displayed quality problems after shipment of the printer to customer sites.
The supplier is reviewing its manufacturing process and intends to supply
printheads in numbers that will not adversely affect the Company's ability to
produce printers. However, in case of loss of any of the suppliers of sole
sourced parts, or if additional quality problems are encountered with sole-
sourced parts, the Company's ability to deliver its products on a timely basis
would be materially adversely affected, and would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The inks, concentrates and varnish currently used in RGI's electrostatic
printers are specially developed by two suppliers. There is no assurance that
these two suppliers will continue to sell to the Company. 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 RGI's
electrostatic products are developed by additional suppliers. A number of
other companies also acquire papers from these suppliers and compete with the
Company in the sale of paper to end users.
The inks used by the Company's PiezoPrint 1000 and PiezoPrint 5000 products
are currently sole sourced. The printing media for the PiezoPrint 1000 and the
PiezoPrint 5000 are supplied by three suppliers. The Company will continue to
develop additional sources for these products. There is no assurance that the
suppliers will continue to sell to the Company, nor is there any assurance
that a new supplier will not enter the market to provide consumables to
compete with the Company's offering.
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
Xerox ColorgrafX Systems, a subsidiary of Xerox Corporation, ("ColorgrafX"),
Encad, Inc. ("Encad"), ColorSpan Corporation, the primary operating subsidiary
of VirtualFund.com ("ColorSpan") and CalComp Technology, Inc. ("CalComp") are
well established, have substantially greater resources than Raster Graphics
and offer similar, and in some instances superior, products and services.
ColorgrafX, for example, markets several color electrostatic printers priced
13
<PAGE>
below the Company's DCS 5442. In addition, ColorSpan offers attractively
priced lower performance inkjet printing systems. Encad markets inkjet
printers for the LFDP market which offer high image quality at a relatively
low price. Calcomp recently introduced their CrystalJet printer, which
utilizes piezoelectric-based inkjet technology similar to that of the
PiezoPrint 5000. At the high end of the market, 3M Commercial Graphics, a
division of Minnesota Mining and Manufacturing Company ("3M"), markets the
ScotchPrint 2000 which offers high performance at a premium price. Raster
Graphics believes, however, that its complete solutions and services compare
favorably against these and other competitors in terms of price and
performance.
In the image processing software market, there are a large number of
companies that compete with the Company's PosterShop product, such as Cactus,
a division of 3M, Star Technology and VisualEdge. However, with the exception
of ColorSpan, 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.
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. These
companies may have the ability to offer superior payment terms. 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.
In the consumables market, Oce supplies consumables, including inks and
papers, to its 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.
EMPLOYEES
As of December 31, 1997, Raster Graphics had 218 regular employees in the
following areas: 52 in manufacturing; 53 in customer support; 30 in research
and development; 45 in sales and marketing; and 38 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.
During the first quarter of 1998, the Company implemented a plan of internal
restructuring of its operations. The plan was initiated to reduce operating
expenses and improve the Company's financial condition. The plan resulted in a
reduction in headcount of approximately 28 and included several officers of
the Company. The costs associated with this restructuring totaled
approximately $300,000.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their ages as of July 15, 1998,
are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rakesh Kumar..................... 53 President, Chief Executive Officer and
Chairman of the Board
Kathy J. Bagby................... 35 Acting Chief Financial Officer
Marc Willard..................... 32 Executive Vice President, Sales and Marketing
</TABLE>
14
<PAGE>
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.
Ms. Bagby came to the Company in 1998 through The Brenner Group LLC, an
interim management and financial advisory services firm. From 1992 to 1997,
she held successive financial management positions at Red Brick Systems, most
recently as the Vice President of Finance and Accounting. Prior to Red Brick
Systems, Ms. Bagby held financial positions at Adia Services and Syntex Corp.
The Company's consulting agreement with The Brenner Group LLC expires November
13, 1998.
Mr. Willard joined the Company in 1997 through the acquisition of
ColourPass. In April, 1998 Mr. Willard was appointed to Executive Vice
President, Sales and Marketing. In January, 1998, Mr. Willard was appointed to
the position of Vice President, Applications and Market Development for the
Company. From 1989 to 1997, Mr. Willard served as President of ColourPass.
Prior to that time, Mr. Willard was a Service Manager with Agfa's Digital Film
Service Department.
ITEM 2. PROPERTIES.
Raster Graphics has leased facilities in six locations. Its main
headquarters of approximately 62,000 square feet is located in San Jose,
California, of which approximately 31% is used for administration and sales
and marketing, approximately 6% is used as a storage facility, and
approximately 63% is used for research and development, manufacturing, and
assembly. The Company's other facilities are comprised of 33,000 square feet
in Newark, California used as a storage and distribution facility, 11,000
square feet in Midvale, Utah, used primarily for administration, sales and
marketing and research and development, and 7,600 square feet, 5,700 square
feet, and 6,800 square feet in Germany, France and England respectively, used
primarily for administration and sales and marketing. The Company believes its
facilities are adequate to support its operations through 1998.
ITEM 3. LEGAL PROCEEDINGS.
Commencing in March 1998 several class action lawsuits were filed in both
state and federal courts purportedly on behalf of stockholders 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter for the fiscal year ended December 31, 1997.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
The Company's Common Stock has been traded in the over-the-counter market
under the Nasdaq symbol RGFX since the Company's initial public offering on
August 8, 1996 until April 21, 1998, at which time the Company's Nasdaq symbol
was changed to RGFXE due to delinquent filing of Form 10-K for December 31,
1997. On May 21, 1998, the Company's stock was delisted from the Nasdaq
National Market due to the Company's failure to meet the filing requirements
of the Securities and Exchange Act of 1934. Since May 21, 1998, the Company's
Common Stock has been listed under the symbol RGFX on the over-the-counter
"Pink Sheets" of the National Quotation Bureau. Prior to the initial public
offering, no public market existed for the Company's Common Stock.
The prices per share reflected in the table represent the range of high and
low closing prices in the Nasdaq National Market System for the quarters
indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
Third quarter ended September 30, 1996................... 11 1/4 8 1/8
Fourth quarter ended December 31, 1996................... 12 1/2 7 5/8
1997
First quarter ended March 31, 1997....................... 11 7/8 6 1/8
Second quarter ended June 30, 1997....................... 8 1/2 5 1/8
Third quarter ended September 30, 1997................... 8 3/8 6 5/8
Fourth quarter ended December 31, 1997................... 8 5/16 4
1998
First quarter ended March 31, 1998....................... 5 2 1/4
Second quarter ended June 30, 1998....................... 2 1/16 1/4
</TABLE>
Historically, the Company has not paid cash dividends on its common stock
and there is no plan to pay dividends in the near future.
The Company had approximately 2,904 stockholders of record as of September
1, 1998.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected consolidated financial data of the
Company. This historical data should be read in conjunction with the attached
consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in Item 7 of this Form 10-K. In addition, in order to
take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company hereby notifies readers that the
factors set forth above in "Risk Factors" as well as other factors, could in
the future affect, and in the past have affected, the Company's actual results
and could cause the Company's results for future quarters to differ materially
from those expressed in any forward looking statements made by or on behalf of
the Company, including without limitation those made in the following
discussion.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 30, DECEMBER 31,
1997 1996 1995(2) 1994 1993
------------ ------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
(5) (5)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues............ $ 48,928 $42,629 $28,870 $13,235 $14,719
Cost of revenues........ 42,754 25,343 18,691 9,704 9,942
-------- ------- ------- ------- -------
Gross profit............ 6,174 17,286 10,179 3,531 4,777
Operating expenses:
Research and develop-
ment.................. 5,763 4,516 3,373 2,748 2,179
Sales, general and ad-
ministrative.......... 13,725 9,189 5,389 3,012 2,492
Allowance for doubtful
accounts.............. 4,394 403 509 -- --
Merger related ex-
penses (1)............ 139 -- -- -- --
Write-off of acquired
goodwill (2).......... 1,211 -- -- -- --
Acquired in-process re-
search and develop-
ment (3) -- -- 889 -- --
-------- ------- ------- ------- -------
Total operating ex-
penses................. 25,232 14,108 10,160 5,760 4,671
-------- ------- ------- ------- -------
Operating income
(loss)................. (19,058) 3,178 19 (2,229) 106
Interest income (ex-
pense), net............ 403 309 49 101 (60)
-------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes (18,655) 3,487 68 (2,128) 46
Provision for income
taxes.................. 310 425 82 -- 5
-------- ------- ------- ------- -------
Net income (loss)....... $(18,965) $ 3,062 $ (14) $(2,128) $ 41
======== ======= ======= ======= =======
Net income per share
(diluted) (4).......... $ (2.01) $ 0.35 $ --
======== ======= =======
Shares used in per share
Calculation (diluted).. 9,426 8,642 6,025
======== ======= =======
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 30, DECEMBER 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
(5) (5)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEETS DATA:
Cash and short term in-
vestments............. $ 5,327 $16,063 $ 1,550 $ 1,607 $ 4,148
Total assets........... 25,558 36,578 13,122 7,912 9,010
Long-term debt......... 164 178 605 338 --
Total stockholders' eq-
uity.................. 8,305 26,927 6,794 3,801 5,900
</TABLE>
- --------
(1) In March 1997 the Company completed a merger with ColourPass and incurred
$139,000 of merger related expenses. (See Notes to Consolidated Financial
Statements.)
(2) In September 1997 the Company acquired Datagraph and recorded goodwill of
$1,211,000; after subsequent review the intangible asset was written off.
(See Notes to Consolidated Financial Statements.)
(3) In August 1995, the Company acquired Onyx and incurred a charge of
$889,000 for acquired in-process research and development. (See Notes to
Consolidated Financial Statements.)
(4) See Notes to Consolidated Financial Statements and Management's Discussion
and Analysis.
(5) Restated for the pooling of interests with ColourPass. (See Notes to
Consolidated Financial Statements.)
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company has restated previously issued financial results for each of the
quarters in the nine months ending September 30, 1997. The restated financial
results primarily reflect revisions to net revenues and related costs,
unrecorded liabilities, inventory reserves, the allowance for bad debt and the
write-off of the Datagraph Intangible Asset. See Amended Form 10-Q/A.
On February 26, 1998 the Company announced its financial results for the
year ended December 31, 1997. The Company reported revenue of $54.7 million,
gross profit of $19.5 million, operating expenses of $20.6 million and a net
loss of $1.2 million for fiscal 1997. On April 1, 1998 the Company announced
that it would revise its 1997 financial results.
In March 1998, after consultation with its independent accountants, the
Board of Directors of the Company performed a review of the Company's
accounting and business practices. By mid-April the Board of Directors became
aware of pervasive errors and irregularities that ultimately affect the dollar
amount and timing of reported revenues in 1997. The Board of Directors
instructed that an analysis be conducted on these matters.
The irregularities took numerous forms and were primarily the result of a
lack of compliance with the Company's procedures and controls. The Company has
concluded that the earnings process for a significant number of printer sales
were not complete at the time of 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.
In addition, the Company has determined that its allowances for doubtful
accounts receivable balances and excess and obsolete inventory, and the
realizable value of inventory and the goodwill recorded on the acquisition of
Datagraph had been incorrectly estimated.
As a result, for the year ended December 31, 1997 the Company reversed
recorded revenues of $5.8 million, recorded additional cost of revenues of
$7.6 million, and additional operating expenses of $4.6 million. In addition,
the Company has restated its previously reported results for each interim
period in the nine months ended September 30, 1997.
The Company has also restated the net assets purchased on the acquisition of
Datagraph, a distributor of LFDP systems in France. The original figures were
based on an estimate, which has since been revised to reflect actual values.
In particular, an intangible asset of $1,420,000 was initially recorded and
was revised to $1,211,000. This intangible asset was written off in the fourth
quarter of 1997 following a revision to the Company's sales forecasts. In
addition, based on recent developments, it is likely that Datagraph will
commence bankruptcy proceedings in the near term and cease operations.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
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
specifically for the LFDP market. 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,
substantially replaced the DCS 5400. In December 1996, the Company introduced
the PiezoPrint 1000, an inkjet printer
18
<PAGE>
manufactured by a third party, that is targeted at the lower priced entry
level production market. In March 1997, the Company introduced the PiezoPrint
5000 as a mid-range, price/performance product. It is the Company's intent to
discontinue actively marketing and selling the PiezoPrint 1000 in 1998 when
existing inventory has been exhausted. The Company has no current plans to
replace the PiezoPrint 1000 with another entry level printer. However, the
future success of the Company will likely depend on its ability to develop and
market new products that offer different levels of performance for the
production segment of the LFDP market and upon its ability to get additional
financing.
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 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 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 of installed systems and printers, including the Company's installed
base of 22-inch, 24-inch and 36-inch printers, which it no longer sells.
Revenue is also generated from the sale of spare parts.
Raster Graphics' end user customers, OEMs, VARs, and 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.
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, 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,
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 strengthen its domestic and international
sales and marketing organizations. The Company believes that sales and
marketing expenses may continue to increase in absolute dollar amounts and as
a percentage of revenues.
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
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<PAGE>
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 December 31, 1997, the Company had
an accumulated deficit of $34.4 million. The Company was profitable in 1996,
and reported a loss in 1997 and 1995. There can be no assurance that the
Company will be profitable in the future.
BUSINESS COMBINATIONS
On September 30, 1997, Raster Graphics acquired Datagraph, a French-based
distributor of large-format digital imaging systems. In exchange for the
outstanding stock of Datagraph, the Company agreed to pay approximately
$1,100,000 in a series of payments through September 30, 1998. The acquisition
was accounted for as a purchase. Including acquisition costs, the transaction
resulted in goodwill of $1,211,000 which, based on the Company's current sales
forecasts, was written off during the fourth quarter. The operating results of
Datagraph prior to the acquisition are not material in relation to the
Company. (See Notes to Consolidated Financial Statements.) In addition, based
on recent developments, it is likely that Datagraph will commence bankruptcy
proceedings in the near term and cease operations.
On March 18, 1997, the Company completed a merger with ColourPass, a
business in the United Kingdom, in which ColourPass was merged with Raster
Graphics System Limited, a wholly owned subsidiary of the Company. The
combination was accounted for as a pooling of interests.
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
-----------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
(RESTATED) (4) (RESTATED) (4)
<S> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0%
Cost of revenues........ 87.4 59.5 64.7
----- ----- -----
Gross profit............ 12.6 40.5 35.3
Operating expenses:
Research and
development.......... 11.8 10.6 11.7
Sales and marketing... 20.1 17.1 15.5
General and
administrative....... 7.9 4.4 3.2
Allowance for doubtful
accounts............. 9.0 0.9 1.8
Merger related
expenses(1).......... 0.3 -- --
Write off of acquired
Goodwill(2).......... 2.5 -- --
Acquired in-process
research
and development(3)... -- -- 3.1
----- ----- -----
Total operating
expenses............. 51.6 33.0 35.3
----- ----- -----
Operating income
(loss)................. (39.0) 7.5 0.0
Interest income, net.... 0.8 0.7 0.2
----- ----- -----
Income (loss) before
provision for income
taxes.................. (38.2) 8.2 0.2
Provision for income
taxes.................. 0.6 1.0 0.2
----- ----- -----
Net income (loss)....... (38.8%) 7.2% 0.0%
===== ===== =====
</TABLE>
20
<PAGE>
- --------
(1) In March 1997 the Company completed a merger with ColourPass and incurred
$139,000 of merger related expenses. (See Notes to Consolidated Financial
Statements.)
(2) In September 1997 the Company acquired Datagraph and recorded goodwill of
$1,211,000; after subsequent review the intangible asset was written off.
(See Notes to Consolidated Financial Statements.)
(3) In August 1995 the Company acquired Onyx and incurred a charge of $889,000
for acquired in-process research and development. (See Notes to
Consolidated Financial Statements.)
(4) Restated for the pooling of interests with ColourPass (See Notes to
Consolidated Financial Statements.)
Raster Graphics' results of operations for fiscal 1997 reflect an increase
in net revenue over the prior fiscal year. Net revenue for the year ended
December 31, 1997, grew 14.8%, to $48.9 million, compared to sales of $42.6
million recorded in fiscal 1996. This increase was primarily due to the growth
in sales of printer systems, increase in sales of consumables, and sales by
the Company's subsidiaries. Sales for the year ended December 31, 1996, grew
47.7%, to $42.6 million, compared to sales of $28.9 million recorded in fiscal
1995. The increase was mainly attributable to growth of sales of printer
systems following the introduction of the DCS 5442 printing system, increase
in sales of consumables, increase in sales of Onyx software and sales by the
Company's German subsidiary.
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
grow and raise additional capital.
Operating results for the quarters ended March 31, 1998, and June 30, 1998,
based upon trended analysis, indicate that Company revenues have decreased and
expenses have increased. In order to return to profitability, the Company must
take active measures to reverse this trend. There can be no assurances that
this trend will be reversed or that the Company will return to profitability.
International sales, which include export sales and sales shipped by the
Company's European operations, were $19.3 million, $22.0 million and $16.2
million for 1997, 1996 and 1995, respectively. These sales represented 39.5%,
51.6%, and 56.1% of net revenue, respectively. Future international revenues
will depend on international customer acceptance of the PiezoPrint Printing
systems, the establishment of new distribution arrangements and sales by the
Company's German and U.K. subsidiaries, and will be subject to unexpected
changes in economic conditions, 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 at current rates, or at all.
No customer accounted for more than 10.0% of net revenues in 1997. Oce, a
European distributor, accounted for 4.8% and 10.9% of net revenues for 1996
and 1995, respectively.
Gross Profit. Gross profit was $6.2 million, $17.3 million and $10.2
million, or 12.6%, 40.5% and 35.3% of revenues, for 1997, 1996 and 1995,
respectively. The decrease in gross margin in 1997 over 1996 was primarily due
to a change in product mix, higher manufacturing overhead as a percentage of
sales, the acquisition of Datagraph which has lower gross margins,
significantly increased inventory reserves and higher warranty and repair
expenses. Based on recent developments, it is likely that Datagraph will
commence bankruptcy proceedings in the near term and cease operations. The
improved gross margin in 1996 over 1995 was primarily due to increases in
sales of higher margin Onyx software products as a percentage of net revenue,
higher gross margin for products sold through the Germany subsidiary, as well
as improved manufacturing efficiency. The Company's future level of gross
profit will depend on a number of factors, including product mix and its
ability to control variable expenses relative to revenue levels, maintain a
revenue base over which to allocate fixed costs to develop, manufacture,
market and sell innovative and reliable new products.
21
<PAGE>
Research and Development. Research and development expenses were $5.8
million, $4.5 million and $3.4 million, or 11.8%, 10.6% and 11.7% of net
revenues, for 1997, 1996 and 1995, respectively. The absolute dollar increases
from year to year were primarily due to increased payroll and related
expenses, including the Onyx engineering staff, which the Company purchased in
mid 1995, and increased engineering material expenditures related to the
development of new products. The Company intends to continue to dedicate a
substantial proportion of its resources to research and development activities
in order to expand its product lines, including printers, to achieve higher
throughput speed and higher image quality, and to enhance its PosterShop image
processing software. However, due to depleted cash, cash equivalents and short
term investments, the Company is reviewing measures to reduce research and
development expenses on an on-going basis, but their can be no assurances that
any such measures will be successful.
Sales and Marketing. Sales and marketing expenses were $9.9 million, $7.3
million and $4.5 million, or 20.1%, 17.1% and 15.5% of net revenues, for 1997,
1996 and 1995, respectively. The primary causes of the absolute dollar
increases have been increases in payroll and payroll-related expenses due to
increases in personnel, expenses associated with participation in additional
trade shows and other expenses related to the launch of the PiezoPrint 5000,
and to a lesser degree, travel-related expenses. Due to depleted cash, cash
equivalents and short term investments, the Company is reviewing measures to
reduce Sales and Marketing expenses on an on-going basis but there can be no
assurances that any such measures will be successful.
General and Administrative. General and administrative expenses, including
the allowance for doubtful accounts, were $8.2 million, $2.3 million and $1.4
million, or 16.9%, 5.3% and 5.0% of net revenues, for 1997, 1996 and 1995,
respectively. The increase in absolute amounts of expenditures in 1997
reflected the increase in bad debt reserve, the increased cost of payroll and
related expenses as well as the increased cost of operating as a public
company for a full year. The increase in 1996 was primarily related to
increased cost of payroll and payroll-related expenses as well as the
increased cost of operating as a public company for part of the year. Due to
depleted cash, cash equivalents and short term investments, the Company is
reviewing measures, including head count reductions, to reduce General and
Administrative expenses on an on-going basis but there can be no assurances
that any such measures will be successful.
Merger Related Expenses. In March 1997, the Company completed a merger with
ColourPass, a business in the United Kingdom, in which ColourPass was merged
with Raster Graphics System Limited, a wholly owned subsidiary of the Company.
The combination was accounted for as a pooling of interests. In connection
with the merger the Company incurred $139,000 of merger related expenses.
Write-off of Acquired Goodwill. On September 30, 1997, Raster Graphics
acquired Datagraph, a French-based distributor of large-format digital imaging
systems. In exchange for the outstanding stock of Datagraph, the Company
agreed to pay approximately $1,100,000 in a series of payments through
September 30, 1998. The acquisition was accounted for as a purchase. Including
acquisition costs, the transaction resulted in goodwill of $1,211,000 which,
based on the Company's current sales forecasts, was written off during the
fourth quarter. In addition, based on recent developments, it is likely that
Datagraph will commence bankruptcy proceedings in the near term and cease
operations. The operating results of Datagraph prior to the acquisition are
not material in relation to the Company. (See Notes to Consolidated Financial
Statements.)
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.
22
<PAGE>
Interest Income (Expense). Net interest income was $403,000, $309,000 and
$49,000 for 1997, 1996 and 1995, respectively. Higher interest income in 1997
was a result of investing cash raised from the Company's initial public
offering of common stock for a full year.
Provisions for Income Taxes. The Company recorded a tax provision in 1997
despite generating an operating loss with the Company's effective tax rate on
the consolidated pretax loss for 1997 being 2%, compared to an effective tax
rate of 12% and 121% on consolidated pretax income for 1996 and 1995,
respectively. The tax provision for 1997 results primarily from taxes on
income in foreign jurisdictions despite an overall loss. The effective tax
rate for 1996 differs from the statutory rate primarily due to the tax benefit
of utilizing net operating loss carryforwards and is lower than the 1995 tax
rate due to a high 1995 tax rate caused by alternative minimum taxes.
As of December 31, 1997, the Company has federal and state net operating
loss carryforwards of approximately $23 million and $8 million, respectively.
The Company also has federal and California tax credit carryforwards of
approximately $1.2 million and $704,000, respectively. The net operating loss
and credit carryforwards will expire in the years 2002 through 2012, if not
utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of preferred stock and common stock of $24.7 million, its
initial public offering of common stock in 1996, issuance of convertible debt,
bank loans, equipment lease financing and private loans. For the year ended
December 31, 1997 and for the same period in 1996 and 1995, $8.3 million,
$283,000 and $599,000 of cash was used in operations, respectively. For fiscal
1997, net cash used in operations was due primarily to net loss incurred
partially offset by a decrease in accounts receivable and increases in amounts
payable and other accrued liabilities. For fiscal 1996 net cash used in
operations was due primarily to increases in inventories and accounts
receivable associated with higher net revenues, which were partially offset by
net income and an increase in accounts payable.
Net cash provided by (used) in investing activities was $9.0 million,
($15.0) million and ($1.1) million for the years ended December 31, 1997, 1996
and 1995, respectively. The Company incurred $2.7 million of capital
expenditure in 1997, $1.9 million in 1996 and $1.1 million in 1995. The
Company had net receipts of $11.5 million from short term cash investments in
1997 and made net purchases of $13.1 million in 1996.
Financing activities provided net cash of $405,000, $16.7 million and $1.6
million for the years ended December 31, 1997, 1996 and 1995, respectively. In
August 1996, the Company successfully completed its initial public offering of
securities which yielded net proceeds of $16.9 million. In fiscal 1995, $1.5
million was raised by issuing Series C preferred stock. The proceeds from the
sale of these equity securities were partially offset by payments on notes and
capital lease obligations.
To date, 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 December 31, 1997, the Company had $5.3 million of cash and cash
equivalents and short term investments. The Company also has available a $4.1
million bank line of credit agreement that expires on December 31, 1998, which
is secured by the assets of the Company. At December 31, 1997, there were no
borrowings outstanding under the bank line of credit. Currently, the Company
is not in compliance with all bank covenants. However, the Company believes
they are effectively managing this relationship. Credit facilities have
remained in place despite non-compliance.
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<PAGE>
In order to continue as a going concern, the Company will need to raise
additional capital that will be used to offset expected losses from future
operations. Also, the Company expects the additional capital to be used for
payment of restructuring costs, including headcount reductions in various
functions of the Company. The Company plans to raise the additional capital
through cost containment measures that will align spending levels with revenue
projections, planned reduction of inventory to meet required customer order
levels, improvement for collection of outstanding trade receivables, and
raising additional equity and debt financing. There can be no assurance that
management will be successful in accomplishing these plans and objectives.
Failure to accomplish these plans or objectives would have a material effect
on the Company's business, financial condition, and results of operation.
Operating results for the quarters ended March 31, 1998, and June 30, 1998,
based upon trended analysis, indicate that Company revenues have decreased and
expenses have increased resulting in a significant loss of net income. In
order to return to profitability, the Company must take active measures to
reverse this trend. There can be no assurances that this trend will be
reversed or that the Company will return to profitability.
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. (See Notes to the Consolidated
Financial Statements for a description of amounts payable on a change in
control.)
TRENDS AND UNCERTAINTIES
Risks Associated with Introduction of New Product. The Company introduced
its PiezoPrint 5000 in March 1997. This product is based on relatively new
technology, is complex and must be reliable and durable. The Company is
continuing to make upgrades and improvements in the features of the PiezoPrint
5000. Nevertheless, despite research and testing, the Company and its
customers have experienced some operational issues with the PiezoPrint 5000,
which the Company believes it is successfully addressing. However, these
operational problems have resulted in delayed payments by customers, requests
for return of printers, greater than anticipated expense incurred servicing
printers and actual returns of printers, all of which had a material adverse
effect on the Company's business, financial condition and results of
operations for 1997 and 1998. The Company believes that the upgrade of faulty
printheads will continue into 1998. Management has estimated the expected cost
of performing work under printer warranties, which is based in part on the
numbers of units sold, the likelihood of operating problems occurring and the
cost of repair and has included in cost of revenues approximately $653,000 for
the expected costs. No estimate can be made of the range of amounts of loss
that are reasonably possible should the warranty work not be successful. In
addition, there can be no assurance that the Company will successfully resolve
any future problem in the manufacture or operation of its printers or any
24
<PAGE>
new product. Failure of the Company to resolve any future manufacturing or
operational problems with its printers or any new product in a timely manner
could result in similar material adverse effects on the Company's business,
financial condition and results of operations.
Slower than Expected Revenue Growth. The Company's sales of the PiezoPrint
5000 have been slower than expected due in large part to the lack of certain
types of compatible media that can be run on the PiezoPrint 5000. During the
development of consumables for the PiezoPrint 5000, the Company found that the
oil based inks used in this printer had certain limitations which did not
allow the Company to develop a photogloss media which was compatible with the
printer. This lack of a photogloss media limited the market acceptance of the
printer. The resulting reduction in anticipated revenue from the sale of
PiezoPrint 5000 printers had a material adverse effect on the Company's
business, financial condition and results of operations for 1997. While the
Company is continuing to add additional types of compatible media to its
product line for use on the PiezoPrint 5000, the Company expects that its
revenue growth will be slower than historical growth rates. Additionally,
revenue growth in 1997 was adversely affected by the Company's efforts to
transition its U.S. distribution model from direct to an indirect sales model.
It is expected that this transition will continue into the first half of 1998.
Inventory Reserves. Inventories are stated at the lower of cost (first-in,
first-out) or fair market value. The Company has recorded a write-down of
inventory of $10.4 million to reflect net realizable value at December 31,
1997 and excess and obsolete inventory. Management has developed a program to
reduce inventories to levels that are consistent with forecasted sales.
Allowance for Doubtful Accounts. The Company reports accounts receivable at
net realizable value. The Company has recorded a bad debt allowance of $4.7
million and a charge to general and administrative expenses. Management has
undertaken efforts to collect amounts owed by its customers and to reduce the
accounts receivable balance to more desirable levels in the near term.
Uncertainty Regarding Asian and Latin American Markets. A significant number
of the Company's customers and suppliers are based in Asia and Latin America.
The financial instability in these regions has and may have an adverse impact
on the financial position of customers and suppliers in the region, which
could impact the Company's future revenues and operations, including the
ability of customers to pay the Company. As a result of experiencing
collection problems from its Asian and Latin American customers in 1997 as the
Company did not require letters of credit, the Company is planning to require
sales to these regions to be secured by letters of credit or transacted on a
prepaid wire transfer basis. Should the current volatility in Asia and Latin
America continue, either the Company or the Company's customers may be unable
to sell its products in the region. The inability to generate revenue in this
region, or the inability to collect amounts due, would have a material adverse
impact on the Company's business, financial condition and results of
operations.
OTHER RISK FACTORS
Uncertain Impact of Restatement of Financial Statements; De-listing from
NASDAQ National Market. Subsequent to the filing with the Commission of its
Quarterly Reports on Forms 10-Q for the quarters ended March 31, 1997, June
30, 1997, and September 30, 1997, the Company became aware of errors and
irregularities that effected the timing and dollar amount of reported earned
revenue. These restatements had a material adverse effect on the Company's
financial condition, most notably evident by substantial reductions in
retained earnings and working capital.
The Company's public announcement on April 3, 1998 of the pending
restatements, delays in reporting operating results for 1997 while the
restatements were being compiled, de-listing of the Company's Common Stock
from the NASDAQ National Market as a result of the Company's failure to
satisfy its public reporting obligations, corporate actions to restructure
operations and reduce operating expenses, and customer uncertainty regarding
the Company's financial condition have adversely affected the Company's
ability to sell its product in fiscal year 1998 and consequently caused a
significant reduction in the Company's stock price. Adverse market conditions,
including significant competitive pressures in the Company's markets and
ongoing customer
25
<PAGE>
uncertainty about the Company's financial condition and business prospects,
and product operating issues, may continue to have an adverse effect on the
Company's ability to sell its products and results of operations.
Product Competition. The introduction of the PiezoPrint 5000 has adversely
impacted sales of the Company's DCS 5442 printer to the extent that future
purchasers favor the lower priced inkjet alternatives. Accordingly, there can
be no assurance that revenue generated by sales of the Company's inkjet
products will compensate for the decrease in revenue resulting from declining
sales of its electrostatic products. The corresponding decrease in total
revenue would have a material adverse effect upon the Company's business,
financial condition and results of operations.
Limited History of Profitability and Uncertainty of Future Financial
Results. The Company had an accumulated deficit as of December 31, 1997 of
approximately $34.4 million. The Company has a limited history of
profitability and had a net loss of $19.0 million in 1997. There can be no
assurance that sales of the Company's products will generate significant
revenues or that the Company can return to profitability on a quarterly or
annual basis in the future.
Going Concern. The Company believes its existing capital resources will be
insufficient to satisfy its working capital requirements through the end of
1998. The Company will need to raise additional capital to fund operations
during 1998 and beyond. The Report of Independent Auditors on the Company's
financial statements for the year ended December 31, 1997, contains an
explanatory paragraph regarding the company's need for additional financing
and indicates substantial doubt about the Company's ability to continue as a
going concern. There can be no assurances that such capital will be available
on acceptable terms, if at all, and such terms may be dilutive to existing
stockholders. The Company's inability to secure the necessary funding would
have a material adverse affect on the Company's financial condition and
results of operations. The Company's actual working capital needs will depend
upon numerous factors, including the extent and timing of acceptance of the
Company's products in the market, the Company's operating results, the
progress of the Company's research and development activities, the cost of
increasing the Company's sales and marketing activities and the status of
competitive products, none of which can be predicted with certainty. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of assets and liabilities that may result from the
outcome of this uncertainty.
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. (See Notes to the Consolidated
Financial Statements for a description of amounts payable on a change in
control.)
The Company's expenses for manufacturing and administrative capabilities,
technical and customer support, research and product development 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
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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.
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 policies 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 Company's ability to collect accounts receivables, 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, the risks related to international operations,
the loss of key suppliers and customers, problems incurred in managing
inventories or accounts receivables, a change in the product mix sold by the
Company, price decreases in inventory, trade barriers established by foreign
countries, as well as other factors. Additionally, because the purchase of a
digital printer or printing system involves a significant capital commitment,
the Company's 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 (loss), 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 return to
profitability on an operating basis in any future period. In particular,
operating results for the quarters ended March 31, 1998, and June 30, 1998,
based upon trended analysis, indicate that Company revenues have decreased and
expenses have increased. In order to return to profitability, the Company must
take active measures to reverse this trend. There can be no assurances that
this trend will be reversed or that the Company will return to profitability.
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, in the third and
fourth quarters of 1997, the Company's revenues and operating results were
below the expectations of public market analysts and investors, which
adversely affected the price of the Company's Common Stock. It is likely that
in some future period the Company's revenues or operating results will again
be below expectations. In such event, the price of the Common Stock could be
materially adversely affected.
Dependence on a Single Product Line. Substantially all of the Company's
sales are derived from its 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 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 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 Company's printing systems were
to purchase consumables from suppliers other than the Company, the Company's
business would be materially adversely affected.
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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 3M, ColorgrafX, Encad, Hewlett-Packard,
Calcomp, and ColorSpan, which manufacture LFDP printers, and Cactus, (Star)
and Visual Edge, which develop LFDP image processing software. A variety of
potential actions by any of the Company's competitors, 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.
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. These
companies may have the ability to offer superior payment terms. 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.
Reliance on Third-Party Distribution. The Company relies heavily on a
network of distributors, original equipment manufacturers ("OEMs") and value
added resellers ("VARs") for both domestic and international sales. The
Company currently maintains distribution, OEM and VAR agreements for its
printing systems and printers with Keundo, 3M and Lisle Kelco for distribution
of its products in Canada; Sumitomo-3M Ltd. ("Sumitomo-3M"), Marubeni
Electronics Co. Ltd. ("Marubeni") and Kimoto Co., Ltd. ("Kimoto") for
distribution of its products in Japan; and Sign-Tronic ("Sign-Tronic") and
Sihl for distribution of its products in Europe. In addition, the Company
distributes its image processing software products through a number of
domestic and international OEMs, VARs and distributors such as Ahearn & Soper.
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 the Company'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.
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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.
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.
Limited History of Product Manufacturing and Use; Product Defects. The
Company's 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. Since its introduction as
a second generation to the DCS 5400, the DCS 5442 has represented an
increasing percentage of the Company's shipments, and by September 1996,
substantially replaced the DCS 5400.
In December 1996, the Company introduced its first inkjet printer, the
PiezoPrint 1000, which is targeted at the lower priced entry level production
market. In March, 1997, the PiezoPrint 5000 joined the Raster Graphics product
line of printers as a mid-range of price/performance product which complements
the Company's affordable PiezoPrint 1000 inkjet printer and the high-volume
DCS 5442.
The Company is continuing to make upgrades and improvements in the features
of its PiezoPrint line of printers. Despite research and testing, the
Company's experience with volume production of its printers and with their
reliability and durability during customer use is limited. The Company and
users have encountered various operational problems with the PiezoPrint 5000
printers, including printhead quality issues, which the Company believes it is
successfully addressing. However, these operational problems have resulted in
delayed payments by customers, requests for return of printers, greater than
anticipated expense incurred servicing printers and actual returns of
printers, all of which had a material adverse effect on the Company's
business, financial condition and results of operations for 1997 and 1998.
There can be no assurance that the Company will successfully resolve any
future problem in the manufacture or operation of its printers or any new
product. Failure of the Company to resolve any future manufacturing or
operational problems with its printers or any new product in a timely manner
could result in similar material adverse effects on the Company's business,
financial condition and results of operations.
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.
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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, these factors would impact adversely sales of the Company's
products. Consequently, the Company's access to a significant portion of its
present customer base would be limited. Moreover, competitors, such as Hewlett
Packard, that have significantly greater financial resources 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 has extended payment terms to its
customers as well as established a leasing program for its customer's benefit
through Integrated Lease Management. 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.
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions
and rapid product obsolescence. The Company's success will be substantially
dependent upon its ability to continue to develop and introduce competitive
products and technologies on a timely basis with features and functionality
that meet changing customer requirements. The Company's business would be
adversely affected if the Company were to incur delays in developing new
products or enhancements, or if such products or enhancements did not gain
widespread market acceptance. In addition, there can be no assurance that
products or technologies developed by others will not render the Company's
products or technologies noncompetitive or obsolete. The Company must
continually assess emerging technologies and standards, and evolving market
needs, and must continually decide which technologies and product directions
to pursue. If the Company were to focus its efforts on technologies, standards
or products that do not meet emerging end user needs and do not achieve market
acceptance, the Company could miss one or more product cycles. In such an
event, the Company's business, financial conditions and results of operations
would be materially adversely affected.
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. During the development process of
consumables for the PiezoPrint 5000, the Company found that the oil based inks
used in this printer had certain limitations which did not allow the Company
to develop a photogloss media which was compatible with the printer. This lack
of a photogloss media limited the market acceptance of the printer. The
resulting reduction in
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anticipated revenue from the sale of PiezoPrint 5000 printers had a material
adverse effect on the Company's business, financial condition and results of
operations for 1997and 1998. Additionally, any quality, durability or
reliability problems with 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.
International Revenues. The Company's international revenues accounted for
approximately 39.5%, 51.6%, and 56.1% of the Company's revenues in 1997, 1996
and 1995, respectively. The Company makes a material amount of sales to third
party distributors in international markets. 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
instability of foreign economies, such as the weak economic conditions
effecting certain Asian and Latin America economies in the latter part of 1997
and 1998, 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 also have a material adverse effect on the Company's
business, financial condition and results of operations. Sales from the
Company's German, French 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
Company utilized foreign currency forward exchange contracts to manage some of
its foreign currency firm purchase commitments. At December 31, 1997, the
Company held a foreign currency forward contract which matured in January 1998
to buy 25.6 million Japanese yen for $200,000. The fair value of the yen
underlying this instrument at December 31, 1997, was $196,000. Purchases of
the PiezoPrint 1000 from the Company's sole source supplier are denominated in
Japanese yen and have resulted in some foreign currency exchange rate
fluctuation exposure. The impact of future exchange rate fluctuations cannot
be predicted adequately. 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.
Dependence on Sole Source Subcontractors and Suppliers. The Company relies
on subcontractors and suppliers to manufacture, subassemble, and perform
first-stage testing of its 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 the
printhead for the PiezoPrint 5000, rubber drive rollers, electrostatic writing
head circuit boards, and application-specific integrated circuits. Also, the
Company's PiezoPrint 1000 inkjet printer is originally manufactured by a third
party. It is the Company's intent to discontinue actively marketing and
selling the PiezoPrint 1000 in 1998 when existing inventory has been
exhausted. The Company has no current plans to replace the PiezoPrint 1000
with another entry level printer. The Company also 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
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each of the Company's subcontractors and suppliers can cease supplying
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. During 1997 the Company received from its sole-source
supplier printheads for the PiezoPrint 5000 which displayed quality problems
after shipment of the printer to customer sites. The supplier is reviewing its
manufacturing process, and intends to supply printheads in numbers that will
not adversely affect the Company's ability to produce printers. However, there
can be no assurance that the Company's present subcontractors and suppliers
will continue to provide sufficient quantities of suitable quality 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.
Dependence on Foreign Supplier. The PiezoPrint 1000 is the first product the
Company has purchased under license for marketing under its own label. The
supplier also distributes the product through its own worldwide distribution
network. The success of the Company in selling this product is dependent upon
many variables such as the established distribution network of the Company,
pricing, support, added value from integration of the Company's PosterShop
software and other factors. In addition this is the Company's first major
procurement of a finished product from a Japanese vendor who does not have
significant international trading experience. The inability to maintain a good
vendor relationship would adversely affect sales of the product. Furthermore
the purchase price of the product is denominated in Japanese yen; and the
fluctuation of this foreign currency will have an impact on the profitability
of the product. It is the Company's intent to discontinue actively marketing
and selling the PiezoPrint 1000 in 1998 when existing inventory has been
exhausted. The Company has no current plans to replace the PiezoPrint 1000
with another entry level printer.
Risks Associated with Intellectual Property. As of December 31, 1997, the
Company had seven pending patent applications and has been awarded nine United
States patents covering technical features and fabrication methods used in
Raster Graphics' printers and color rendering techniques used by its image
processing software. 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 Latin America, Korea, 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.
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.
Difficulties in Managing Growth. The Company has experienced growth in
recent years, which has placed demands on the Company's administrative,
operational and financial personnel, information systems and financial and
administrative controls, manufacturing operations, research and development,
technical support and other resources. Additionally, certain of the Company's
officers have recently joined the Company. Failure to
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manage the changes in any of these areas would have a material adverse effect
on the Company's business, financial condition and results of operations.
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. 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. 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. With the exception of
employment agreements containing initial compensation terms and severance
obligations with respect to the Company's Chief Executive Officer, Acting
Chief Financial Officer, Executive Vice President and Vice President of
Domestic Sales, 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.
Environmental. The Company is subject to local laws and regulations
governing the use, storage, handling and disposal of the inks, varnishes and
finishing solutions 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.
Possible Volatility of Stock Price. 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
Year 2000 Compliance. The "Year 2000 issue" arises because many computer
systems and programs were designed to handle only a two-digit year, not a
four-digit year. These computers may interpret "00" as the year 1900 and could
either stop processing date-related computations or could process them
incorrectly.
The Company has examined the potential impact of the Year 2000 issue on its
printer and image processing software products and believes that its products
are Year 2000 compliant, meaning that the use or occurrence of dates on or
after January 1, 2000 will not materially affect the performance of Company
products to correctly create, store, process and output information related to
such dates. The Company's printer system products are not effected by the Year
2000 issue because the custom operating systems designed into the DCS and
PiezoPrint systems are insensitive to year code. The Company's PosterShop
image processing software product utilizes more than a 2-digit year code, and
therefore will not be effected by the change to the year 2000.
The Company has determined that with an upgrade to its current information
systems, those systems will be able to process the Year 2000 accurately and
accordingly does not anticipate any Year 2000 issues from its own information
systems, databases or programs as long as it can successfully complete this
upgrade. However, the Company could be adversely impacted by Year 2000 issues
faced by major distributors, suppliers, customers,
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vendors, and financial service organizations with which the Company interacts.
The Company is in the process of developing a plan to determine the impact
that third parties which are not Year 2000 compliant may have on the
operations of the Company. There can be no assurance that such plan will be
able to address fully, or at all, the "Year 2000 issue", which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Pending Litigation. Commencing in March 1998 several class action lawsuits
were filed in both state and federal courts purportedly on behalf of
stockholders 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.
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. 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. On February 3, 1998, the Company's Board
of Directors adopted a stockholder rights plan. This plan provides
stockholders with special purchase rights under certain circumstances,
including if any new person or group acquires 15 percent or more of the
Company's common stock. This plan 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the Company's consolidated financial
statements and supplementary information. Such financial statements and
information are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The officers and directors of the Company and their ages as of July 15, 1998
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rakesh Kumar.............................. 53 President, Chief Executive
Officer and Chairman of the
Board
Kathy J. Bagby............................ 35 Acting Chief Financial Officer
Marc Willard.............................. 32 Executive Vice President
Charles Case.............................. 51 Director
Promod Haque (1)(2)....................... 50 Director
Lucio L. Lanza (1)(2)..................... 53 Director
Delbert W. Yocam (1)(2)................... 54 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, Applican, Inc., a CAD systems company, and
Digital Equipment Corporation.
Ms. Bagby came to the Company in 1998 through The Brenner Group LLC, an
interim management and financial advisory services firm. From 1992 to 1997,
she held successive financial management positions at Red Brick Systems, most
recently as the Vice President of Finance and Accounting. Prior to Red Brick
Systems, Ms. Bagby held financial positions at Adia Services and Syntex Corp.
The Company's consulting agreement with The Brenner Group LLC expires November
13, 1998.
Mr. Willard joined the Company in 1997 through the acquisition of ColourPass
Ltd., where he served as President from 1989 to 1997. After acquisition of
ColourPass by Raster Graphics, Mr. Willard served as Managing Director of the
UK-based subsidiary prior to being named Vice President of Applications and
Market Development. In April 1998 Mr. Willard was appointed to Executive Vice
President of Sales and Marketing for the Company. Prior to 1989, he was a
service manager with Agfa's Digital Film Service Department.
Mr. Case has served as a director of the Company since November 1997. Since
1991, he has been Managing Partner of Roger's Hill Associates, a strategic
consulting firm to the digital printing industry. Prior to founding Roger's
Hill Associates, Mr. Case was Senior Vice President of CAP International Inc.,
which provides market information services for the electronic printing
industry.
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 Prism Solutions, Inc.; Transaction
Systems Architect, Inc.; Connect, Inc.; and Information Advantage, Inc.
Mr. Lanza has served as a director of the Company since May 1994. 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 until
1989. Prior to 1986, he served in a number of marketing, engineering and
general management positions in the electronics industry, including
corporations such as Intel Corporation and Olivetti SpA. Mr. Lanza is also
Chairman of the Board of Artisan Components.
35
<PAGE>
Mr. Yocam has served as a director of the Company since April 1995. Since
December 1996, Mr. Yocam has been Chairman of the Board of Directors and Chief
Executive Officer of Inprise Corporation (formerly Borland International).
From November 1994 to November 1996, he was an independent consultant. From
September 1992 to November 1994, Mr. Yocam was President, Chief Operating
Officer and a director of Tektronix, Inc. Mr. Yocam is also a director of
Adobe Systems, Inc., Hollywood Park, Inc., Xircom, Inc. and several privately
held technology companies.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation received by (a) the individual
who served as the Company's Chief Executive Officer during the fiscal year
ended December 31, 1997; (b) the other most highly compensated individuals who
were serving as executive officers of the Company for the fiscal year ended
December 31, 1997; and (c) the compensation received by each such individual
for the Company's two preceding fiscal years.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------- ------------
SECURITIES
BONUS AND UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMMISSION OPTIONS
--------------------------- ---- -------- ---------- ------------
<S> <C> <C> <C> <C>
Rakesh Kumar 1997 $180,692 $20,000 --
President, Chief 1996 $168,923 $ 755 100,000
Executive Officer and 1995 $161,539 -- 60,000
Chairman of the Board
Dennis R. Mahoney (1) 1997 $124,212 -- --
Former Vice President 1996 $ 82,500(2) 20,000 90,000
and Chief Financial Officer 1995 -- -- --
Sebastian J. Nardecchia (3) 1997 $143,135 $15,000 10,000
Former Vice President, 1996 $123,538 $10,000 20,000
Operations 1995 $111,539 -- 30,000
Michael Willingham (4) 1997 $117,802 $10,000 10,000
Former Vice President, 1996 $106,742 $ 5,000 10,000
Customer Service 1995 $ 95,143 -- 20,000
</TABLE>
- --------
(1) Mr. Mahoney's employment was terminated on October 21, 1997.
(2) Mr. Mahoney joined the Company in May 1996 at an annual base salary
level of $150,000, of which $82,500 was paid during fiscal year 1996.
(3) Mr. Nardecchia's employment was terminated on March 31, 1998.
(4) Mr. Willingham's employment was terminated on March 31, 1998.
The following table sets forth information for the executive officers named
in the Summary Compensation Table with respect to grants of options to
purchase Common Stock of the Company made in 1997 and the value of all options
held by such executive officers on December 31, 1997.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
INDIVIDUAL GRANTS(1) APPRECIATION
--------------------------------------- FOR OPTION
NUMBER OF PERCENTAGE OF TERM(2)
SECURITIES TOTAL OPTIONS EXERCISE ---------------
UNDERLYING GRANTED TO OR BASE
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (SHARES) FISCAL 1996 ($/SHARE) DATE 5%($) 10%($)
---- --------------- ------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Sebastian J. Nardecchia
(3).................... 10,000 1.34% $5.25 4/22/07 $33,017 $83,671
Michael Willingham (4).. 10,000 1.34% $5.25 4/22/07 $33,017 $83,671
</TABLE>
- --------
(1) Consists of stock options granted pursuant to the Company's 1996 Stock
Plan. The Company's options generally become exercisable at a rate of
12.5% after six months following the date of grant and
36
<PAGE>
approximately 6% per calendar quarter thereafter for 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.
(2) 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.
(3) Mr. Nardecchia's employment was terminated on March 31, 1998.
(4) Mr. Willingham's employment was terminated on March 31, 1998.
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1997 AND YEAR-END
OPTION VALUES
The following table sets forth information for the executive officers named
in the Summary Compensation Table with respect to exercises in fiscal year
1997 of options to purchase Common Stock of the Company.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS FISCAL YEAR
SHARES AT FISCAL YEAR END END(1)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- ----------- -------- --------------------- ----------------
<S> <C> <C> <C> <C>
Rakesh Kumar............ -- -- 265,833/79,167 $933,281/$77,344
Dennis R. Mahoney (2)... -- -- 33,958/56,042 $0/$0
Sebastian J. Nardecchia
(3).................... -- -- 58,958/31,042 $208,828/$38,672
Michael Willingham (4).. 4,000 $26,000 38,083/27,917 $122,719/$25,781
</TABLE>
- --------
(1) The value of unexercised in-the-money is based on the closing price of
the Company's Common Stock as reported on the Nasdaq National Market on
December 31, 1997 of $4.625 per share.
(2) Mr. Mahoney's employment was terminated on October 21, 1998.
(3) Mr. Nardecchia's employment was terminated on March 31, 1998.
(4) Mr. Willingham's employment was terminated on March 31, 1998.
COMPENSATION COMMITTEE REPORT
The following is a report of the Compensation Committee of the Board of
Directors (the "Committee") describing the compensation policies applicable to
the Company's executive officers during the fiscal year ended December 31,
1997. The Committee recommends salaries, incentives and other forms of
compensation for directors, officers and other employees of the Company,
administers the Company's various incentive compensation and benefit plans
(including stock plans) and recommends policies relating to such incentive
compensation and benefit plans. Executive officers who are also directors have
not participated in deliberations or decisions involving their own
compensation.
COMPENSATION POLICY
The Company's executive officer compensation philosophies are designed to
attract, motivate and retain senior management by providing an opportunity for
competitive, performance-based compensation. Executive officer compensation
consists of competitive base salaries and stock-based incentive opportunities
in the form of options to purchase the Company's Common Stock. The Company's
executive compensation program consists of three main components: (1) base
salary, (2) potential for bonus based on overall Company performance as well
as individual performance, (3) stock options/grants that provide the executive
officers with the opportunity to build a meaningful stake in the Company, with
the objective of aligning executive officers' long-range
37
<PAGE>
interests with those of the stockholders and encouraging the achievement of
superior results over time. The second and third elements of the compensation
program constitute the "at risk" components. The Committee annually evaluates
the Company's performance, actual compensation and stock ownership of
executive officers on a comparative basis with companies in the same industry
as well as other companies in the same geographical area.
BASE SALARIES FOR 1997
In establishing compensation guidelines with respect to base salary, the
Company utilized data from various surveys prepared by independent firms to
assist it in setting salary levels competitive with those of other similar
industry companies. While it is the Committee's intent to continue to review
periodically base salary information to monitor competitive ranges within the
applicable market, including consideration of the Company's geographic
location and individual job responsibilities, it is further the intent of the
Committee to maintain a close relationship between the Company's performance
and the base salary component of its executive officers' compensation.
STOCK OPTION AWARDS FOR 1997
The Company's 1996 Stock Plan provides for the issuance of stock options to
officers and employees of the Company to purchase shares of the Company's
Common Stock at an exercise price equal to the fair market value of such stock
on the date of grant. The Company's stock options typically vest ratably over
a period of four years. Stock options are granted to the Company's executive
officers and other employees both as a reward for past individual and
corporate performance and as an incentive for future performance. The
Committee believes that stock-based performance compensation arrangements are
essential in aligning the interests of management and the stockholders in
enhancing the value of the Company's equity.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The compensation for Rakesh Kumar, the Company's Chairman, President and
Chief Executive Officer ("CEO") is determined based on a number of factors,
including comparative salaries of CEO's of companies in the Company's peer
group, the CEO's individual performance and the Company's performance as
measured against the stated objectives. The CEO's total compensation package
includes stock option grants with the goal of motivating leadership for long-
term Company success and providing significant reward upon achievement of
Company objectives and enhancing stockholder value. As with other executives,
size of option grants is also based on a review of competitive survey data.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Committee has considered the impact of Section 162(m) of the Internal
Revenue Code adopted under the Omnibus Budget Reconciliation Act of 1993,
which section disallows a deduction for any publicly held corporation for
individual compensation exceeding $1 million in any taxable year for the CEO
and four other most highly compensated executive officers, unless such
compensation meets the requirements for the "performance-based" exception to
the general rule. Since the cash compensation paid by the Company to each of
its executive officers is expected to be well below $1 million and the Company
believes that options granted under the Company's 1996 Stock Option Plan will
meet the requirements for qualifying as performance-based, the Committee
believes that this section will not affect the tax deductions available to the
Company. It will be the Committee's policy to qualify, to the extent
reasonable, the executive officers' compensation for deductibility under
applicable tax law.
SUBMITTED BY THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS
Promod Haque
Lucio L. Lanza
Delbert W. Yocam
38
<PAGE>
STOCKHOLDER RETURN
The following table compares cumulative total stockholder return, assuming
reinvestment of all dividends, for the Company's Common Stock at December 31,
1997 since August 8, 1996 (the date on which the Company's stock was first
registered under Section 12 of the Securities Exchange Act of 1934, as
amended) to the cumulative return over such period of (i) the Hambrecht &
Quist Technology Index and (ii) the U.S. Index for the NASDAQ National Market.
The data assumes that $100 was invested on August 8, 1996 in the Common Stock
of the Company and each of the comparative indices. The data further assumes
that such amount was initially invested in the Common Stock of the Company at
a price per share of $8.00, the price at which such stock was first offered to
the public by the Company on that date. The stock price performance in the
following chart is not necessarily indicative of future stock price
performance.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG RASTER GRAPHICS, INC.,
THE HAMBRECHT & QUIST TECHNOLOGY INDEX
AND THE NASDAQ STOCK MARKET INDEX
<TABLE>
<CAPTION>
AUGUST 8, DECEMBER 31, DECEMBER 31,
1996 1996 1997
--------- ------------ ------------
<S> <C> <C> <C>
Raster Graphics, Inc................... 100 148 58
H & Q Technology Index................. 100 113 139
NASDAQ Stock Market Index.............. 100 118 139
</TABLE>
39
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of the Company's
Common Stock as of June 30, 1998 as to (i) each person who is known by the
Company to beneficially own more than five percent of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each of the executive
officers named in the Summary Compensation Table, and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED(1)
-----------------
5% STOCKHOLDERS, DIRECTORS
NAMED EXECUTIVE OFFICERS,
AND DIRECTORS AND
EXECUTIVE OFFICERS
AS A GROUP NUMBER PERCENT
------------------------------------------------------- --------- -------
<S> <C> <C>
State of Wisconsin Investment Board.................... 865,000 9.01%
P.O. Box 7842
Madison, WI 53707
Norwest Equity Partners IV,............................ 857,584 8.93%
a Minnesota Limited Partnership
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
Sihl................................................... 618,500 6.44%
Allmendstrasse 125
CH-8021 Zurich, Switzerland
FMR Corp............................................... 550,000 5.73%
82 Devonshire Street
Boston, MA 02109
Promod Haque(2)........................................ 869,251 9.04%
Rakesh Kumar(3)........................................ 312,145 3.16%
Sebastian J. Nardecchia(4)............................. 68,285 *
Delbert W. Yocam(5).................................... 51,667 *
Michael Willingham(6).................................. 44,333 *
Lucio L. Lanza(7)...................................... 14,167 *
Dennis R. Mahoney(8)................................... 238 *
Charles Case........................................... 0 *
All executive officers and directors as a group (8 per-
sons)(9).............................................. 1,360,086 13.49%
</TABLE>
- --------
* Less than 1.00%.
(1) Information with respect to beneficial ownership is based upon information
furnished by each director and officer or contained in filings made with
the Securities and Exchange Commission. Except as indicated in the
footnotes to this table, the stockholders named in this table have sole
voting and investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to community property laws
where applicable.
(2) 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. Haque disclaims beneficial ownership of such shares
except to the extent of his interest in such shares arising from his
interest in Norwest Equity Partners. Includes 11,667 shares issuable upon
the exercise of outstanding options exercisable within 60 days of June 30,
1998.
(3) Includes 292,499 shares issuable upon the exercise of outstanding options
exercisable within 60 days of June 30, 1998.
(4) Includes 66,458 shares issuable upon the exercise of outstanding options
exercisable within 60 days of June 30, 1998. Mr. Nardecchia's employment
was terminated on March 31, 1998.
(5) Includes 51,667 shares issuable upon the exercise of outstanding options
exercisable within 60 days of June 30, 1998.
(6) Includes 44,333 shares issuable upon the exercise of outstanding options
exercisable within 60 days of June 30, 1998. Mr. Willingham's employment
was terminated on March 31, 1998.
40
<PAGE>
(7) Includes 14,167 shares issuable upon the exercise of outstanding options
exercisable within 60 days of June 30, 1998.
(8) Mr. Mahoney's employment was terminated on October 21, 1997.
(9) Includes an aggregate 480,791 shares subject to options held by officers
and directors which options are exercisable within 60 days after June 30,
1998. In addition, this total includes an aggregate 857,584 shares held by
a director of the Company, beneficial ownership for such shares is
disclaimed within the meaning of Rule 13d-3 under the Exchange Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into an employment agreement with its Chief Executive
Officer on July 3, 1991, which provides for a six-month severance payment in
the event of termination of employment. On August 21, 1998, the Compensation
Committee approved the grant of a $300,000 retention bonus payable to the
Chief Executive Officer upon change of control of the Company. On August 21,
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. In addition, the Company entered into a consulting agreement
on May 14, 1998 with The Brenner Group LLC pursuant to which the Company has
retained the services of its Acting Chief Financial Officer. Under the terms
of the consulting agreement, the Company is obligated to pay The Brenner Group
LLC a fee of $155.00 per hour and a bonus and additional fees of $85,000 to a
maximum of $200,000 upon change of control or recapitalization which occurs
within six months of the expiration of the agreement or any extensions
thereto. The Company's consulting agreement with The Brenner Group LLC expires
November 13, 1998.
In March 1997, the Company issued an interest-free note receivable to the
Chief Financial Officer of $10,000. In June 1997, the Company issued an
additional note receivable to that officer of $80,000 which bore interest at
6.8% per annum and of which $5,000 was repaid in November 1997. In October
1997 the Chief Financial Officer's employment was terminated. Consulting fees
and severance expenses due to the officer as of December 31, 1997 amounted to
approximately $43,000 and were recorded as a reduction to the principal
amounts of the notes receivable. The remaining unpaid balance at December 31,
1997 of approximately $42,000 was repaid in 1998.
In November 1997, the Company issued an irrevocable standby letter of credit
in favor of Barclays' Bank on behalf of the Executive Vice President for an
unsecured personal line of credit in the amount of $175,000. This letter of
credit expired May 31, 1998.
The Company has entered into an indemnification agreement with each of its
executive officers and directors that may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or services as director or officer and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified.
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.
On March 18, 1997, the Company completed a merger with ColourPass, a
business in the United Kingdom, in which ColourPass was merged with Raster
Graphics System Limited, a wholly owned subsidiary of the Company. Pursuant to
the terms of the merger, the Company's Executive Vice President (who was an
80% stockholder of ColourPass) received 176,340 shares of Common Stock of the
Company.
41
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) The following documents are filed as part of this report:
(1) All financial statements:
Index to Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
The following financial statement schedule is included herein:
Schedule II--Valuation and Qualifying Accounts:
All other schedules have been omitted because the information
required to be set forth therein is not applicable or is shown
in the financial statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
2.1(1) Agreement and Plan of Reorganization dated as of June 12, 1995 among
Registrant, Onyx Graphics Corporation and Bank of America N.T.S.A.,
and Amendment dated as of December 31, 1995.
2.2(1) Form of Agreement and Plan of Merger between Registrant and Raster
Graphics, Inc. (a California Corporation)
3.1(1) Amended and Restated Articles of Incorporation of Registrant
(California)
3.2(1) Amended and Restated Articles of Incorporation of Registrant
(California)
3.3(1) Certificate of Incorporation of Registrant (Delaware)
3.4(1) Amended and Restated Certificate of Incorporation of Registrant
(Delaware)
3.5(1) Bylaws of Registrant (California)
3.6(1) Bylaws of Registrant (Delaware)
4.1 Reference is made to 3.1, 3.2, 3.3, 3.4, 3.5, 3.6 and 10.7
4.2(1) Specimen Common Stock Certificate
4.3(1) Form of Warrant of Registrant for Common Stock
4.4(1) Form of Warrant for Series B Preferred Stock
10.1(1)* 1988 Stock Option Plan
10.2(1)* 1996 Stock Plan
10.3(1)* 1996 Directors' Stock Option Plan
10.4(1)* 1996 Employee Stock Purchase Plan
10.5(1) Form of Indemnification Agreement (California)
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.6(1) Form of Indemnification Agreement (Delaware)
10.7(1) Amended and Restated Registration Rights Agreement dated as of
August 4, 1995 between Registrant and holders of its Preferred
Stock and warrant holders
10.8(1) Amended and Restated Product Agreement by and between Registrant,
Inc. and Oce Graphics France S.A. dated October 1, 1990 and
Amendments July 17, 1991, April 29, 1992, January 13, and
September 1, 1994
10.9(1) Purchase Agreement by and between ENCAD, Inc. and Onyx Graphics
Corporation dated March 9, 1996
10.10(1) Lease Agreement by and between Raster Graphics, Inc. and Principal
Mutual Life Insurance Company for facility on 3025 Orchard
Parkway, San Jose, CA
10.11(1)(2) Development and Purchase Agreement dated March 16, 1996
10.12(1) Employment Offer Letter Agreement between the Registrant and
Rakesh Kumar dated July 3, 1991
10.13(1) Employment Offer Letter Agreement between the Registrant and
Dennis Mahoney dated May 16, 1996
10.14(3) Assignment of the Lease Agreement between the Registrant and Kaman
Music Corporation and Coast Wholesale Music Division dated June
27, 1997
10.15(4) The Secured Loan Agreement between the Registrant and Dennis R.
Mahoney dated June 25, 1997
10.16 The Consulting Agreement between the Registrant and The Brenner
Group LLC dated May 14, 1998
10.17 Indemnification Agreement between the Registrant and The Brenner
Group LLC
10.18 Indemnification Agreement between Registrant and Kathy J. Bagby.
10.19 Agreement and Plan of Merger between Registrant and Gretag Imaging
Group, Inc. dated as of October 6, 1998
10.20 Loan and Pledge Agreement between Registrant and Gretag Imaging
Group, Inc. dated as of October 6, 1998
10.21 Asset and Subsidiary Stock Option Agreement between Registrant and
Gretag Imaging Group, Inc. dated as of October 6, 1998
10.22* 1997 Stock Option Plan
10.23 Form of Stockholders Agreement between Gretag Imaging Group, Inc.
and certain stockholders.
21.1(1) Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (reference is made to page 44 of this Report).
27 Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 333-06617), which was filed with the Commission on
August 8, 1996.
(2) Confidential treatment has been granted as to certain portions of this
Exhibit by the Securities and Exchange Commission.
* Management contract or compensatory plan or arrangement
(3) Incorporated by reference to exhibits of the Registrant 10-Q for the
quarter ended June 30, 1997.
(4) Incorporated by reference to exhibits of the Registrant 10-Q for the
quarter ended September 30, 1997.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter ended December 31,
1997.
43
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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 THIS 2ND DAY OF
OCTOBER, 1998.
RASTER GRAPHICS, INC
/s/ Rakesh Kumar
By: _________________________________
RAKESH KUMAR
PRESIDENT, AND CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF THE BOARD
(PRINCIPAL EXECUTIVE OFFICER)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS RAKESH KUMAR AND KATHY J. BAGBY, JOINTLY AND
SEVERALLY, HIS ATTORNEYS-IN-FACT, EACH WITH THE POWER OF SUBSTITUTION, FOR HIM
OR HER IN ANY AND ALL CAPACITIES, TO SIGN ANY AMENDMENTS TO THIS REPORT ON
FORM 10-K, AND TO FILE THE SAME, WITH EXHIBITS THERETO AND OTHER DOCUMENTS IN
CONNECTION THEREWITH WITH THE SECURITIES AND EXCHANGE COMMISSION, HEREBY
RATIFYING AND CONFIRMING ALL THAT EACH OF SAID ATTORNEYS-IN-FACT, OR HIS
SUBSTITUTE OR SUBSTITUTES MAY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Rakesh Kumar President, Chief October 2, 1998
- ------------------------------------- Executive Officer
RAKESH KUMAR and Chairman of the
Board (Principal
Executive Officer)
/s/ Kathy J. Bagby Acting Chief October 2, 1998
- ------------------------------------- Financial Officer
KATHY J. BAGBY
/s/ Charles Case Director October 2, 1998
- -------------------------------------
CHARLES CASE
/s/ Promod Haque Director October 2, 1998
- -------------------------------------
PROMOD HAQUE
/s/ Lucio L. Lanza Director October 2, 1998
- -------------------------------------
LUCIO L. LANZA
/s/ Delbert W. Yocam Director October 2, 1998
- -------------------------------------
DELBERT W. YOCAM
44
<PAGE>
RASTER GRAPHICS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
----------- ----------- ------
<C> <S> <C>
2.1(1) Agreement and Plan of Reorganization dated as of June 12,
1995 among Registrant, Onyx Graphics Corporation and Bank
of America N.T.S.A., and Amendment dated as of December
31, 1995.
2.2(1) Form of Agreement and Plan of Merger between Registrant
and Raster Graphics, Inc. (a California Corporation)
3.1(1) Amended and Restated Articles of Incorporation of
Registrant (California)
3.2(1) Amended and Restated Articles of Incorporation of
Registrant (California)
3.3(1) Certificate of Incorporation of Registrant (Delaware)
3.4(1) Amended and Restated Certificate of Incorporation of
Registrant (Delaware)
3.5(1) Bylaws of Registrant (California)
3.6(1) Bylaws of Registrant (Delaware)
4.1 Reference is made to 3.1, 3.2, 3.3, 3.4, 3.5, 3.6 and
10.7
4.2(1) Specimen Common Stock Certificate
4.3(1) Form of Warrant of Registrant for Common Stock
4.4(1) Form of Warrant for Series B Preferred Stock
10.1(1)* 1988 Stock Option Plan
10.2(1)* 1996 Stock Plan
10.3(1)* 1996 Directors' Stock Option Plan
10.4(1)* 1996 Employee Stock Purchase Plan
10.5(1) Form of Indemnification Agreement (California)
10.6(1) Form of Indemnification Agreement (Delaware)
10.7(1) Amended and Restated Registration Rights Agreement dated
as of August 4, 1995 between Registrant and holders of
its Preferred Stock and warrant holders
10.8(1) Amended and Restated Product Agreement by and between
Registrant, Inc. and Oce Graphics France S.A. dated
October 1, 1990 and Amendments July 17, 1991, April 29,
1992, January 13, and September 1, 1994
10.9(1) Purchase Agreement by and between ENCAD, Inc. and Onyx
Graphics Corporation dated March 9, 1996
10.10(1) Lease Agreement by and between Raster Graphics, Inc. and
Principal Mutual Life Insurance Company for facility on
3025 Orchard Parkway, San Jose, CA
10.11(1)(2) Development and Purchase Agreement dated March 16, 1996
10.12(1) Employment Offer Letter Agreement between the Registrant
and Rakesh Kumar dated July 3, 1991
10.13(1) Employment Offer Letter Agreement between the Registrant
and Dennis Mahoney dated May 16, 1996
10.14(3) Assignment of the Lease Agreement between the Registrant
and Kaman Music Corporation and Coast Wholesale Music
Division dated June 27, 1997
10.15(4) The Secured Loan Agreement between the Registrant and
Dennis R. Mahoney dated June 25, 1997
10.16 The Consulting Agreement between the Registrant and The
Brenner Group LLC dated May 14, 1998
10.17 Indemnification Agreement between the Registrant and The
Brenner Group LLC
10.18 Indemnification Agreement between Registrant and Kathy J.
Bagby.
10.19 Agreement and Plan of Merger between Registrant and
Gretag Imaging Group, Inc. dated as of October 6, 1998
10.20 Loan and Pledge Agreement between Registrant and Gretag
Imaging Group, Inc. dated as of October 6, 1998
10.21 Asset and Subsidiary Stock Option Agreement between
Registrant and Gretag Imaging Group, Inc. dated as of
October 6, 1998
10.22* 1997 Stock Option Plan
10.23 Form of Stockholders Agreement between Gretag Imaging
Group, Inc. and certain stockholders.
21.1(1) Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (reference is made to page 44 of this
Report).
27 Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 333-06617), which was filed with the Commission on August
8, 1996.
(2) Confidential treatment has been granted as to certain portions of this
Exhibit by the Securities and Exchange Commission.
* Management contract or compensatory plan or arrangement
(3) Incorporated by reference to exhibits of the Registrant 10-Q for the
quarter ended June 30, 1997.
(4) Incorporated by reference to exhibits of the Registrant 10-Q for the
quarter ended September 30, 1997.
45
<PAGE>
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 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
Raster Graphics, Inc. will continue as a going concern. As more fully
disclosed in Note 2 to the financial statements, the Company incurred
significant operating losses in 1997 and has experienced a significant decline
in working capital. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty
/s/ ERNST & YOUNG LLP
San Jose, California
September 25, 1998
46
<PAGE>
RASTER GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
(RESTATED)(1)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 3,727 $ 2,963
Short term investments............................ 1,600 13,100
Accounts receivable, net of allowance for doubtful
accounts of $4,668 in 1997 and $606 in 1996...... 8,050 10,070
Inventories....................................... 6,640 6,705
Prepaid expenses.................................. 523 506
------- -------
Total current assets............................ 20,540 33,344
Property and equipment, net....................... 4,443 2,547
Deposits and other assets......................... 575 585
Intangible assets related to acquisitions......... -- 102
------- -------
Total assets.................................... $25,558 $36,578
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 8,711 $ 4,953
Accrued payroll and related expenses.............. 1,000 1,089
Accrued warranty.................................. 670 331
Other accrued liabilities......................... 5,122 1,635
Deferred revenues................................. 1,361 1,162
Current portion of long-term borrowing............ 225 303
------- -------
Total current liabilities....................... 17,089 9,473
Long-term borrowing............................... 164 178
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Authorized shares -- 2,000,000
Issued and outstanding shares--none............. -- --
Common stock, $0.001 par value:
Authorized shares -- 50,000,000
Issued and outstanding shares 9,587,748 in 1997
and 9,192,289 in 1996.......................... 10 10
Additional paid-in capital........................ 43,279 42,746
Accumulated deficit............................... (34,382) (15,417)
Cumulative translation adjustment................. (315) --
Deferred compensation............................. (287) (392)
Note receivable from stockholder.................. -- (20)
------- -------
Total stockholders' equity...................... 8,305 26,927
------- -------
Total liabilities and stockholders' equity...... $25,558 $36,578
======= =======
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass. (See note 5.)
See accompanying notes to consolidated financial statements.
47
<PAGE>
RASTER GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
-------- ------------- -------------
(RESTATED)(1) (RESTATED)(1)
<S> <C> <C> <C>
Net revenues.............................. $ 48,928 $ 42,629 $ 28,870
Cost of revenues.......................... 42,754 25,343 18,691
-------- -------- --------
Gross profit.............................. 6,174 17,286 10,179
Operating expenses:
Research and development................ 5,763 4,516 3,373
Sales and marketing..................... 9,870 7,302 4,464
General and administrative.............. 3,855 1,887 925
Allowance for doubtful accounts......... 4,394 403 509
Merger related expenses................. 139 -- --
Write-off acquired goodwill............. 1,211 -- --
Acquired in-process research
and development........................ -- -- 889
-------- -------- --------
Total operating expenses.............. 25,232 14,108 10,160
-------- -------- --------
Operating income (loss)................... (19,058) 3,178 19
Interest income, net...................... 403 309 49
-------- -------- --------
Income (loss) before provision
for income taxes......................... (18,655) 3,487 68
Provision for income taxes................ 310 425 82
-------- -------- --------
Net income (loss)......................... $(18,965) $ 3,062 $ (14)
======== ======== ========
Net income (loss) per share--basic........ $ (2.01) $ 0.40 $ --
======== ======== ========
Weighted average number of shares
and equivalents outstanding--basic....... 9,426 7,562 6,025
-------- -------- --------
Net income (loss) per share--diluted...... $ (2.01) $ 0.35 $ --
======== ======== ========
Weighted average number of shares
and equivalents outstanding--diluted..... 9,426 8,642 6,025
======== ======== ========
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass. (See Note 5).
See accompanying notes to consolidated financial statements.
48
<PAGE>
RASTER GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
----------------------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------------- ------------------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995 (Restated)(1)..... 4,853,988 $ 5 420,852 $ 1 $22,433 $(18,465)
Issuance of convertible
preferred
stock, net of issuance
costs................. 595,368 1 -- -- 1,476 --
Issuance of convertible
preferred
stock for Onyx Acquisi-
tion.................. 443,360 -- -- -- 1,098 --
Issuance of common stock
under
stock option plan and
upon
exercise of warrants... -- -- 144,231 -- 260 --
Net income
(Restated)(1).......... -- -- -- -- -- (14)
------------- ------- --------- --- ------- --------
Balance at December 31,
1995 (Restated)(1)..... 5,892,716 6 565,083 1 25,267 (18,479)
Conversion of preferred
stock.................. (5,892,716) (6) 5,892,716 6 -- --
Proceeds from IPO, net
of
offering expenses of
$2,716................ -- -- 2,450,000 3 16,880 --
Issuance of common stock
under stock option
plans and
upon exercise of war-
rants................. -- -- 284,490 -- 181 --
Unearned compensation
related
to stock options....... -- -- -- -- 418 --
Amortization of unearned
compensation -- -- -- -- -- --
Note receivable from
stockholder............ -- -- -- -- -- --
Net income
(Restated)(1).......... -- -- -- -- -- 3,062
------------- ------- --------- --- ------- --------
Balance at December 31,
1996 (Restated)(1)..... -- -- 9,192,289 10 42,746 (15,417)
Issuance of common stock
under employee stock
purchase plan......... -- -- 59,261 -- 291 --
Issuance of common stock
under stock option
plans................. -- -- 336,198 -- 242 --
Amortization of unearned
compensation........... -- -- -- -- -- --
Repayment of note
receivable from
stockholder............ -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- --
Net loss................ -- -- -- -- -- (18,965)
------------- ------- --------- --- ------- --------
Balance at December 31,
1997................... -- $ -- 9,587,748 $10 $43,279 $(34,382)
============= ======= ========= === ======= ========
</TABLE>
- --------
(1) Restated for the pooling of interests with ColourPass (see Note 5).
49
<PAGE>
<TABLE>
<CAPTION>
NOTES
CUMULATIVE RECEIVABLE TOTAL
TRANSLATION DEFERRED FROM STOCKHOLDERS'
ADJUSTMENT COMPENSATION STOCKHOLDERS EQUITY
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995
(Restated)(1)............. $ -- $ -- $ -- $ 3,974
Issuance of convertible
preferred stock, net of
issuance costs............ -- -- -- 1,477
Issuance of convertible
preferred stock for Onyx
Acquisition............... -- -- -- 1,098
Issuance of common stock
under stock option plan
and upon exercise of
warrants.................. -- -- -- 260
Net income (Restated)(1)... -- -- -- (14)
------ ------ ----- --------
Balance at December 31,
1995 (Restated)(1)........ -- -- -- 6,795
Conversion of preferred
stock..................... -- -- -- --
Proceeds from IPO, net of
offering expenses of
$2,716.................... -- -- -- 16,883
Issuance of common stock
under stock option plans
and upon exercise of
warrants.................. -- -- -- 181
Unearned compensation
related to stock options.. -- (418) -- --
Amortization of unearned
compensation.............. -- 26 -- 26
Note receivable from
stockholder............... -- -- (20) (20)
Net income (Restated)(1)... -- -- -- 3,062
------ ------ ----- --------
Balance at December 31,
1996 (Restated)(1)........ -- (392) (20) 26,927
Issuance of common stock
under employee stock
purchase plan............. -- -- -- 291
Issuance of common stock
under stock option plans.. -- -- -- 242
Amortization of unearned
compensation.............. -- 105 -- 105
Repayment of note
receivable from
stockholder............... -- -- 20 20
Foreign currency
translation adjustment.... (315) -- -- (315)
Net loss................... -- -- -- (18,965)
------ ------ ----- --------
Balance at December 31,
1997...................... $ (315) $ (287) $ -- $ 8,305
====== ====== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
RASTER GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------- ------------
(RESTATED)(1) (RESTATED)(1)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................... $(18,965) $ 3,062 $ (14)
Adjustments to reconcile net (loss)
income to net cash used in
operating activities:
Depreciation...................... 1,139 1,018 697
Amortization...................... 102 156 196
Acquired in-process research and
development...................... -- -- 889
Amortization of deferred
compensation..................... 105 26 --
Changes in operating assets and
liabilities:
Accounts receivable............... 2,757 (4,100) (2,185)
Inventories....................... 926 (3,328) (1,394)
Prepaid expenses and other
assets........................... 100 (817) 274
Accounts payable.................. 1,682 2,437 1,298
Accrued payroll and related
expenses......................... (89) 506 123
Other accrued liabilities......... 3,731 709 429
Deferred revenue from related
parties.......................... -- -- (152)
Deferred revenues................. 199 48 (760)
-------- ------- ------
Net cash used in operating
activities......................... (8,313) (283) (599)
INVESTING ACTIVITIES
Capital expenditures................ (2,746) (1,871) (1,121)
Datagraph acquisition, net of cash
acquired........................... 235 -- 55
Purchases of short term
investments........................ (485) (32,055) --
Proceeds from sale of short term
investments........................ 11,985 18,955 --
-------- ------- ------
Net cash provided by (used in)
investing activities............... 8,989 (14,971) (1,066)
FINANCING ACTIVITIES
Proceeds from notes payable......... -- -- 418
Repayment of term loan.............. (148) (378) (473)
Repayment of note from shareholder.. 20 -- --
Proceeds from Initial Public
Offering........................... -- 16,884 --
Proceeds from exercise of common
stock options...................... 533 161 196
Proceeds from issuance of
convertible preferred stock........ -- -- 1,467
-------- ------- ------
Net cash provided by financing
activities......................... 405 16,667 1,608
-------- ------- ------
Effect of exchange rate changes on
cash and cash equivalent........... (317) -- --
-------- ------- ------
Net increase (decrease) in cash and
cash equivalents................... 764 1,413 (57)
Cash and cash equivalents at
beginning of year.................. 2,963 1,550 1,607
-------- ------- ------
Cash and cash equivalents at end of
year............................... $ 3,727 $ 2,963 $1,550
======== ======= ======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for interest.............. $ 64 $ 73 $ 57
Cash paid for taxes................. $ 72 $ 85 $ 28
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass (see Note 5).
See accompanying notes to consolidated financial statements.
51
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PREVIOUSLY REPORTED FINANCIAL RESULTS
On February 26, 1998 the Company announced its financial results for the
year ended December 31, 1997. The Company reported revenue of $54.7 million,
gross profit of $19.5 million, operating expenses of $20.6 million and a net
loss of $1.2 million for fiscal 1997. On April 1, 1998 the Company announced
that it would revise its 1997 financial results.
In March 1998, after consultation with its independent accountants, the
Board of Directors of the Company performed a review of the Company's
accounting and business practices. By mid-April the Board of Directors became
aware of pervasive errors and irregularities that ultimately affect the dollar
amount and timing of reported revenues in 1997. The Board of Directors
instructed that an analysis be conducted on these matters.
The irregularities took numerous forms and were primarily the result of a
lack of compliance with the Company's procedures and controls. The Company has
concluded that the earnings process for a significant number of printer sales
were not complete at the time of 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.
In addition, the Company has determined that its allowances for doubtful
accounts receivable balances and excess and obsolete inventory, and the
realizable value of inventory and the goodwill recorded on the acquisition of
Datagraph have been incorrectly estimated.
As a result, for the year ended December 31, 1997 the Company reversed
recorded revenues of $5.8 million, recorded additional cost of revenue of $7.6
million, and additional operating expenses of $4.6 million. In addition, the
Company has restated its previously reported results for each interim period
in the nine months ended September 30, 1997.
The Company has also restated the net assets purchased on the acquisition of
Datagraph, a distributor of LFDP systems in France. The original figures were
based on an estimate, which has since been revised to reflect actual values.
In particular, an intangible asset of $1,420,000 was initially recorded and
was revised to $1,211,000. This intangible asset was written off in the fourth
quarter of 1997 following a revision to the Company's sales forecasts. In
addition, based on recent developments, it is likely that Datagraph will
commence bankruptcy proceedings in the near term and cease operations.
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Raster Graphics, Inc. (the Company) was incorporated on July 27, 1987. The
Company operates in a single segment consisting of the design, manufacture and
marketing of large format digital printing systems and related software and
consumables.
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, Raster Graphics Limited, a company incorporated in
England and Wales and Datagraph, a French corporation. The functional
currencies of the subsidiaries have been determined to be the local
currencies. Consequently, assets and liabilities of operations outside the
United States are translated into U.S. dollars using period-end exchange
rates, and revenues and expenses are translated at the average monthly
exchange rates. Gains and losses from this translation process are credited or
charged to stockholders' equity. All material inter-company accounts and
transactions have been eliminated.
52
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These consolidated financial statements have been restated to include the
amounts of ColourPass, which was merged with the Company's wholly owned
subsidiary, Raster Graphics Systems Ltd., effected March 18, 1997, for
relevant periods prior to the merger (see Note 5). All periods presented have
been restated to reflect the merger which has been accounted for as a pooling
of interests.
As a result of the Company's significant operating losses and the cost of
acquiring and funding its recent acquisitions, the Company's working capital
has been substantially reduced. The Company ended fiscal 1997 with a working
capital of $3.5 million and cash, cash equivalents and short-term investments
of $5.3 million compared with $23.9 million of working capital and $16.1
million of cash, cash equivalents, and short-term investments at the end of
fiscal 1996. The Company's accumulated deficit was $34.4 million at December
31, 1997. The Company's available working capital is not sufficient to
maintain the Company's activities.
Operating results for the quarters ended March 31, 1998, and June 30, 1998,
based upon trended analysis, indicate that Company revenues have decreased and
expenses have increased. In order to return to profitability, the Company must
take active measures to reverse this trend. There can be no assurances that
this trend will be reversed or that the Company will return to profitability.
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. (See Note 12 for a description of
amounts payable on a change in control.)
The Company's future capital requirements, however, depend on numerous
factors, including, without limitation, the success of marketing, sales, and
distribution efforts; the success of its research and development programs;
the costs involved in preparing, filing, prosecuting, defending, and enforcing
intellectual property rights; competition; competing technology and market
developments; and the effectiveness of product commercialization activities
and arrangements.
There can be no assurance that the Company will obtain further additional
financing or product revenue necessary to continue operations. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
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
53
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
In particular, the Company has recorded accounts receivable of $8,050,000,
net of an allowance for doubtful accounts of $4,668,000. The allowance for
doubtful accounts is based among other things, upon management's estimate as
to the credit worthiness of its customers and their willingness to pay.
Management has undertaken efforts to collect amounts owed by its customers and
to reduce the accounts receivable balance to more desired levels over the near
term. No estimate can be made of a range of amounts of loss that are
reasonably possible, should Management's efforts not be successful.
Management also determined that the Company's inventory is in excess of its
current requirements and has written down inventory by $10.4 million to
reflect net realizable value and also excess and obsolete inventory.
Management is in the process of developing a plan to reduce the Company's
inventory to more desired levels over the near term. No estimate can be made
of a range of amounts of loss that are reasonably possible should the plan not
be successful.
Furthermore, management has estimated the expected cost of performing work
under printer warranties, which is based in part on the number of units sold,
the likelihood of operating problems occurring and the cost of repair and has
included in cost of revenues of approximately $653,000 for the expected costs.
No estimate can be made of the range of amounts of loss that are reasonably
possible should the warranty work not be successful.
Cash Equivalents and 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 stockholder's
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.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or fair
market value.
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.
Revenue Recognition
Revenue from product sales is recognized upon the later of shipment,
acceptance of the product by the customer, or when payment from the customer
is assured. In particular, where the Company has made arrangements with
customers, such as resellers, that have resulted in contingencies or
allowances after the product has shipped, revenue is recognized once the
contingency has been removed and cash collection is assured.
54
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Further, where a customer has obtained financing through a third party
broker, revenue is not recognized until the finance agreement is in place and
the product has been accepted by the customer.
Revenue under maintenance contracts is recognized ratably over the term of
the related contract, generally twelve months.
The Company estimates and maintains a reserve for product returns.
Advertising Costs
Advertising costs are expensed when incurred and amounted to $161,000,
$190,000 and $77,000 for the years ended December 31, 1997, 1996, and 1995
respectively.
Net Income (Loss) 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 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 years ended December 31, 1995
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).
Impact of Recently Issued Accounting Standards
In October 1997 and March 1998 the Accounting Standards Executive Committee
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition" and
SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition", respectively, which will be effective for the Company's
transactions entered into after December 31, 1997. The Company is assessing
the impact of the implementation of SOP 97-2 and SOP 98-4 on reported revenue
and earnings.
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. The
Company is assessing the impact of this Statement on its financial statements.
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. The Company is assessing the
impact of this Statement on its financial statements.
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, including certain derivative instruments embedded in other
contracts (collectively referred
55
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to as derivatives) 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. The Company is assessing the impact of
this Statement on its financial statements.
2. CONCENTRATIONS
Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of investments in cash equivalents, short
term investments and receivables from customers. The Company invests in money
market funds, commercial paper and state and municipal bonds of high credit
quality institutions. The Company is exposed to credit risks in the event of
default by these institutions to the extent of the amount recorded on the
balance sheet. The Company maintains reserves for potential credit losses.
A significant number of the Company's customers and suppliers are based in
Asia and Latin America. The financial instability in these regions may have an
adverse impact on the financial position of customers and suppliers in the
region which could impact the Company's future revenues and operations,
including the ability of customers to pay the Company. Should the current
volatility in Asia and Latin America continue, either the Company or the
Company's customers may be unable to sell its products in the region. The
inability to generate revenue in this region, or the inability to collect
amounts due, would have a material adverse impact on the Company's business,
financial condition and results of operations.
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 the PiezoPrint 1000 printer and for
certain critical components for the PiezoPrint 5000 and DCS printers. The
Company also relies on single suppliers for certain consumables to support its
line of printers. 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 would have a material adverse effect on
the Company's business, financial condition, and results of operations.
Dependence on Limited Products
The majority of the Company's sales are derived from two principal product
lines, the DCS and PiezoPrint printing systems, printers and related
consumables, and the Company anticipates that it will derive the bulk of its
future revenues from sales of these products. If the Company is unable to
generate sufficient sales of these product lines due to competitive factors,
manufacturing difficulties, or other reasons, it may be unable to continue its
business.
Major Customers
One customer accounted for 10.9% of net revenues for 1995. No customer
accounted for more than 10% of net revenue during 1997 or 1996.
3. FINANCIAL INSTRUMENTS
Available-For-Sale Securities
As of December 31, 1997, the Company has $1.6 million of investments in
state and municipal bonds. These state and municipal bonds bear interest at a
rate which automatically resets to the prevailing market interest rate
56
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at approximately 35-day intervals. As of December 31, 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 December 31,
1997 were immaterial to the Company and, therefore, no amounts were recorded
to stockholders' equity. There were no sales of available-for-sale securities
during fiscal 1996.
Derivative Financial Instruments
During the period covered by the financial statements, the Company has not
used any derivative instrument for trading purposes.
Although the majority of the Company's transactions are denominated in U.S.
dollars, its operations have resulted in some foreign currency exchange rate
fluctuation exposure. The Company utilized foreign currency forward exchange
contracts to manage some of its foreign currency firm purchase commitments.
At December 31, 1997, the Company held a foreign currency forward contract
which matured in January 1998 to buy 25.6 million Japanese yen for $200,000.
The fair value of the yen underlying this instrument at December 31, 1997, was
$196,000.
Valuation of Financial Instruments
The fair values for cash equivalents and short term investments represent
the quoted market prices at the balance sheet dates. The fair values for
foreign currency forward contracts represent the difference between the
contracted forward rate and the quoted fair value of the underlying yen at the
balance sheet date.
4. BALANCE SHEET COMPONENTS
Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
(RESTATED)(1)
<S> <C> <C>
Raw materials.................................. $ 2,934 $ 956
Work in progress............................... 958 1,708
Finished goods................................. 2,748 4,041
------- ------
$ 6,640 $6,705
======= ======
</TABLE>
--------
(1) Restated for the pooling of interest with ColourPass (see Note 5)
57
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
(RESTATED)(1)
<S> <C> <C>
Machinery and equipment........................ $8,518 $5,615
Furniture and fixtures......................... 517 400
Leasehold improvements......................... 728 543
------ ------
9,763 6,558
Accumulated depreciation....................... 5,320 4,011
------ ------
$4,443 $2,547
====== ======
</TABLE>
--------
(1) Restated for the pooling of interest with ColourPass (see Note 5)
Property and equipment includes approximately $213,000 of equipment under
capital leases as of December 31, 1997. The related depreciation expense
totaled approximately $9,000 for the year ended December 31, 1997. The Company
did not have any property and equipment under capital leases as of December
31, 1996.
INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
(RESTATED)(1)
<S> <C>
Assembled work force........................................ $ 80
Trademarks and tradenames................................... 54
Developed technology........................................ 280
Distributor relationships................................... 40
Goodwill.................................................... --
----
454
Accumulated amortization.................................... 352
----
Net intangible assets....................................... $102
====
</TABLE>
--------
(1) Restated for the pooling of interest with ColourPass (see Note 5)
At December 31, 1997 all intangible assets were either fully amortized or
written off.
The Company has adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
As a result of the existence of certain impairment indicators, the Company
had determined that the value of certain assets are impaired and has recorded
impairment write-downs of $1.2 million in relation to certain intangible
assets (see Note 5), which have been expensed in fiscal 1997. Those impairment
indicators include a significant operating loss in 1997.
58
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. BUSINESS COMBINATIONS
On September 30, 1997, Raster Graphics acquired Datagraph, a French-based
distributor of large-format digital imaging systems. In exchange for the
outstanding stock of Datagraph, the Company agreed to pay approximately
$1,100,000 in a series of payments through September 30, 1998. The acquisition
was accounted for as a purchase with the results of operations of the acquired
business being included in the consolidated results of operations for the
period subsequent to the acquisition date. Including acquisition costs, the
transaction resulted in goodwill of $1,211,000, which based on the Company's
sales forecasts was written off during the fourth quarter of 1997. The
operating results of Datagraph prior to the acquisition are not material in
relation to the Company. In addition, based on recent developments, it is
likely that Datagraph will commence bankruptcy proceedings in the near term
and cease operations.
On March 18, 1997, the Company completed a merger with ColourPass, a
business in the United Kingdom, in which ColourPass was merged with Raster
Graphics System Limited, a wholly owned subsidiary of the Company. On the
effective date of the merger, the Company issued 220,426 shares of common
stock to the owners of ColourPass. The combination was accounted for as a
pooling of interests. Accordingly, the consolidated statements of operations
for the years ended December 31, 1996 and 1995, the balance sheet as of
December 31, 1996, 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 $139,000 incurred in the first quarter of 1997 were included in
the Raster Graphics, Inc. and ColourPass net income (loss).
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
(RESTATED)(1)
<S> <C> <C>
Revenues
Raster Graphics, Inc......................... $39,395 $26,045
ColourPass................................... 3,234 2,825
------- -------
Combined................................... $42,629 $28,870
======= =======
Net income (loss)
Raster Graphics, Inc......................... $ 3,298 $ 77
ColourPass................................... (236) (91)
------- -------
Combined................................... $ 3,062 $ (14)
======= =======
</TABLE>
On August 10, 1995, the Company acquired Onyx Graphics Corporation ("Onyx")
for 443,359 shares of convertible preferred stock of the Company, the
cancellation of a note due from Onyx and for the assumption of options to
acquire Onyx common stock. The consideration, including acquisition costs,
totaled $1.5 million. The Company expensed $750,000 of acquired in-process
research and development and wrote off $139,000 for redundant PostScript
licenses in the September 1995 quarter. The acquisition has been accounted for
as a purchase with the results of operations of the acquired business being
included in the consolidated results of operations for the period subsequent
to the acquisition date.
59
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except earnings per share):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1997 1996 1995
-------- ------ -----
<S> <C> <C> <C>
Numerator for basic and diluted earnings per
share net income (loss)......................... $(18,965) $3,062 $ (14)
======== ====== =====
Denominator for basic earnings per share
Weighted average common shares................... 9,426 4,007 441
Convertible preferred stock (pro forma 1996 and
1995)........................................... -- 3,555 5,584
-------- ------ -----
Shares used in computing basic earnings per share
(pro forma 1996 and 1995)....................... 9,426 7,562 6,025
======== ====== =====
Basic earnings per share (pro forma 1996 and
1995)........................................... $ (2.01) $ 0.40 $ --
======== ====== =====
Denominator for diluted earnings per share
Weighted average common shares................... 9,426 4,007 441
Convertible preferred stock (pro forma 1995)..... -- 3,555 5,584
Stock options and warrants....................... -- 1,080 --
-------- ------ -----
Shares used in computing diluted earnings per
share (pro forma 1995).......................... 9,426 8,642 6,025
======== ====== =====
Diluted earnings per share (pro forma 1995)...... $ (2.01) $ 0.35 $ --
======== ====== =====
</TABLE>
Options to purchase 1,735,714 shares and 10,400 shares issuable on the
conversion of warrants were outstanding at December 31, 1997 and 1,112,350
options to purchase shares and 10,400 shares issuable on the conversion of
warrants were outstanding at December 31, 1995 and were excluded from the
computation of diluted net loss per share because the effect would have been
anti-dilutive.
7. BORROWINGS
The Company's long-term debt includes two notes payable. The first note
issued on August 29, 1994 has a principal balance of $13,000 at December 31,
1997 with interest being charged at 1.0% above the lenders prime rate. An
additional note issued on June 5, 1995 has a principal balance of $115,000 at
December 31, 1997 with interest being charged at a rate of 0.5% above the
lenders prime rate. Such prime rate was 8.5% at December 31, 1997.
In December 1997 the Company's bank line of credit agreement was amended.
The facility was increased to $10 million and extended one year to expire on
December 13, 1998 and the line of credit is governed by a borrowing base of
eligible accounts receivable and is secured by the Company's assets. Interest
is charged at the lender's prime rate plus 0.25 percentage points.
In July 1998 the Company's bank line of credit agreement was further
amended. The facility was decreased to $4.1 million, extended to December 31,
1998 and the interest rate was revised to the Lender's prime rate plus 2.0
percentage points. At December 31, 1997, no amounts were outstanding under the
line of credit.
These 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. Currently, the Company is not in compliance with these
Bank covenants.
60
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, the Company's wholly owned subsidiary, Datagraph, has various
notes payable which have a total outstanding balance of $56,000 at December
31, 1997. As it is likely that Datagraph will commence bankruptcy proceedings
in the near term and cease operations, all of the outstanding balances have
been classified as being due within one year.
Future principal maturities on the notes payable at December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
1998.............................................. $184
====
</TABLE>
8. COMMITMENTS
The Company leases its principal facilities under operating lease
arrangements. Future minimum annual rental payments are as follows for the
years ended December 31 (in thousands):
<TABLE>
<S> <C>
1998............................................ $ 993
1999............................................ 967
2000............................................ 909
2001............................................ 690
2002............................................ 78
------
$3,637
======
</TABLE>
Rent expense for the fiscal years ended 1997, 1996, and 1995 was
approximately $895,000, $614,000, and $539,000, respectively.
The Company leases some equipment under capital leases. Future minimum lease
payments under capital leases are as follows for years ended December 31:
<TABLE>
<CAPTION>
CAPITAL
LEASES
--------------
(IN THOUSANDS)
<S> <C>
1998.................................... $ 69
1999.................................... 68
2000.................................... 68
2001.................................... 60
2002.................................... 9
----
Total minimum lease and principal pay-
ments.................................. 274
Amount representing interest............ (69)
----
Present value of future payments........ 205
Current portion of capital lease obliga-
tions.................................. 41
----
Noncurrent portion of capital lease ob-
ligations.............................. $164
====
</TABLE>
The Company has purchase commitments of approximately $2.1 million to
suppliers at December 31, 1997, including non-cancelable purchase orders
totaling $1 million for products in excess of current requirements which have
been expensed to cost of revenues in 1997.
9. STOCKHOLDERS' EQUITY
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 shares and per
share amounts in the accompanying consolidated financial statements have been
adjusted retroactively.
61
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Initial Public Offering
In August 1996, the Company completed its initial public offering and issued
2,450,000 shares of its common stock to the public at a price of $8.00 per
share. The Company received approximately $16.9 million of cash, net of
underwriting discounts, commissions, and other offering costs incurred to
date. Upon completion of the offering, all outstanding shares of Preferred
Stock and 70,412 warrants were converted into shares of Common Stock on a one-
for-one basis.
Upon completion of the offering, the Board of Directors was 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 number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders.
Stockholder Rights Plan
On February 3, 1998 the Board of Directors approved a Stockholder Rights
Plan where the Board declared a dividend of one right for each share of common
stock outstanding. Each right will entitle stockholders to buy one one-
thousandth of a share of the company's Series A participating Preferred Stock
at an exercise price of $30 and under certain circumstances will entitle
stockholders, other than a potential acquirer, to purchase at the then current
exercise price, that number of shares of Raster Graphics' common stock having
a market value at that time of twice the exercise price. The Rights will
separate from the common stock and become exercisable following the tenth day
after a person or group acquires beneficial ownership of 15% or more of the
Company's common stock or announces a tender or exchange offer, the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's common stock (the Distribution Date). The Rights expire
on the earliest of (a) January 29, 2008, (b) exchange or redemption of the
Rights or (c) consummation of a merger or consolidation or sale of assets
resulting in expiration of the Rights. The Rights will not have any voting
rights.
Stock Option Plans
The Company has stock option plans (the "Plans") under which key employees,
consultants and Directors may be granted incentive or nonstatutory stock
options for the purchase of common stock.
The Company's 1988 stock options plan (the "1988 Stock Plan") was adopted by
the Board of Directors in 1988. 1,560,000 shares are authorized for issuance
under this plan.
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 is administered by the
Board of Directors (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. An
aggregate of 150,000 shares of common stock are reserved for
62
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
issuance under the Directors' Plan. The Directors' Plan provides for the
granting 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.
The Company's 1997 Stock Option Plan (the "1997 Stock Plan") was adopted by
the Board of Directors in December 1997. An aggregate of 400,000 shares of the
Company's common stock are reserved for issuance under the 1997 Stock Plan.
The 1997 Stock Plan provides for the granting to employees (including officers
and employee directors upon joining the Company) and consultants of
nonstatutory stock options. The 1997 Stock Plan is administered by the Board
of Directors or a Committee designated by the Board (the "1997
Administrator"). The 1997 Administrator determines the terms of options
granted under the 1997 Stock Plan, including the number of shares subject to
the option, exercise price, term and exercisability.
There are 2,910,000 shares authorized under the Plans. Under the Plans,
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 2.08% or quarterly increments of approximately
6.25% of the total grant thereafter. Expiration dates are determined by the
Board of Directors, but in no event will they exceed ten years from the date
of grant. Unexercised options are cancelable thirty days after the date of
termination of employment.
Because of certain security laws issues applicable to the Company, no stock
option grants or exercises have been made (except for a stock grant to the
Company's Executive Vice President) since the Company was de-listed from the
NASDAQ National Market.
A summary of the Company's stock option activity, and related information
for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of year................ 1,535,800 $3.52 1,112,350 $0.51 623,770 $0.49
Granted................. 776,050 $7.10 632,841 $7.83 513,280 $0.53
Exercised............... (336,198) $0.72 (141,245) $0.48 (19,787) $0.50
Forfeited............... (239,938) $6.29 (68,146) $0.78 (4,913) $0.50
--------- --------- ---------
Outstanding--end of
year................... 1,735,714 $5.28 1,535,800 $3.52 1,112,350 $0.51
========= ===== ========= ===== ========= =====
</TABLE>
At December 31, 1997, there were 633,311 shares of common stock available
for option grants.
63
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about options outstanding and
exercisable by price range as of December 31, 1997:
<TABLE>
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AS OF LIFE (YEARS) PRICE AS OF PRICE
- --------------- ----------- ------------ -------- ----------- --------
$0.03 15,960 7.59 $0.03 15,960 $0.03
$0.50-$0.75 478,926 5.88 $0.50 413,632 $0.50
$0.80 19,400 7.59 $0.80 19,400 $0.80
$1.25-$1.50 11,600 7.87 $1.36 7,242 $1.36
$4.00-$6.00 344,281 9.43 $5.25 56,600 $5.23
$6.88-$8.75 613,886 8.91 $7.44 155,689 $7.39
$9.50-$11.00 251,661 8.97 $9.97 54,409 $9.96
--------- -------
1,735,714 8.15 $5.28 722,932 $3.07
=========== ============ ======== =========== ========
</TABLE>
Deferred Compensation
The Company recorded aggregate compensation of $418,000 during 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 1996. The amortization of deferred compensation is charged to
operations and is amortized over the vesting period of the options, which is
typically four years.
Stock Purchase Plans
In 1988, the Company adopted a stock purchase plan (the "1988 Plan") for
consultants and key employees of the Company. There are 90,000 shares
authorized for issuance under this plan. Under this 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 31, 1997, 24,000 shares
have been issued under the Plan.
The Company's 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan")
was adopted by the Board of Directors and approved by the stockholders in
August 1996. Upon adoption of the 1996 Purchase Plan, the Company's Board of
Directors determined to make no further grants under the 1988 Plan. A total of
400,000 shares of common stock has been reserved for issuance under this plan.
As of December 31, 1997, 54,661 shares have been issued under this plan.
The 1996 Purchase Plan, which is intended to qualify under Section 423 of
the Code, has been implemented by a series of twelve month offering periods
with purchases commencing on or about January 1 and July 1 of each year. The
Purchase Plan is administered 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. Because of
certain securities law issues applicable to the Company, no purchase was made
under the Plan on June 30, 1998, and all participants will have withdrawn from
the Plan as of September 25, 1998 without any exercise of outstanding options.
64
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounting for Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock based compensation
because, as discussed below, the alternative fair value accounting provided
for under FASB Statement No. 123, "Accounting for Stock-Based Compensation",
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's options generally equals the market price of the underlying
stock on the date of the grant, no compensation expense is recognized in the
Company's financial statements.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by Statement 123, which also requires that the information
be determined as if the Company has accounted for its employee stock options
(including shares issued under the Employee Stock Purchase Plan, collectively
called options') granted subsequent to December 31, 1994 under the fair value
method of the Statement. The fair value for these options was estimated at the
date of grant using the minimum value method prior to the Company's Initial
Public Offering ("IPO") in August 1996. Subsequent to the IPO, the fair value
of the options has been estimated using the Black-Scholes option pricing
model. The following weighted-average assumptions were used in the valuation
of options:
<TABLE>
<CAPTION>
EMPLOYEE STOCK
EMPLOYEE STOCK OPTIONS PURCHASE PLAN
------------------------- ------------------
1997 1996 1995 1997 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Risk-free interest rate... 6.47% 6.41% 6.46% 5.41% 5.64%
Dividend yield............ 0% 0% 0% 0% 0%
Volatility................ 0.85 0.28 0% 0.85 0.28
Average life.............. 5 years 5 years 5 years 6 months 6 months
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The weighted average fair value of options granted during the year ended
December 31, 1997, 1996 and 1995 was $5.09, $5.67, and $0.69 per share,
respectively for options granted at an exercise price equal to fair value at
the grant date, and $2.92 and per share, for options granted at an exercise
price less than the fair value at the grant date during the year ended
December 31, 1996. The weighted average estimated fair value of employee stock
purchase rights granted during 1997 was $4.25.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period (for employee
stock options) and the six month purchase period (for stock purchases under
the Employee Stock Purchase Plan). The Company's pro forma information at
December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
(RESTATED)(1) (RESTATED)(1)
<S> <C> <C> <C>
Pro forma net income (loss).... $(20,237,000) $2,810,000 $(61,000)
Pro forma basic income (loss)
per share..................... $ (2.16) $ 0.37 $ (0.01)
Pro forma diluted income (loss)
per share..................... $ (2.16) $ 0.33 $ (0.01)
</TABLE>
--------
(1) Restated for the pooling of interests with ColourPass. (See Note 5.)
65
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The effects of applying FAS 123 for either recognizing compensation expense
or providing pro forma disclosures are not likely to be representative of the
effects on reported net income (loss) for future years. As FAS 123 is
applicable only to options granted subsequent to December 31, 1994, its pro
forma effect will not be fully reflected until approximately the year 2000.
Warrants
During 1989, the Company issued warrants to purchase 10,400 shares of stock
at $12.50 per share to a financial institution in connection with an equipment
lease line. The warrants expired in 1998.
Common Stock Reserved
The Company has reserved shares of common stock for future issuance as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Stock Option Plans................... 2,369,025
Stock Purchase Plan.................. 345,339
Conversion of warrants............... 10,400
---------
2,724,764
=========
</TABLE>
Notes Receivable From Stockholder
On February 28, 1996, the Company issued a note receivable for $20,000 to a
consultant. The note incurred interest at a rate of 5.25% per annum and was
repaid in full in January, 1997.
10. TAXES ON INCOME
The tax provision consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................... $ -- $193 $40
State............................. 54 56 28
Foreign........................... 256 176 14
---- ---- ---
$310 $425 $82
==== ==== ===
</TABLE>
The difference between the tax provision and the amount computed by applying
the federal statutory income tax rate to income before provision for income
taxes is explained below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected provision (benefit) at
statutory rate.................. $ (5,619) $ 1,220 $ 24
State taxes...................... 54 56 28
Federal alternative minimum tax.. -- 81 40
Net operating losses (utilized)
not utilized.................... 5,875 (932) (10)
-------- ------- ----
Provision for income taxes....... $ 310 $ 425 $ 82
======== ======= ====
</TABLE>
66
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards............... $ 8,553 $ 3,238
Tax credit carryforwards....................... 1,640 1,278
Inventory reserve.............................. 673 367
Other accruals and reserves not deductible for
tax purposes.................................. 1,925 890
Other, net..................................... 565 350
-------- -------
Total deferred tax assets...................... 13,356 6,123
Valuation allowance for deferred tax assets.... (13,356) (6,123)
-------- -------
Net deferred tax assets........................ $ -- $ --
======== =======
</TABLE>
The net operating loss and credit carryforwards will expire in the years
2002 through 2012, if not utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
11. EXPORT AND INTERNATIONAL SALES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue from unaffiliated customers
US.......................................... $ 42,459 $39,071 $25,482
Europe...................................... 6,469 3,558 3,388
-------- ------- -------
Total revenue............................. $ 48,928 $42,629 $28,870
======== ======= =======
Transfers (eliminations)
US.......................................... $ (1,386) $ -- ($ 648)
Europe...................................... (9,684) (1,918) --
Eliminations................................ (450) (3,660) (240)
-------- ------- -------
Total transfers........................... $(11,520) ($5,578) ($ 888)
======== ======= =======
Income (Loss) from Operations
US.......................................... ($17,992) $ 3,594 $ 268
Europe...................................... (586) (181) (166)
Eliminations................................ (480) (235) (83)
-------- ------- -------
Total income (loss)....................... $(19,058) $ 3,178 $ 19
======== ======= =======
Identifiable assets
US.......................................... $ 26,214 $35,860 $12,641
Europe...................................... 11,341 4,314 1,452
Eliminations................................ (11,997) (3,596) (971)
-------- ------- -------
Total assets on balance sheet............. $ 25,558 $36,578 $13,122
======== ======= =======
</TABLE>
67
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total export sales by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Europe............................................. $ 4,464 $ 8,386 $ 7,252
Far East........................................... 4,865 4,161 3,184
Other.............................................. 3,497 5,856 2,358
------- ------- -------
$12,826 $18,403 $12,794
======= ======= =======
</TABLE>
International sales, including export sales and sales of the Company's
foreign subsidiaries, were $19.3 million, $22.0 million and $16.2 million in
1997, 1996 and 1995, respectively. International sales in 1996 and 1995 have
been restated for the merger with ColourPass (see Note 5).
12. RELATED PARTY TRANSACTIONS
In March 1997, the Company issued an interest-free note receivable to the
Chief Financial Officer of $10,000. In June 1997, the Company issued an
additional note receivable to that officer of $80,000 which bore interest at
6.8% per annum and of which $5,000 was repaid in November 1997. In October
1997 the Chief Financial Officer's employment was terminated. Consulting fees
and severance expenses due to the officer as of December 31, 1997 amounted to
approximately $43,000 and were recorded as a reduction to the principal
amounts of the notes receivable. The remaining unpaid balance at December 31,
1997 of approximately $42,000 was repaid in 1998.
In November 1997, the Company issued an irrevocable standby letter of credit
in favor of Barclays' Bank on behalf of the Executive Vice President for an
unsecured personal line of credit in the amount of $175,000. This letter of
credit expired May 31, 1998. 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 a
change in control of the Company, and a stock option grant of 175,000 shares.
In addition, the Company has agreed to make bonus payments to its Chief
Executive Officer, The Brenner Group, LLC, and general counsel to a maximum of
$600,000, on a change of control of the Company.
13. 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
through December 31, 1997.
14. PENDING LITIGATION
Commencing in March 1998 several class action lawsuits have been filed in
both state and federal courts purported by on behalf of stockholders 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.
68
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
15. SUBSEQUENT EVENTS
Restructuring
During the first quarter of 1998, the Company implemented a plan of internal
restructuring of its operations. The plan was initiated to reduce operating
expenses and improve the Company's financial condition. The plan resulted in a
reduction in headcount of approximately 28 and included several officers of
the Company. The costs associated with this restructuring totaled
approximately $300,000.
Agreement and Plan of Merger
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. (See Notes to the Consolidated
Financial Statements for a description of amounts payable on a change in
control.)
69
<PAGE>
SCHEDULE II
RASTER GRAPHICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT (REDUCTIONS) BALANCE AT
BEGINNING CHARGE TO END OF
CLASSIFICATIONS (IN THOUSANDS) OF PERIOD EXPENSE DEDUCTIONS PERIOD
------------------------------ ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEAR ENDED:
December 31, 1997............... $606 $4,394 $(332) $4,668
December 31, 1996
(Restated)(1).................. 467 403 (264) 606
December 31, 1995
(Restated)(1).................. 246 509 (288) 467
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass. (See Note 5.)
70
<PAGE>
EXHIBIT 10.16
CONSULTING ENGAGEMENT AGREEMENT
This Consulting Engagement Agreement (the" Agreement") is made effective as of
May 14, 1998, (the "Commencement Date") between The Brenner Group LLC, a
California limited liability company, with its principal place of business
located at 20195 Stevens Creek Blvd., St. 110, Cupertino, CA 95014-2357
("Consultant") and Raster Graphics Incorporated, a Delaware corporation, with
its principal place of business located at 3025 Orchard Parkway, San Jose, CA
95134 ("Client").
RECITALS
A. Consultant is in the business of providing management services to client
companies in all areas of business operations.
B. Client is in need of assistance in the form provided by Consultant.
C. Consultant and Client desire to enter into a consulting arrangement upon the
terms and conditions set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. ENGAGEMENT: Client agrees to engage Consultant under the terms of this
-----------
Agreement, and Consultant agrees to accept such engagement. Consultant, or
its representative shall be available to Client according to the time or the
projects specified in Exhibit A, attached hereto and made a part of this
Agreement by reference herein.
2. TERM AND TERMINATION: Consultant's engagement pursuant to this Agreement
---------------------
shall commence on May 14, 1998 and continue until September 30, 1998, unless
terminated earlier, as provided herein (the "Term"). At the end of the
Term, this Agreement shall automatically be extended for periods of three
(3) months each, unless one party gives the other party one (1) month notice
of their intent to not extend the Agreement. During the first five (5) days
after the effective date of this Agreement, either party may terminate this
Agreement with one day notice. Other than for the reasons described in
Section 4, below, either party may terminate this Agreement during the Term,
or any extensions thereof, by giving the other party one (1) month written
notice of their intent to so terminate.
3. COMPENSATION: As compensation for services rendered by Consultant pursuant
-------------
to this Agreement, Client shall pay Consultant the sum(s) as shown on
Exhibit A, plus reimbursement for any expenses incurred on Client's behalf.
If Consultant uses his automobile on Client's behalf, Client shall reimburse
Consultant for actual miles traveled at the rate of $0.32 per mile. Client
and Consultant agree that Exhibit A may be modified from time to time, and
such modifications shall be made a part of this Agreement when executed by
both parties.
<PAGE>
4. PERSONNEL: Client and Consultant agree that Consultant is not in the
---------
business of providing a recruiting or placement service for permanent
positions. However, if Client wishes to offer employment to any of
Consultant's representatives, and if the representative wishes to accept
such employment, Consultant has the right to invoice Client, and Client will
promptly pay, a fee as shown in the following table:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
<S> <C>
Period after the Effective Date of the Agreement % of estimated first
year's compensations
----------------------------------------------------------------------------
Within the first six (6) months 50%
----------------------------------------------------------------------------
Between seven (7) months and nine (9) months 40%
----------------------------------------------------------------------------
After the commencement of the tenth (10th) month 30%
----------------------------------------------------------------------------
</TABLE>
5. INVOICING AND PAYMENT: Consultant shall invoice Client as of the fifteenth
----------------------
and last day of each month for services performed pursuant to this
Agreement. Client shall pay Consultant's invoice, in full, within five (5)
business days of the date of Consultant's invoice. If Client does not
pay Consultant pursuant to these terms, Consultant shall have the right to
receive a retainer, as described in Paragraph 6, below.
6. RETAINER: If Consultant has the right, pursuant to Paragraph 5, above, to
---------
receive a retainer form Client, and further, if Consultant requests such
retainer, Client shall pay Consultant a retainer (the "Retainer") upon
written demand from Consultant. Such retainer shall approximate Consultant's
best estimate of one half month's worth of Consultant's charges working on
Client's matters. Client agrees that such retainer shall be replenished to
an amount equal to the following one half month's projected amount due for
projected services during such period. Any retainer remaining shall be
applied against the final invoice pursuant to this Agreement.
. STATUS: Consultant is engaged by Client as an independent contractor, and
-------
not as an employee. As such, Consultant is solely responsible for and will
make proper and timely payment of any and all taxes on amounts paid to him
by Client, including, if applicable, estimated state and federal income
taxes, self employment taxes, state disability insurance taxes and the like.
Consultant will not receive or participate in any of Client's employee
health insurance or any other employee fringe benefit programs, and
Consultant will not be covered by Client's workers' compensation and other
insurance policies.
<PAGE>
8. PROPRIETARY INFORMATION AND INVENTIONS: Consultant understands that certain
---------------------------------------
proprietary information of Client's may be disclosed to him during the term
of this Agreement. Unless such information was known to him prior to such
disclosure, or becomes part of the public domain, Consultant agrees not to
disclose such information to third parties for a period of twenty four
months, without prior written consent of the Client. Consultant
acknowledges that, if requested by Client, he will sign an additional and
separate Non-Disclosure Agreement with Client.
9. NO AUTHORITY: Consultant does not have, and is not granted by this
-------------
Agreement, any express or implied right or authority to assume or create
any obligations on behalf of, or in the name of, Client; or to bind Client
to, or enter into, directly or indirectly, any contract, agreement or
undertaking with any third party. If Client wishes to grant such authority
to Consultant, Client shall issue such authority to Consultant in writing
prior to Consultant taking any such action.
10. INDEMNITY: Client shall offer indemnification to Consultant in a manner
----------
that is acceptable to both parties.
11. MISCELLANEOUS:
--------------
A. ASSIGNMENT: This Agreement may not be assigned by either party hereto
-----------
without the prior written consent of the other.
B. ADDITIONAL PERSONNEL: Consultant may use additional personnel to support
---------------------
the requirements of Client under this Agreement. The additional personnel
will only be used after Client has agreed in writing to: (a) such
addition; (b) the compensation for such addition; (c) the term of such
addition, and (d) such addition is made a part of this Agreement by an
amendment to Exhibit A and executed by both parties.
C. GOVERNING LAW: This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of California.
<PAGE>
D. NOTICES: All notices hereunder shall be in writing, and shall be deemed
-------
given upon personal delivery or upon placing in the United States postal
service First Class delivery system, to the addresses set forth below:
IF TO CONSULTANT: IF TO CLIENT:
Richard M. Brenner Rak Kumar
Managing Director President & C.E.O.
The Brenner Group LLC Raster Graphics Incorporated
20195 Stevens Creek Blvd., St. 110 3025 Orchard Parkway
Cupertino, CA 95014 San Jose, CA 95134
Either party may change its notice address by written notice to the other in
accordance herewith.
E. AMENDMENT; ENTIRE AGREEMENT: This Agreement may be amended only in writing,
---------------------------
and signed by both parties. This Agreement sets forth the entire
understanding of the parties with respect to the subject matter hereof, and
expressly terminates and supersedes any and all oral and or written
understandings and agreements with regard to such subject matter.
F. ATTORNEYS' FEES: If any action is brought hereunder, the prevailing party
---------------
shall be entitled to reasonable attorneys' fees to be fixed by the court in
such action.
G. PARTIAL INVALIDITY: If any provision of this Agreement is found to be
------------------
invalid by any court or other authority, the invalidity of such provision
shall not affect the validity of the remaining provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement this 14th day of
May, 1998, to be effective as of the fourteenth day of May, 1998.
CONSULTANT: CLIENT:
- ---------- ------
/s/ Richard M. Brenner /s/ Rak Kumar
- -------------------------- ----------------------------
Signature Signature
Richard M. Brenner Rak Kumar
- -------------------------- ----------------------------
Name Name
Managing Director President & C.E.O.
- -------------------------- ----------------------------
Title Title
The Brenner Group LLC Raster Graphics Incorporated
- -------------------------- ----------------------------
Company Company
Page 4 of 5
<PAGE>
EXHIBIT A
THE ASSIGNMENTS SHALL BE DEFINED AS:
- ------------------------------------
. Consultant shall assist Client by performing duties normally associated with
the Chief Financial Officer of Client, including SEC report preparation for
Client's signature and managing the day to day accounting and finance
functions of Client's business.
. Consultant shall assist Client in such other matters as Client may reasonably
request.
CONSULTANT'S RATES FOR SUCH SERVICES:
- ------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Consultant's Representative Rate
-----------------------------------------------------------------
<S> <C>
1. Kathy J. Bagby, or equivalent $155 per hour
-----------------------------------------------------------------
</TABLE>
IN WITNESS WHEREOF, the parties have executed this Agreement this 14th day of
May, 1998, to be effective as of the fourteenth day of May, 1998.
<TABLE>
<CAPTION>
CONSULTANT: CLIENT:
- ---------- ------
<S> <C>
/s/ Richard M. Brenner /s/ Rak Kumar
- ------------------------------ -------------------------------
Richard M. Brenner Rak Kumar
- ------------------------------ -------------------------------
Name Name
Managing Director President & C.E.O
- ------------------------------ -------------------------------
Title Title
The Brenner Group LLC Raster Graphics Incorporated
- ------------------------------ --------------------------------
Company Company
</TABLE>
Page 5 of 5
<PAGE>
EXHIBIT A-1
This Exhibit A-1 is hereby added to the Consulting Engagement Agreement (the
"Agreement") between The Brenner Group LLC ("Consultant") and Raster Graphics
Incorporated ("Client") dated as of May 14, 1998. All terms and conditions of
the Agreement and this Exhibit A-1 shall continue to have the same meaning as in
the original Agreement. The intent of this Exhibit A-1 is to provide for the
additional compensation as described below. This Exhibit A-1 is an addition to
the Agreement, and Exhibit A in the Agreement shall remain in full effect and
force.
Consultant's additional rates for services:
- -------------------------------------------
. Client wishes to incentivize Consultant to continue to assist Client in the
management of its financial affairs. To accomplish this, Client agrees to
pay Consultant a fee, which is in addition to any other fees which
Consultant is entitled to pursuant to the Agreement, as more fully described
below (Additional Fee). Such Additional Fee shall be payable to Consultant
during the Term, and any extensions thereto, or at any time within six (6)
months of any termination of the Agreement if Client's business is sold or
merged or is re-capitalized (the "Transaction").
. If the Transaction is $5 million or greater but less than $7 million,
and occurs at any time prior to August 14, 1998, Consultant shall be
entitled to an Additional Fee of $85,000, payable upon presentation of an
invoice from Consultant to Client;
. If the Transaction is $5 million or greater but less than $7 million, and
occurs after August 14, 1998, Consultant shall be entitled to receive an
Additional Fee of $85,000 plus $17,000 for any month (or fraction
thereof), up to a maximum Additional Fee of $170,000, payable upon
presentation of an invoice from Consultant to Client;
. If the Transaction is greater than $7 million, and occurs at any time
prior to August 14, 1998, Consultant shall be entitled to an Additional
Fee of $100,000, payable upon presentation of an invoice from Consultant
to Client;
. If the Transaction is greater than $7 million, and occurs after August
14, 1998, Consultant shall be entitled to receive an Additional Fee of
$100,000 plus $20,000 for any month (or fraction thereof), up to a
maximum Additional Fee of $200,000, payable upon presentation of an
invoice from Consultant to Client.
IN WITNESS WHEREOF, the parties have executed this Agreement this 22nd day of
June, 1998, to be effective as of the fourteenth day of May, 1998.
Consultant: Client:
- ----------- -------
The Brenner Group LLC Raster Graphics Incorporated
/s/ Richard M. Brenner /s/ Rak Kumar
- ---------------------------- ------------------------------
Signature Signature
Richard M. Brenner Rak Kumar
- ---------------------------- ------------------------------
Name Name
Managing Director President & C.E.O.
- ---------------------------- ------------------------------
Title Title
Page 1 of 1
<PAGE>
EXHIBIT B
This Exhibit B is hereby added to the Consulting Engagement Agreement (the
"Agreement") between The Brenner Group LLC ("Consultant") and Raster Graphics
Incorporated ("Client") dated as of May 14, 1998. All terms and conditions of
the Agreement and this Exhibit B shall continue to have the same meaning as in
the original Agreement. This Exhibit B is an addition to the Agreement, and
Exhibit A and A-1 in the Agreement shall remain in full effect and force.
. The initial Term is hereby extended to November 13, 1998; and
. The Retainer paid by Client to Consultant shall remain in the possession of
Consultant until the earlier of the sale of Client's business (in which case
the Retainer shall be applied against the Success Fee owed to Consultant by
Client) or eighteen months from the last day services are performed under the
Agreement. Consultant shall apply the Retainer to fees for any additional
services requested as a result of any litigation support for Client, or for
any securities or other shareholder investigation which requires Consultant's
attention;
. As of November 13, 1998, the Success Fee which is payable by Client to
Consultant in the event of a Transaction valued at greater than $7 million is
$160,000. After November 13, 1998, if Consultant is utilized by Client for
less than 80 hours per month, the Success Fee shall be increased by $10,000
per month, or portion thereof, instead of $20,000 per month. If Client
utilizes Consultant for more than 80 hours per month, the success fee shall
continue to increment by $20,000, as described in Exhibit A-1.
IN WITNESS WHEREOF, the parties have executed this Agreement this 28th day of
September, 1998, to be effective as of the twenty eight day of September, 1998.
Consultant: Client:
- ----------- -------
THE BRENNER GROUP LLC RASTER GRAPHICS INCORPORATED
/s/ Richard M. Brenner /s/ Rak Kumar
- ---------------------------- ----------------------
Signature Signature
Richard M. Brenner Rak Kumar
- ---------------------------- ----------------------
Name Name
Managing Director President & C.E.O.
- ---------------------------- ----------------------
Title Title
Page 1 of 1
<PAGE>
EXHIBIT 10.17
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (the "Agreement") is made as of May 14, 1998
---------
by and between Raster Graphics, Inc., a Delaware corporation (the "Company"),
-------
and The Brenner Group LLC (the "Indemnitee") in its capacity as a consultant to
----------
the Company. As used herein Indemnitee shall mean the officers, directors,
members and agents of Indemnitee.
RECITALS
--------
The Company and Indemnitee recognize the increasing difficulty in obtaining
liability insurance for directors, officers, key employees and consultants, the
significant increases in the cost of such insurance and the general reductions
in the coverage of such insurance. The Company and Indemnitee further recognize
the substantial increase in corporate litigation in general, subjecting
directors, officers and key employees to expensive litigation risks at the same
time as the availability and coverage of liability insurance has been severely
limited. Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee is not willing to
continue to serve as consultant to the Company without additional protection.
The Company desires to attract the services of Indemnitee and to indemnify
Indemnitee so as to provide it with the maximum protection permitted by law.
For this purpose the Company and Indemnitee agree that Indemnitee is acting as
an "agent" of the Company within the meaning of Section 145 of the Delaware
General Corporation Law.
AGREEMENT
---------
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
---------------
(a) THIRD PARTY PROCEEDINGS. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order,
<PAGE>
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, or, with respect to any criminal
action or proceeding, that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while a director,
officer, employee or agent by reason of the fact that Indemnitee is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) and, to the fullest extent
permitted by law, amounts paid in settlement (if such settlement is approved in
advance by the Company, which approval shall not be unreasonably withheld), in
each case to the extent actually and reasonably incurred by Indemnitee in
connection with the defense or settlement of such action or suit if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company and its stockholders, except
that no indemnification under this Section 1(b) shall be made in respect of any
claim, issue or matter as to which Indemnitee shall have been finally
adjudicated by court order or judgment to be liable to the Company in the
performance of Indemnitee's duty to the Company and its stockholders unless and
only to the extent that the court in which such action or proceeding is or was
pending shall determine upon application that, in view of all the circumstances
of the case, Indemnitee is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
(c) MANDATORY PAYMENT OF EXPENSES. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. NO EMPLOYMENT RIGHTS. Nothing contained in this Agreement is intended
--------------------
to create in Indemnitee any right to continued employment.
3. EXPENSES; INDEMNIFICATION PROCEDURE.
-----------------------------------
(a) ADVANCEMENT OF EXPENSES. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section l(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall
<PAGE>
ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby.
(b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in writing as soon as practicable of any claim made
against Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company and shall be given in accordance with the provisions of
Section 12(d) below. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
(c) PROCEDURE. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than twenty (20) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within twenty (20) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the
Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) NOTICE TO INSURERS. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
<PAGE>
(e) SELECTION OF COUNSEL. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ counsel in any such proceeding at Indemnitee's expense; and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
-------------------------------------------------
(a) SCOPE. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors, officer, employee or agent, such changes shall be deemed
to be within the purview of Indemnitee's rights and the Company's obligations
under this Agreement. In the event of any change in any applicable law, statute
or rule which narrows the right of a Delaware corporation to indemnify a member
of its board of directors, officer, employee or agent, such changes, to the
extent not otherwise required by such law, statute or rule to be applied to this
Agreement shall have no effect on this Agreement or the parties' rights and
obligations hereunder.
(b) NONEXCLUSIVITY. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he, she or it may have
ceased to serve in any such capacity at the time of any action, suit or other
covered proceeding.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred in the
investigation, defense, appeal or settlement of any civil or criminal action,
suit or proceeding, but not, however, for the total
<PAGE>
amount thereof, the Company shall nevertheless indemnify Indemnitee for the
portion of such expenses, judgments, fines or penalties to which Indemnitee is
entitled.
6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
---
the position that indemnification is not permissible for liabilities arising
under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the SEC to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time
----------------------------------------
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing Indemnitee coverage for losses from
wrongful acts, or to ensure the Company's performance of its indemnification
obligations under this Agreement. Among other considerations, the Company will
weigh the costs of obtaining such insurance coverage against the protection
afforded by such coverage. In all policies of director and officer liability
insurance, Indemnitee shall be named as an insured in such a manner as to
provide Indemnitee the same rights and benefits as are accorded to the most
favorably insured of the Company's directors, if Indemnitee is a director; or of
the Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if Indemnitee is not an officer or
director but is a key employee. Notwithstanding the foregoing, the Company
shall have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, if the
premium costs for such insurance are disproportionate to the amount of coverage
provided, if the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a parent or subsidiary of the Company. Indemnitee shall
be given thirty (30) days advance written notice if the Company determines it
will terminate such insurance coverage of Indemnitee.
8. SEVERABILITY. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
<PAGE>
9. EXCEPTIONS. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
(b) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) INSURED CLAIMS. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) CLAIMS UNDER SECTION 16(B). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. CONSTRUCTION OF CERTAIN PHRASES.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
-------
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
-----------------
shall include employee benefit plans; references to "fines" shall include any
-----
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
-------------------------------------
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in
<PAGE>
good faith and in a manner Indemnitee reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan, Indemnitee
shall be deemed to have acted in a manner "not opposed to the best interests of
------------------------------------
the Company" as referred to in this Agreement.
- -----------
11. ATTORNEYS' FEES. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
12. MISCELLANEOUS.
-------------
(a) GOVERNING LAW. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) CONSTRUCTION. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(d) NOTICES. Any notice, demand or request required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram or forty-eight (48) hours after
being deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, and addressed to the party to be notified at such party's address as
set forth below or as subsequently modified by written notice.
(e) COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
<PAGE>
(f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
(g) SUBROGATION. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
to effectively bring suit to enforce such rights.
The parties hereto have executed this Agreement as of the day and year set
forth on the first page of this Agreement.
RASTER GRAPHICS, INC.
By: /s/ Rak Kumar
------------------------------
Title: President, CEO
----------------------------
Address: 3025 Orchard Parkway
San Jose, California 95134
AGREED TO AND ACCEPTED:
THE BRENNER GROUP LLC
/s/ Richard M. Brenner
- --------------------------
(SIGNATURE)
ADDRESS: 20195 Stevens Creek Blvd.
Suite 110
Cupertino, CA 95014
<PAGE>
EXHIBIT 10.18
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (the "Agreement") is made as of May 14, 1998
---------
by and between Raster Graphics, Inc., a Delaware corporation (the "Company"),
-------
and Kathy J. Bagby (the "Indemnitee") in its capacity as a consultant to the
----------
Company. As used herein Indemnitee shall mean the officers, directors, members
and agents of Indemnitee.
RECITALS
--------
The Company and Indemnitee recognize the increasing difficulty in obtaining
liability insurance for directors, officers, key employees and consultants, the
significant increases in the cost of such insurance and the general reductions
in the coverage of such insurance. The Company and Indemnitee further recognize
the substantial increase in corporate litigation in general, subjecting
directors, officers and key employees to expensive litigation risks at the same
time as the availability and coverage of liability insurance has been severely
limited. Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee is not willing to
continue to serve as consultant to the Company without additional protection.
The Company desires to attract the services of Indemnitee and to indemnify
Indemnitee so as to provide it with the maximum protection permitted by law.
For this purpose the Company and Indemnitee agree that Indemnitee is acting as
an "agent" of the Company within the meaning of Section 145 of the Delaware
General Corporation Law.
AGREEMENT
---------
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
---------------
(a) THIRD PARTY PROCEEDINGS. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order,
<PAGE>
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, or, with respect to any criminal
action or proceeding, that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company
---------------------------------------------
shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to
be made a party to any threatened, pending or completed action or proceeding
by or in the right of the Company or any subsidiary of the Company to procure
a judgment in its favor by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while a
director, officer, employee or agent by reason of the fact that Indemnitee is
or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) and, to the fullest
extent permitted by law, amounts paid in settlement (if such settlement is
approved in advance by the Company, which approval shall not be unreasonably
withheld), in each case to the extent actually and reasonably incurred by
Indemnitee in connection with the defense or settlement of such action or suit
if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in or not opposed to the best interests of the Company and its
stockholders, except that no indemnification under this Section 1(b) shall be
made in respect of any claim, issue or matter as to which Indemnitee shall
have been finally adjudicated by court order or judgment to be liable to the
Company in the performance of Indemnitee's duty to the Company and its
stockholders unless and only to the extent that the court in which such action
or proceeding is or was pending shall determine upon application that, in view
of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
(c) MANDATORY PAYMENT OF EXPENSES. To the extent that Indemnitee
-----------------------------
has been successful on the merits or otherwise in defense of any action, suit
or proceeding referred to in Section 1(a) or Section 1(b) or the defense of
any claim, issue or matter therein, Indemnitee shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee in connection therewith.
2. NO EMPLOYMENT RIGHTS. Nothing contained in this Agreement is intended
--------------------
to create in Indemnitee any right to continued employment.
3. EXPENSES; INDEMNIFICATION PROCEDURE.
-----------------------------------
(a) ADVANCEMENT OF EXPENSES. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense,
settlement or appeal of any civil or criminal action, suit or proceeding
referred to in Section l(a) or Section 1(b) hereof (including amounts actually
paid in settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall
<PAGE>
ultimately be determined that Indemnitee is not entitled to be indemnified by
the Company as authorized hereby.
(b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in writing as soon as practicable of any claim made
against Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company and shall be given in accordance with the provisions of
Section 12(d) below. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
(c) PROCEDURE. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than twenty (20) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within twenty (20) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the
Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) NOTICE TO INSURERS. If, at the time of the receipt of a
------------------
notice of a claim pursuant to Section 3(b) hereof, the Company has director
and officer liability insurance in effect, the Company shall give prompt
notice of the commencement of such proceeding to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to
pay, on behalf of the Indemnitee, all amounts payable as a result of such
proceeding in accordance with the terms of such policies.
<PAGE>
(e) SELECTION OF COUNSEL. In the event the Company shall be
--------------------
obligated under Section 3(a) hereof to pay the expenses of any proceeding
against Indemnitee, the Company, if appropriate, shall be entitled to assume
the defense of such proceeding, with counsel approved by Indemnitee, upon the
delivery to Indemnitee of written notice of its election so to do. After
delivery of such notice, approval of such counsel by Indemnitee and the
retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred
by Indemnitee with respect to the same proceeding, provided that (i)
Indemnitee shall have the right to employ counsel in any such proceeding at
Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee
has been previously authorized by the Company, (B) Indemnitee shall have
reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense or (C) the Company
shall not, in fact, have employed counsel to assume the defense of such
proceeding, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
-------------------------------------------------
(a) SCOPE. Notwithstanding any other provision of this Agreement,
-----
the Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not
specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change, after the date of this Agreement, in any applicable
law, statute, or rule which expands the right of a Delaware corporation to
indemnify a member of its board of directors, officer, employee or agent, such
changes shall be deemed to be within the purview of Indemnitee's rights and
the Company's obligations under this Agreement. In the event of any change in
any applicable law, statute or rule which narrows the right of a Delaware
corporation to indemnify a member of its board of directors, officer, employee
or agent, such changes, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement shall have no effect on this
Agreement or the parties' rights and obligations hereunder.
(b) NONEXCLUSIVITY. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he, she or it may have
ceased to serve in any such capacity at the time of any action, suit or other
covered proceeding.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceeding, but not, however, for the total
<PAGE>
amount thereof, the Company shall nevertheless indemnify Indemnitee for the
portion of such expenses, judgments, fines or penalties to which Indemnitee is
entitled.
6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
---
the position that indemnification is not permissible for liabilities arising
under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the SEC to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from
----------------------------------------
time to time, make the good faith determination whether or not it is
practicable for the Company to obtain and maintain a policy or policies of
insurance with reputable insurance companies providing Indemnitee coverage for
losses from wrongful acts, or to ensure the Company's performance of its
indemnification obligations under this Agreement. Among other considerations,
the Company will weigh the costs of obtaining such insurance coverage against
the protection afforded by such coverage. In all policies of director and
officer liability insurance, Indemnitee shall be named as an insured in such a
manner as to provide Indemnitee the same rights and benefits as are accorded
to the most favorably insured of the Company's directors, if Indemnitee is a
director; or of the Company's officers, if Indemnitee is not a director of the
Company but is an officer; or of the Company's key employees, if Indemnitee is
not an officer or director but is a key employee. Notwithstanding the
foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided
by such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
parent or subsidiary of the Company. Indemnitee shall be given thirty (30)
days advance written notice if the Company determines it will terminate such
insurance coverage of Indemnitee.
8. SEVERABILITY. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
<PAGE>
9. EXCEPTIONS. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance
------------------------------
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with
respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other statute or law or otherwise
as required under Section 145 of the Delaware General Corporation Law, but
such indemnification or advancement of expenses may be provided by the Company
in specific cases if the Board of Directors finds it to be appropriate;
(b) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) INSURED CLAIMS. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for
--------------------------
expenses or the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
10. CONSTRUCTION OF CERTAIN PHRASES.
-------------------------------
(a) For purposes of this Agreement, references to the "Company"
-------
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and
employees or agents, so that if Indemnitee is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, Indemnitee shall stand in the same position under the provisions
of this Agreement with respect to the resulting or surviving corporation as
Indemnitee would have with respect to such constituent corporation if its
separate existence had continued.
(b) For purposes of this Agreement, references to "other
-----
enterprises" shall include employee benefit plans; references to "fines" shall
- ----------- -----
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
-------------------------------------
include any service as a director, officer, employee or agent of the Company
which imposes duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and if Indemnitee acted in
<PAGE>
good faith and in a manner Indemnitee reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "not opposed to the best
-----------------------
interests of the Company" as referred to in this Agreement.
- ------------------------
11. ATTORNEYS' FEES. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
12. MISCELLANEOUS.
-------------
(a) GOVERNING LAW. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) CONSTRUCTION. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(d) NOTICES. Any notice, demand or request required or permitted
-------
to be given under this Agreement shall be in writing and shall be deemed
sufficient when delivered personally or sent by telegram or forty-eight (48)
hours after being deposited in the U.S. mail, as certified or registered mail,
with postage prepaid, and addressed to the party to be notified at such
party's address as set forth below or as subsequently modified by written
notice.
(e) COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
<PAGE>
(f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
----------------------
the Company and its successors and assigns, and inure to the benefit of
Indemnitee and Indemnitee's heirs, legal representatives and assigns.
(g) SUBROGATION. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
to effectively bring suit to enforce such rights.
The parties hereto have executed this Agreement as of the day and year set
forth on the first page of this Agreement.
RASTER GRAPHICS, INC.
/s/ Rak Kumar
By: ______________________________________
President and CEO
Title: ______________________________________
Address: 3025 Orchard Parkway
San Jose, California 95134
AGREED TO AND ACCEPTED:
KATHY J. BAGBY
/s/ Kathy J. Bagby
___________________________________
(SIGNATURE)
ADDRESS:
470 University Ave.
Los Altos, CA 94022
<PAGE>
EXHIBIT 10.19
EXECUTION COPY
================================================================================
AGREEMENT AND PLAN OF MERGER
between
GRETAG IMAGING GROUP, INC.
GRETAG ACQUISITION CORP.
and
RASTER GRAPHICS, INC.
Dated as of October 6, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE 1 The Merger............................................................ 2
1.1. The Merger.................................................... 2
1.2. The Closing................................................... 2
1.3. Effective Time................................................ 2
ARTICLE 2 Certificate of Incorporation and Bylawsof the Surviving
Corporation........................................................... 3
2.1. Certificate of Incorporation.................................. 3
2.2. Bylaws........................................................ 3
ARTICLE 3 Directors and Officers of the Surviving Corporation................... 3
3.1. Directors..................................................... 3
3.2. Officers...................................................... 3
ARTICLE 4 Effect of the Merger on Securitiesof Merger Sub and the
Company............................................................... 3
4.1. Merger Sub Stock.............................................. 3
4.2. Company Securities............................................ 4
4.3. Exchange of Certificates Representing Common Stock............ 5
4.4. Adjustment of Merger Consideration............................ 6
4.5. Dissenting Company Stockholders............................... 6
ARTICLE 5 Representations and Warranties of the Company......................... 7
5.1. Existence; Good Standing; Corporate Authority................. 7
5.2. Authorization, Validity and Effect of Agreements.............. 8
5.3. Compliance with Laws.......................................... 8
5.4. Capitalization................................................ 8
5.5. Subsidiaries.................................................. 9
5.6. No Violation................................................. 10
5.7. Company Reports; Proxy Statement............................. 11
5.8. Litigation................................................... 12
5.9. Absence of Certain Changes................................... 13
5.10. Taxes........................................................ 13
5.11. Employee Benefit Plans....................................... 15
5.12. Labor and Employment Matters................................. 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
5.13. Brokers and Finders.......................................... 17
5.14. Fairness Opinion............................................. 17
5.15. Licenses and Permits......................................... 17
5.16. Environmental Matters........................................ 17
5.17. Material Contracts........................................... 18
5.18. Intellectual Property; Technology............................ 20
5.19. Required Vote of Company Stockholders........................ 23
5.20. State Statutes............................................... 23
5.21. Disclosures.................................................. 23
ARTICLE 6 Representations and Warranties of Purchaser and Merger Sub........... 24
6.1. Existence; Good Standing; Corporate Authority................ 24
6.2. Authorization, Validity and Effect of Agreements............. 24
6.3. Proxy Statement.............................................. 24
6.4. No Violation................................................. 24
6.5. Financing.................................................... 25
6.6. Brokers and Finders.......................................... 25
ARTICLE 7 Covenants............................................................ 25
7.1. No Solicitation.............................................. 25
7.2. Interim Operations........................................... 27
7.3. Filings; Other Action........................................ 32
7.4. Access to Information........................................ 33
7.5. Publicity.................................................... 34
7.6. Further Action............................................... 34
7.7. Insurance; Indemnity......................................... 35
7.8. Restructuring of Merger...................................... 35
7.9. Employees and Employee Benefit Plans......................... 36
7.10. Stockholder Approval; Preparation of Proxy Statement......... 36
7.11. Additional Agreements of the Company......................... 38
7.12. Transfer Taxes............................................... 39
ARTICLE 8 Conditions........................................................... 39
8.1. Conditions to Each Party's Obligation to Effect the Merger... 39
8.2. Additional Conditions to Obligations of Purchaser and
Merger Sub to Effect the Merger.............................. 40
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
8.3. Additional Conditions to Obligations of the Company.......... 41
ARTICLE 9 Termination; Amendment; Waiver....................................... 41
9.1. Termination.................................................. 41
9.2. Effect of Termination........................................ 44
9.3. Amendment.................................................... 44
9.4. Extension; Waiver............................................ 44
ARTICLE 10 General Provisions................................................... 45
10.1. Nonsurvival of Representations and Warranties................ 45
10.2. Notices...................................................... 45
10.3. Assignment; Binding Effect................................... 45
10.4. Entire Agreement............................................. 46
10.5. Fees and Expenses............................................ 46
10.6. Governing Law................................................ 47
10.7. Headings..................................................... 48
10.8. Interpretation............................................... 48
10.9. Investigations............................................... 48
10.10. Severability................................................. 48
10.11. Enforcement of Agreement..................................... 48
10.12. Counterparts................................................. 49
DEFINITIONS ....................................................................... v
</TABLE>
DISCLOSURE SCHEDULE
EXHIBIT I Memorandum of Understanding
iii
<PAGE>
DEFINITIONS
<TABLE>
<CAPTION>
Defined Term Section Reference
------------ -----------------
<S> <C>
"Acquisition Agreement" Section 7.1(b)
---------------------
"Acquisition Proposal" Section 7.1
--------------------
"affiliate" Section 10.8
---------
"Agreement" First Paragraph
---------
"associate" Section 10.8
---------
"Board" or "Board of Directors" Section 7.15
----- ------------------
"Cap" Section 7.7(a)
---
"Certificate" Section 4.2(b)
-----------
"Closing" Section 1.2
-------
"Closing Date" Section 1.2
------------
"Commercial Software" Section 5.18(h)
-------------------
"Common Stock" Section 4.2(a)
------------
"Company" First Paragraph
-------
"Company Benefit Plans" Section 5.11
---------------------
"Company Intellectual Property" Section 5.18(b)
-----------------------------
"Company Owned Intellectual Property" Section 5.18
-----------------------------------
"Company Reports" Section 5.7(a)
---------------
"Company Software" Section 5.18(h)
----------------
"Company Stockholder Approval" Section 5.19
----------------------------
"Computer Systems" Section 5.18(i)
----------------
"Consents" Section 7.3
--------
"Contract" or "Contracts" Section 5.6
-------- ---------
"Current Policies" Section 7.7(a)
----------------
"Delaware Courts" Section 10.6
---------------
"Derivative" or "Derivatives" Section 5.17
---------- -----------
"DGCL" Section 4.5
----
"Disclosure Letter" Section 5
-----------------
"Dissenting Common Stock" Section 4.5
-----------------------
"Effective Time" Section 1.3
--------------
"Employee Agreements" Section 5.11
-------------------
"Encumbrances" Section 5.5
------------
</TABLE>
iv
<PAGE>
"Environmental Laws" Section 5.16(a)
------------------
"excess parachute payment" Section 5.11
------------------------
"Exchange Act" Section 5.6
------------
"Exchange Fund" Section 4.3(a)
-------------
"Fairness Opinion" Section 5.14
----------------
"Foreign Antitrust Laws" Section 5.6
----------------------
"Governmental Entity" Section 5.3
-------------------
"group" Section 8.2(g)
-----
"Hazardous Substances" Section 5.16(b)
--------------------
"HSR Act" Section 5.6
-------
"Information Statement" Section 5.7(b)
---------------------
"Inkjet Business" Option Agreement
---------------
"Inkjet Option" Option Agreement
-------------
"Intellectual Property" Section 5.18(j)
---------------------
"Laws" Section 5.3
----
"Litigation" Section 5.8
----------
"Loan Agreement" Recitals
--------------
"Losses" Section 7.7(b)
------
"Material Adverse Effect" Section 5.1
-----------------------
"Material Contracts" Section 5.17
------------------
"Material Delaying Effect" Section 5.6
------------------------
"Maximum Expense Amount" Section 10.5(b)
----------------------
"Merger" Section 1.1
------
"Merger Consideration" Section 4.2(a)
--------------------
"Merger Sub" First Paragraph
----------
"MOU" Section 5.8
---
"Option" or "Options" Section 4.2(d)
------ -------
"Option Agreement" Recitals
----------------
"Other Antitrust Consents" Section 7.3
------------------------
"Other Antitrust Filings" Section 7.3
-----------------------
"Paying Agent" Section 4.3(a)
------------
"Pending Reports" Section 7.10(c)
---------------
"Permits" Section 5.15
-------
"Preferred Stock" Section 5.4
---------------
"Proxy Statement" Section 7.10(b)
---------------
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
"Purchaser" First Paragraph
---------
"Purchaser Expenses" 11.5(b)
------------------
"Regulatory Filings" Section 5.6
------------------
"Requisite Regulatory Approvals" Section 8.1(f)
------------------------------
"Rights" Section 5.4
------
"Rights Agreement" Section 5.4
----------------
"Settlement" Section 5.8
----------
"SEC" Section 5.7
---
"Securities Act" Section 5.7(a)
--------------
"Seiko Epson Agreement" Section 7.11(d)
---------------------
"Software" Section 5.18(k)
--------
"Stock Option Plans" Section 4.2(d)
------------------
"Stock Purchase Plan" Section 5.4
-------------------
"Stockholders Agreement" Recitals
----------------------
"Stockholders Meeting" Section 7.10
--------------------
"Subsidiary" Section 10.8
----------
"Superior Proposal" Section 7.1
-----------------
"Surviving Corporation" Section 1.1
---------------------
"Tax" or "Taxes" Section 5.10(l)
--- -----
"Tax Return" Section 5.10(l)
----------
"Termination Amount" Section 10.5(b)
------------------
"Unaudited 1998 Financial Statements" Section 5.7
-----------------------------------
"Vested Options" Section 4.2(d)
--------------
</TABLE>
vi
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of October 6, 1998 (this
"Agreement"), among Gretag Imaging Group, Inc., a Delaware corporation
---------
("Purchaser"), Gretag Acquisition Corp., a Delaware corporation and a wholly
- -----------
owned subsidiary of Purchaser ("Merger Sub"), and Raster Graphics, Inc., a
----------
Delaware corporation (the "Company").
-------
RECITALS
WHEREAS, the Boards of Directors of Purchaser, Merger Sub and the Company
each have determined that it is advisable and in the best interests of their
respective companies and stockholders for Purchaser to acquire the Company upon
the terms and subject to the conditions set forth herein;
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Purchaser's and Merger Sub's willingness to enter into this
Agreement, the Purchaser and the Company are entering into an Asset and
Subsidiary Stock Option Agreement (the "Option Agreement"), pursuant to which
----------------
Purchaser shall have the right, upon the occurrence of certain conditions, to
purchase certain assets of the Company and/or the shares of Onyx Graphics
Corporation ("O-Sub"), a wholly owned Subsidiary of the Company;
-----
WHEREAS, concurrently with the execution of this Agreement and as a
condition and inducement to the Purchaser's and Merger Sub's willingness to
enter into this Agreement, certain stockholders of the Company, Purchaser and
Merger Sub are entering into a Stockholders Agreement (the "Stockholders
------------
Agreement"), pursuant to which such stockholders have agreed, among other
- ---------
things, to vote their shares in favor of the Merger;
WHEREAS, the Board of Directors of the Company has approved the
transactions contemplated by the Option Agreement and the Stockholders
Agreement;
WHEREAS, concurrently with the execution of this Agreement, the Company
and Purchaser have entered into a Loan and Pledge Agreement, dated as of the
date hereof (the "Loan Agreement") pursuant to which Purchaser has agreed to
--------------
advance certain amounts to the Company; and
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection herewith.
<PAGE>
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement,
----------
at the Effective Time, Merger Sub shall be merged with and into the Company in
accordance with this Agreement, and the separate corporate existence of Merger
Sub shall thereupon cease (the "Merger"). The Company shall be the surviving
------
corporation in the Merger (sometimes hereinafter referred to as the "Surviving
---------
Corporation"). The Merger shall have the effects specified in the DGCL.
- -----------
1.2 The Closing. Subject to the terms and conditions of this Agreement,
-----------
the closing of the Merger (the "Closing") shall take place at the offices of
-------
Debevoise & Plimpton, 875 Third Avenue, New York, New York, at 10:00 a.m., local
time, as soon as practicable following the satisfaction (or waiver if
permissible) of the conditions set forth in Article 8 or at such other time,
---------
date or place as Purchaser and the Company may agree. The date on which the
Closing occurs is hereinafter referred to as the "Closing Date."
------------
1.3 Effective Time. If all the conditions to the Merger set forth in
--------------
Article 8 shall have been fulfilled or waived in accordance herewith and this
- ---------
Agreement shall not have been terminated as provided in Article 9, the parties
---------
hereto shall cause a Certificate of Merger meeting the requirements of Sections
103 and 251 of the DGCL to be properly executed and filed in accordance with
such Sections on the Closing Date. The Merger shall become effective at the
time of filing of the Certificate of Merger with the Secretary of State of the
State of Delaware in accordance with the DGCL or at such later time which the
parties hereto shall have agreed upon and designated in such filing as the
effective time of the Merger (the "Effective Time").
--------------
2
<PAGE>
ARTICLE 2
CERTIFICATE OF INCORPORATION AND BYLAWS
OF THE SURVIVING CORPORATION
2.1 Certificate of Incorporation. The Certificate of Incorporation of
----------------------------
Merger Sub in effect immediately prior to the Effective Time shall be adopted as
the Certificate of Incorporation of the Surviving Corporation, until duly
amended in accordance with applicable law, except that the name of the Surviving
Corporation shall be "Raster Graphics, Inc."
2.2 Bylaws. The Bylaws of the Company in effect immediately prior to
------
the Effective Time shall be adopted as the Bylaws of the Surviving Corporation,
until duly amended in accordance with applicable law.
ARTICLE 3
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1 Directors. The directors of Merger Sub immediately prior to the
---------
Effective Time shall be the directors of the Surviving Corporation as of the
Effective Time and until their successors are duly appointed or elected in
accordance with applicable law.
3.2 Officers. The officers of the Company immediately prior to the
--------
Effective Time, together with such additions thereto as Merger Sub shall
designate, shall be the officers of the Surviving Corporation as of the
Effective Time and until their successors are duly appointed or elected in
accordance with applicable law.
ARTICLE 4
EFFECT OF THE MERGER ON SECURITIES
OF MERGER SUB AND THE COMPANY
4.1 Merger Sub Stock. At the Effective Time, each share of common
----------------
stock, $0.01 par value per share, of Merger Sub outstanding immediately prior to
the Effective Time shall be converted into and exchanged for one validly issued,
fully paid and
3
<PAGE>
nonassessable share of common stock, $0.001 par value per share, of the
Surviving Corporation.
4.2 Company Securities.
------------------
(a) At the Effective Time, each share of Common Stock, par value $0.001
per share (the "Common Stock") of the Company, together with the associated
------------
Rights, issued and outstanding immediately prior to the Effective Time (other
than shares of Common Stock owned by Purchaser or Merger Sub or held by the
Company or owned or held by any of their respective Subsidiaries, all of which
shall be canceled as provided in Section 4.2(c), and other than shares of
--------------
Dissenting Common Stock) shall, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into the right to receive cash
in the amount of $1.2968 per share, without interest (the "Merger
------
Consideration"). Except where the context otherwise requires, all references
- -------------
herein to shares of Common Stock shall include the associated Rights.
(b) As a result of the Merger and without any action on the part of the
holders thereof, at the Effective Time, all shares of Common Stock shall cease
to be outstanding and shall be automatically canceled and retired and shall
cease to exist, and each holder of shares of Common Stock (other than Merger
Sub, Purchaser, the Company and each of their respective Subsidiaries) shall
thereafter cease to have any rights with respect to such shares of Common Stock,
except the right to receive, without interest, the Merger Consideration in
accordance with Section 4.3 upon the surrender of a certificate or certificates
-----------
(a "Certificate") representing such shares of Common Stock or, with respect to
-----------
shares of Dissenting Common Stock, payment of the appraised value of shares of
Dissenting Common Stock in accordance with Section 4.5.
-----------
(c) Each share of Common Stock issued and owned or held by Purchaser,
Merger Sub, the Company or any of their respective Subsidiaries at the Effective
Time shall, by virtue of the Merger, cease to be outstanding and shall be
automatically canceled and retired without payment of any consideration
therefor.
(d) All options (individually, an "Option" and collectively, the
------
"Options") outstanding immediately prior to the Effective Time under any Company
-------
stock option plan or stock purchase plan (the "Stock Option Plans"), whether or
------------------
not then exercisable, shall be canceled and each holder of an Option will be
entitled to receive, for each share of Common Stock subject to an Option, an
amount in cash equal to the excess, if any, of the Merger Consideration over the
per share exercise price of such Option, without interest. The amounts payable
pursuant to this Section 4.2(d) shall be subject to all applicable withholding
--------------
of taxes. The Company shall use its reasonable best efforts to
4
<PAGE>
obtain all necessary consents of the holders of Options to the cancellation of
the Options in accordance with this Section 4.2(d).
--------------
4.3 Exchange of Certificates Representing Common Stock.
--------------------------------------------------
(a) Prior to the Effective Time, Purchaser shall appoint a commercial
bank or trust company having net capital of not less than $100,000,000 and which
is reasonably satisfactory to the Company, to act as paying agent hereunder for
payment of the Merger Consideration upon surrender of Certificates (the "Paying
------
Agent"). Purchaser shall, or shall cause the Surviving Corporation to, provide
- -----
the Paying Agent with cash in amounts necessary to pay for all the shares of
Common Stock pursuant to Section 4.2(a) and to make all payments in connection
--------------
with the Options pursuant to Section 4.2(d), as and when such amounts are needed
--------------
by the Paying Agent. Such amounts shall hereinafter be referred to as the
"Exchange Fund."
-------------
(b) Promptly after the Effective Time, Purchaser shall cause the Paying
Agent to mail to each holder of record of shares of Common Stock immediately
prior to the Effective Time (i) a letter of transmittal which shall specify that
-
delivery shall be effected, and risk of loss and title to such Certificates
shall pass, only upon delivery of the Certificates to the Paying Agent and which
letter shall be in customary form and have such other provisions as Purchaser
may reasonably specify and (ii) instructions for effecting the surrender of such
--
Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate to the Paying Agent together with such letter of transmittal, duly
executed and completed in accordance with the instructions thereto, and such
other documents as may reasonably be required by the Paying Agent, the holder of
such Certificate shall be entitled to receive in exchange therefor the amount of
cash into which shares of Common Stock theretofore represented by such
Certificate shall have been converted pursuant to Section 4.2, and the shares
-----------
represented by the Certificate so surrendered shall forthwith be canceled. No
interest will be paid or will accrue on the cash payable upon surrender of any
Certificate. In the event of a transfer of ownership of Common Stock which is
not registered in the transfer records of the Company, payment may be made with
respect to such Common Stock to such a transferee if the Certificate
representing such shares of Common Stock is presented to the Paying Agent,
accompanied by all documents required to evidence and effect such transfer and
to evidence that any applicable stock transfer taxes have been paid.
(c) At and after the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the shares of Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are
5
<PAGE>
presented to the Surviving Corporation, they shall be canceled and exchanged as
provided in this Article 4.
---------
(d) Any portion of the Exchange Fund (including the proceeds of any
interest and other income received by the Paying Agent in respect of all such
funds) that remains unclaimed by the former stockholders of the Company six
months after the Effective Time shall be delivered to the Surviving Corporation.
Any former stockholders of the Company who have not theretofore complied with
this Article 4 shall thereafter look only to the Surviving Corporation for
---------
payment of any Merger Consideration that may be payable upon surrender of any
Certificates such stockholder holds, as determined pursuant to this Agreement,
without any interest thereon.
(e) None of Purchaser, the Company, the Surviving Corporation, the
Paying Agent or any other person shall be liable to any former holder of shares
of Common Stock for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(f) If any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Certificate
to be lost, stolen or destroyed and, if required by the Surviving Corporation,
the posting by such person of a bond in such reasonable amount as the Surviving
Corporation may direct as indemnity against any claim that may be made against
it with respect to such Certificate, the Paying Agent will issue in exchange for
such lost, stolen or destroyed Certificate the Merger Consideration payable in
respect thereof pursuant to this Agreement.
4.4 Adjustment of Merger Consideration. If, subsequent to the date of
----------------------------------
this Agreement but prior to the Effective Time, the outstanding shares of Common
Stock shall have been changed into a different number of shares or a different
class as a result of a stock split, reverse stock split, stock dividend,
subdivision, reclassification, split, combination, exchange, recapitalization or
other similar transaction, the Merger Consideration shall be appropriately
adjusted.
4.5 Dissenting Company Stockholders. Notwithstanding any provision of
-------------------------------
this Agreement to the contrary, if required by the DGCL but only to the extent
required thereby, shares of Common Stock which are issued and outstanding
immediately prior to the Effective Time and which are held by holders of such
shares of Common Stock who have properly exercised appraisal rights with respect
thereto (the "Dissenting Common Stock") in accordance with Section 262 of the
-----------------------
Delaware General Corporation Law ("DGCL") will not be exchangeable for the right
----
to receive the Merger Consideration, and holders of such shares of Dissenting
Common Stock will be entitled to receive
6
<PAGE>
payment of the appraised value of such shares of Dissenting Common Stock in
accordance with the provisions of such Section 262 unless and until such holders
fail to perfect or effectively withdraw or lose their rights to appraisal and
payment under the DGCL. If, after the Effective Time, any such holder fails to
perfect or effectively withdraws or loses such right, such shares of Dissenting
Common Stock will thereupon be treated as if they had been converted into and
have become exchangeable for, at the Effective Time, the right to receive the
Merger Consideration, without any interest thereon. Notwithstanding anything to
the contrary contained in this Section 4.5, if (i) the Merger is rescinded or
----------- -
abandoned or (ii) the stockholders of the Company revoke the authority to effect
--
the Merger, then the right of any stockholder to be paid the fair value of such
stockholder's Dissenting Common Stock pursuant to Section 262 of the DGCL shall
cease. The Company will give Purchaser prompt notice of any demands and
withdrawals of such demands received by the Company for appraisals of shares of
Dissenting Common Stock. The Company shall not, except with the prior written
consent of Purchaser, make any payment with respect to any demands for appraisal
or offer to settle or settle any such demands.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser and Merger Sub as
of the date hereof and as of the Effective Time as follows, except as
specifically disclosed in the writing from the Company to Purchaser and Merger
Sub that is dated the date of this Agreement and that is identified by the
Company to Purchaser as the disclosure letter to this Agreement (the "Disclosure
----------
Letter"):
- ------
5.1 Existence; Good Standing; Corporate Authority. Each of the Company
---------------------------------------------
and its Subsidiaries is (i) a corporation duly incorporated, validly existing
-
and in good standing under the laws of its jurisdiction of incorporation and
(ii) is duly licensed or qualified to do business as a foreign corporation and
--
is in good standing under the laws of any other state of the United States or
any other jurisdiction in which the character of the properties owned or leased
by it or in which the transaction of its business makes such licensure,
qualification or good standing necessary, except where the failure to be so in
good standing or to be so licensed or qualified, individually or in the
aggregate, would not have a material adverse effect on the business, operations,
results of operations, assets, financial condition or prospects of the Company
and its Subsidiaries taken as a whole (a "Material Adverse Effect"). Each of
-----------------------
the Company and its Subsidiaries has the requisite corporate power and authority
to own, operate and lease its properties and carry
7
<PAGE>
on its business as now conducted. The Company has heretofore delivered to
Purchaser true and correct copies of the Certificate of Incorporation and Bylaws
of the Company as currently in effect.
5.2 Authorization, Validity and Effect of Agreements. The Company has
------------------------------------------------
the requisite corporate power and authority to execute and deliver this
Agreement and the Option Agreement and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Option Agreement by the Company, the execution and delivery of the
Stockholders Agreement by the stockholders who are parties thereto and the
consummation by the Company of the transactions contemplated hereby and thereby
have been duly and validly authorized by the Board of Directors, and no other
corporate proceedings on the part of the Company or its stockholders are
necessary to authorize this Agreement, the Stockholders Agreement or the Option
Agreement or to consummate the transactions contemplated hereby or thereby
(other than the approval of this Agreement and the Merger by the holders of a
majority of the shares of Common Stock, if required by applicable law). The
Board of Directors has duly adopted resolutions determining that the Merger is
advisable and the terms of the Merger are fair to, and in the best interests of,
the Company and the Company's stockholders and recommending that the Company's
stockholders approve the Merger and this Agreement. Each of this Agreement and
the Option Agreement has been duly and validly executed and delivered by the
Company, and (assuming this Agreement and the Option Agreement each constitutes
a valid and binding obligation of Purchaser and Merger Sub) constitutes the
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms.
5.3 Compliance with Laws. Except as set forth in the Disclosure Letter,
--------------------
neither the Company nor any of its Subsidiaries is in violation of any foreign,
federal, state or local law, statute, ordinance, rule, regulation, order,
judgment, ruling or decree ("Laws") of any foreign, federal, state or local
----
judicial, legislative, executive, administrative or regulatory body or authority
or any court, arbitration, board or tribunal (each such entity, a "Governmental
------------
Entity") applicable to the Company or any of its Subsidiaries or any of their
- ------
respective properties or assets, except for violations which, individually or in
the aggregate, would not have a Material Adverse Effect.
5.4 Capitalization. The authorized capital stock of the Company
--------------
consists of 50,000,000 shares of Common Stock and 2,000,000 shares of preferred
stock, $0.001 par value (the "Preferred Stock"). As of October 5, 1998, (a)
--------------- -
9,599,525 shares of Common Stock were issued and outstanding, (b) 30,000 shares
-
of Preferred Stock were subject to Preferred Stock Purchase Rights ("Rights")
------
issued pursuant to the Preferred Shares Rights Agreement, dated as of February
4, 1998, between the Company and U.S. Stock
8
<PAGE>
Transfer Corporation, as rights agent (the "Rights Agreement"), (c) Options to
---------------- -
purchase an aggregate of 1,628,408 shares of Common Stock were outstanding,
1,628,408 shares of Common Stock were reserved for issuance upon the exercise of
outstanding Options and 430,300 shares were reserved for future grants under the
Stock Option Plans, and there were no stock appreciation rights or limited stock
appreciation rights outstanding other than those attached to such Options, (d)
-
no shares of Common Stock were held by the Company in its treasury, and (e) no
-
shares of Common Stock of the Company were held by the Company's Subsidiaries.
Except for the Rights, the Warrants and the Options, the Company has no
outstanding bonds, debentures, notes or other obligations or securities
entitling the holders thereof to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the Company on any matter. The Disclosure Letter sets forth for each Option and
Warrant, (i) its exercise price, (ii) its expiration date, (iii) the first date
- -- ---
upon which it becomes exercisable, and (iv) the number of shares of Common Stock
--
(or the securities) for which it is exercisable. Since December 31, 1997, the
Company (i) has not issued any shares of Common Stock, (ii) has granted Options
- --
to purchase an aggregate of 487,900 shares of Common Stock under the Stock
Option Plans, and (iii) has not split, combined or reclassified any of its
---
shares of capital stock. All issued and outstanding shares of Common Stock are
duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights. Except for the Rights, the Options and pursuant to the Loan
Agreement and except as set forth in this Section 5.4 or in the Disclosure
-----------
Letter, there are no other shares of capital stock of the Company, no securities
of the Company convertible or exchangeable for shares of capital stock or voting
securities of the Company, and no existing options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate the Company or any of its Subsidiaries to issue,
transfer or sell any shares of capital stock of, or equity interests in, the
Company or any of its Subsidiaries. There are no outstanding obligations of the
Company or any Subsidiaries to repurchase, redeem or otherwise acquire any
shares of capital stock of the Company and, other than outstanding Options,
there are no awards outstanding under the Stock Option Plans or any other
outstanding stock-related awards. After the Effective Time, the Surviving
Corporation will have no obligation to issue, transfer or sell any shares of
capital stock of the Company or the Surviving Corporation pursuant to any
Options or any Company Benefit Plan. Except as set forth in the Disclosure
Letter, there are no voting trusts or other agreements or understandings to
which the Company or any of its Subsidiaries is a party with respect to the
voting of capital stock of the Company or any of its Subsidiaries.
5.5 Subsidiaries. Except as set forth in the Disclosure Letter, (i) the
------------ -
Company owns, directly or indirectly through a Subsidiary, all of the
outstanding shares of capital stock (or other ownership interests having by
their terms ordinary voting power
9
<PAGE>
to elect directors or others performing similar functions with respect to such
Subsidiary) of each of the Company's Subsidiaries, and (ii) each of the
--
outstanding shares of capital stock of each of the Company's Subsidiaries (other
than O-Sub) is duly authorized, validly issued, fully paid and nonassessable,
and is owned, directly or indirectly, by the Company free and clear of all
liens, pledges, security interests, claims or other encumbrances
("Encumbrances"). Each of the outstanding shares of capital stock of O-Sub is
------------
duly authorized, validly issued, fully paid and nonassessable and is owned
directly by the Company, free and clear of all Encumbrances. The Disclosure
Letter sets forth for each Subsidiary of the Company: (i) its name and
-
jurisdiction of incorporation or organization; (ii) its authorized capital stock
--
or share or equity capital; (iii) the number of issued and outstanding shares of
---
capital stock or share or equity capital; and (iv) the holder or holders of such
--
shares. Except for interests in the Company's Subsidiaries or as set forth in
the Disclosure Letter, neither the Company nor any of its Subsidiaries owns
directly or indirectly any interest or investment (whether equity or debt) in
any corporation, partnership, joint venture, business, trust or other entity.
5.6 No Violation. Except as set forth in the Disclosure Letter, neither
------------
the execution and delivery by the Company of this Agreement or the Option
Agreement nor the consummation by the Company of the transactions contemplated
hereby or thereby will: (i) violate, conflict with or result in a breach of any
-
provisions of the Certificate of Incorporation or Bylaws (or comparable
constituent documents) of the Company or any of its Subsidiaries; (ii) violate,
--
conflict with, result in a breach of any provision of, constitute a default (or
an event which, with notice or lapse of time or both, would constitute a
default) under, result in the termination or in a right of termination of,
accelerate the performance required by or benefit obtainable under, result in
the triggering of any payment or other obligations pursuant to, result in the
creation of any Encumbrance upon any of the properties of the Company or its
Subsidiaries (including, without limitations, the assets subject to the Option
Agreement and the shares of O-Sub) under, or result in there being declared
void, voidable, subject to withdrawal, or without further binding effect, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture, deed
of trust or any license, franchise, Permit, lease, contract, plan, agreement or
other instrument, commitment or obligation to which the Company or any of its
Subsidiaries is a party, by which the Company or any of its Subsidiaries or any
of their respective properties is bound, or under which the Company or any of
its Subsidiaries or any of their respective properties is entitled to a benefit
(each of the foregoing, to the extent the same have any continuing force or
effect, a "Contract" and collectively, "Contracts"), except for any of the
-------- ---------
foregoing matters which, individually or in the aggregate, would not have a
Material Adverse Effect, prevent or materially delay the consummation of the
transactions contemplated hereby (a "Material Delaying Effect") or prevent or
------------------------
materially delay the consummation of the transactions
10
<PAGE>
contemplated by the Option Agreement; (iii) other than the filings provided for
---
in Section 1.3, the filings required under the Hart-Scott-Rodino Antitrust
-----------
Improvements Act of 1976 (the "HSR Act"), the Securities Exchange Act of 1934,
-------
as amended, and the rules and regulations promulgated thereunder (the "Exchange
--------
Act"), or filings in connection with the maintenance of qualification to do
- ---
business in other jurisdictions (the filings disclosed in the Disclosure Letter
in response to this clause (iii), the other filings referred to in this clause
(iii) and the Other Antitrust Filings and Consents required or permitted to be
made or obtained, collectively, the "Regulatory Filings"), require any consent,
------------------
approval or authorization of, or declaration, filing or registration with, any
Governmental Entity, including any such consent, approval, authorization,
declaration, filing or registration under any Laws of any foreign jurisdiction
relating to antitrust matters or competition ("Foreign Antitrust Laws") or any
----------------------
other Law of any foreign jurisdiction, except for those consents, approvals,
authorizations, declarations, filings or registrations the failure of which to
obtain or make, individually or in the aggregate, would not have a Material
Adverse Effect or a Material Delaying Effect; or (iv) violate any Laws
--
applicable to the Company, any of its Subsidiaries or any of their respective
assets, except for violations which, individually or in the aggregate, would not
have a Material Adverse Effect.
5.7 Company Reports; Proxy Statement. (a) The Company has made
--------------------------------
available to Purchaser each registration statement, report, proxy statement or
information statement (as defined under the Exchange Act) prepared by it for
filing with the Securities and Exchange Commission (the "SEC") since December
---
31, 1995, each in the form (including exhibits and any amendments thereto) filed
with the SEC (collectively, as amended or restated, the "Company Reports"). As
---------------
of their respective dates (or the respective dates of the latest amendment
thereto or restatement thereof), the Company Reports and, when filed, the
Pending Reports, (i) complied, or will comply, as to form in all material
-
respects with the applicable requirements of the Securities Act of 1933, as
amended, and the rules and regulations thereunder (the "Securities Act") and the
--------------
Exchange Act and (ii) did not, or will not, contain any untrue statement of a
--
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. Each of the consolidated balance
sheets of the Company included in or incorporated by reference into the Company
Reports (including the related notes and schedules) fairly presents the
consolidated financial position of the Company and its consolidated Subsidiaries
as of its date, and each of the consolidated statements of earnings and cash
flows of the Company included in or incorporated by reference into the Company
Reports (including any related notes and schedules) fairly presents the results
of operations, earnings or cash flows, as the case may be, of the Company and
its Subsidiaries for the periods set forth therein, in each case in accordance
with generally
11
<PAGE>
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein. The unaudited financial statements of the
Company for the periods ended March 31, 1998 and June 30, 1998 (the "Unaudited
---------
1998 Financial Statements"), previously provided to Merger Sub have been
- -------------------------
prepared using the same accounting principles and policies and in a manner
consistent with the financial statements of the Company and its Subsidiaries for
the period ended December 31, 1996 and fairly present the consolidated financial
position of the Company and its consolidated Subsidiaries as of March 31, 1998
and June 30, 1998, respectively, and the consolidated results of their
operations, changes in stockholders' equity and statements of cash flow for the
periods ended March 31, 1998 and June 30, 1998, respectively. Except as set
forth in the Disclosure Letter, neither the Company nor any of its Subsidiaries
has any liabilities or obligations, contingent or otherwise, except (i)
-
liabilities and obligations in the respective amounts reflected or reserved
against in the Company's consolidated balance sheet as of December 31, 1997,
included in the Company Reports or (ii) liabilities and obligations incurred in
--
the ordinary course of business since that date which individually or in the
aggregate would not have a Material Adverse Effect.
(b) The Proxy Statement will comply as to form in all material respects
with the Exchange Act and, at the respective times filed with the SEC or first
published, sent or distributed to the stockholders of the Company, will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, that the Company makes no representation or warranty as to
--------
any information included in the Proxy Statement that was provided by Purchaser
or Merger Sub. If at any time prior to the Closing Date the Company shall
obtain knowledge of any facts with respect to itself, any of its officers and
directors or any of its Subsidiaries that would require the supplement or
amendment to any of the foregoing documents in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or to comply with applicable Laws, such amendment or supplement
shall be promptly filed with the SEC and, as required by Law, disseminated to
the stockholders of the Company, and in the event Purchaser shall advise the
Company as to its obtaining knowledge of any facts that would make it necessary
to supplement or amend the Proxy Statement, the Company shall promptly amend or
supplement such document as required and distribute the same to its
stockholders.
5.8 Litigation. Except as set forth in the Disclosure Letter, there are
----------
no claims, actions, suits, proceedings, arbitrations, investigations or audits
(collectively, "Litigation") by a third party (including a Governmental Entity)
----------
pending or, to the knowledge of the Company, threatened against the Company or
any of its Subsidiaries,
12
<PAGE>
other than those which, individually or in the aggregate, would not have a
Material Adverse Effect. Except as set forth in the Disclosure Letter, no
Governmental Entity has indicated an intention to conduct any audit,
investigation or other review with respect to the Company or any of its
Subsidiaries. No Person has notified the Company that it or any other Person
intends to terminate, renegotiate or otherwise modify or object to the
settlement (the "Settlement"), reached on August 18, 1998, the terms of which
----------
are identical in all material respects to the Memorandum of Understanding
("MOU") attached hereto as Exhibit I (with the changes specifically set forth in
---
the Disclosure Schedule), with respect to the In re Raster Graphics Securities
--------------------------------
Litigation, No. C-980807-FMS pending in the United States District Court for the
- ----------------------------
Northern District of California and Ginter, et al. v. Raster Graphics, Inc. et
------------------------------------------
al., Civil No. CV 772401 pending in Santa Clara Superior Court (collectively,
- ------------------------
the "Settlement Litigation"), and to the knowledge of the Company, there is no
---------------------
reason that the Settlement will not be timely approved by the appropriate courts
of competent jurisdiction in substantially the form described in the MOU. The
aggregate amount of damages and costs (including legal fees) that the Company
will incur as a result of the final disposition of the Litigation described in
the second and fourth paragraphs of Schedule 5.8 of the Disclosure Letter shall
not exceed $400,000.
5.9 Absence of Certain Changes. Except as set forth in the Disclosure
--------------------------
Letter, since December 31, 1996, the Company and its Subsidiaries have conducted
their business only in the ordinary course of such business consistent with past
practices, and there has not been (i) any Material Adverse Effect suffered by
-
the Company or any of its Subsidiaries; (ii) any declaration, setting aside or
--
payment of any dividend or other distribution with respect to the capital stock
of the Company or its Subsidiaries (other than wholly-owned Subsidiaries) or any
repurchase, redemption or any other acquisition by the Company or its
Subsidiaries of any outstanding shares of capital stock or other securities of,
or other ownership interests in, the Company or its Subsidiaries; (iii) any
---
change in accounting principles, practices or methods; (iv) any entry into or
--
amendment of any employment agreement with, or any increase in the rate or terms
(including, without limitation, any acceleration of the right to receive
payment) of compensation payable or to become payable by the Company or any of
its Subsidiaries to, their respective directors, officers or employees, except
increases in the ordinary course of business in accordance with the past
practice of the Company; (v) any entry into or amendment of any increase in the
-
rate or terms (including, without limitation, any acceleration of the right to
receive payment) of any bonus, insurance, pension or other employee benefit plan
or arrangement covering any such directors, officers or employees, except
increases in the ordinary course of business in accordance with the past
practice of the Company; (vi) any revaluation by the Company or any of its
--
Subsidiaries of any of their respective assets, including, without limitation,
write-downs
13
<PAGE>
of inventory or write-offs of accounts receivable; (vii) any transaction
---
or commitment made by the Company or any of its Subsidiaries to buy or
sell any assets that are or would be material to the Company's business; or
(viii) any other transaction or event that, had it occurred after the date of
- -----
this Agreement, would constitute a breach of the covenant contained in Section
-------
7.2(b).
- ------
5.10. Taxes. Except as set forth in the Disclosure Letter:
-----
(a) Each of the Company and its Subsidiaries has timely filed (subject
to extensions) all U.S. federal income Tax Returns and all other material Tax
Returns required to be filed by it, and has duly paid or caused to be paid on
its behalf all Taxes shown to be due on such returns or otherwise due and
payable. Such Tax Returns of the Company and the Subsidiaries are true and
complete in all material respects, except where failure to be so true or
complete would not have a Material Adverse Effect. The most recent consolidated
financial statements contained in the Company Reports reflect an adequate
reserve in accordance with generally accepted accounting principles for all
Taxes payable by the Company and its Subsidiaries for all taxable periods and
portions thereof through the date of such financial statements.
(b) No material deficiencies for any Taxes have been proposed, asserted
or assessed against the Company or any of the Subsidiaries that have not been
fully paid or adequately provided for in the appropriate financial statements of
the Company and its Subsidiaries, no waivers of the time to assess any Taxes are
outstanding, and no power of attorney granted by the Company or any Subsidiary
with respect to any Taxes is currently in force. No material issues relating to
Taxes have been raised in writing by any governmental authority during any
presently pending audit or examination.
(c) There are no material Encumbrances for Taxes on any of the assets
of the Company or the Subsidiaries or the shares of O-Sub (other than for
current taxes not yet due and payable).
(d) The Company and the Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations relating to the payment
and withholding of Taxes.
(e) None of the Company or the Subsidiaries has filed a consent under
Section 341(f) of the Code.
14
<PAGE>
(f) None of the Company or the Subsidiaries is a party to any agreement
that could obligate it to make any payments that would not be deductible by
reason of Section 280G of the Code.
(g) Neither the Company nor, since the date of its acquisition by the
Company, any Subsidiary is a party to any tax allocation, tax sharing agreement,
any closing agreement or similar agreement relating to Taxes.
(h) No U.S. federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently pending with
regard to any U.S. federal income or material state, local or foreign Taxes or
Tax Returns of the Company or any of the Subsidiaries and neither the Company
nor any of the Subsidiaries has received a written notice of any pending audit
or proceeding.
(i) Neither the Company nor, since the date of its acquisition by the
Company, any Subsidiary has agreed to or is required to make any material
adjustment under Section 481(a) of the Code.
(j) The Company has not been (and will not be) a United States real
property holding corporation within the meaning of Section 897(c)(2) of the Code
during the 5-year period ending at the Effective Time.
(k) The statute of limitations with respect to the U.S. federal income
tax liability of the Company has expired with respect to the year 1993 and all
earlier years.
(l) For the purpose of this Agreement, (A) the terms "Tax" or "Taxes"
- --- -----
shall mean all taxes, fees, duties, tariffs, levies, imposts, or other charges
of any kind (together with any interest, penalties, additions to tax or
additional amounts imposed by any taxing authority with respect thereto),
including, without limitation, taxes or other charges on or with respect to
income, franchise, gross receipts, property, sales, use, profits, capital stock,
payroll, employment, social security, workers compensation, unemployment
compensation or net worth, taxes or charges in the nature of excise,
withholding, ad valorem, stamp, transfer, value added or gains taxes; license
registration and documentation fees; and customs duties, tariffs and similar
charges of any kind whatsoever, and (B) the term "Tax Return" shall mean any
- ----------
report, return, document, declaration or any other information or filing
required to be supplied to any taxing authority with respect to Taxes.
5.11 Employee Benefit Plans. All employee benefit plans and other
----------------------
benefit arrangements covering employees of the Company or any of its
Subsidiaries or to which
15
<PAGE>
the Company or any of its Subsidiaries are required to contribute (the "Company
-------
Benefit Plans") and all employee agreements providing compensation, severance,
- -------------
retention, change in control or other benefits to any employee or former
employee of the Company or any of its Subsidiaries, other than agreements which
have been satisfied in full (the "Employee Agreements") are set forth in the
-------------------
Disclosure Letter. True and complete copies of (1) the Company Benefit Plans and
-
any related agreement, (2) the most recent annual report and actuarial valuation
-
(if applicable), and (3) the Employee Agreements have been made available to
-
Purchaser. Any Company Benefit Plan intended to be qualified under Section
401(a) of the Code has received a determination letter and, to the knowledge of
the Company, continues to satisfy the requirements for such qualification. No
Company Benefit Plan nor the Company nor any Subsidiary has incurred any
material liability or penalty under Section 4975 of the Code or Section 502(i)
of ERISA or engaged in any transaction that is reasonably likely to result in
any such material liability or penalty. Each Company Benefit Plan that the
Company does not maintain and administer has been maintained and administered in
compliance in all material respects with its terms and with ERISA and the Code
to the extent applicable thereto, and to the knowledge of the Company, each
other Company Benefit Plan has been maintained and administered in compliance in
all material respects with its terms and with ERISA and the Code to the extent
applicable thereto. There is no pending or, to the knowledge of the Company,
threatened Litigation against or otherwise involving any of the Company Benefit
Plans and no Litigation has been brought against or with respect to any such
Company Benefit Plan, except for any of the foregoing which, individually or in
the aggregate, would not have a Material Adverse Effect. Except as set forth in
the Disclosure Letter, neither the Company nor any of its Subsidiaries has any
current or expected liability with respect to any Company Benefit Plan that is
not fully reflected in the materials delivered to Purchaser as described above
nor is any asset of the Company nor any of its Subsidiaries subject to any lien
under Code section 401(a)(29), ERISA section 302(f) or Code section 412(n),
ERISA section 4068 or arising out of any action filed under ERISA section
4301(b). Neither the Company nor any of its Subsidiaries that is, or has been
treated as a "single employer" together with the Company under section 414(b),
414(c) or 414(m) of the Code, has incurred any liability which can subject any
of the parties to this Agreement to material liability under section 4062, 4063
or 4064 of ERISA. Neither the Company nor any of its Subsidiaries is required to
contribute to any multi-employer plan within the meaning of section 4001(a)(3)
of ERISA. Neither the Company nor any of its Subsidiaries has incurred any
withdrawal liability within the meaning of section 4201 of ERISA. Except as
described in the Company Reports, neither the Company nor any of its
Subsidiaries maintains or contributes to any plan or arrangement which provides
or has any liability to provide life insurance or medical or other employee
welfare benefits to any employee or former employee upon his or her retirement
or termination of employment, and neither the Company nor any of its
16
<PAGE>
Subsidiaries has ever represented, promised or contracted (whether in oral
or written form) to any employee or former employee that such benefits would be
provided. Except as set forth in the Disclosure Letter, (i) the execution of,
-
and performance of the transactions contemplated in, this Agreement will not
(either alone or upon the occurrence of any additional or subsequent events)
constitute an event under any benefit plan, policy, arrangement or agreement or
any trust or loan that will or may result in any payment (whether of severance
pay or otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with respect
to any employee and (ii) no payment or benefit which will or may be made by the
--
Company, any of its Subsidiaries, or Purchaser or Merger Sub with respect to any
employee will constitute an "excess parachute payment" within the meaning of
Section 280G(b)(1) of the Code.
5.12 Labor and Employment Matters. Except as set forth in the Disclosure
----------------------------
Letter, (a) neither the Company nor any of its Subsidiaries is a party to, or
-
bound by, any collective bargaining agreement or other Contracts or
understanding with a labor union or labor organization; and (b) except as would
-
not, individually or in the aggregate, have a Material Adverse Effect, there is
no (i) unfair labor practice, labor dispute (other than routine individual
-
grievances) or labor arbitration proceeding pending or, to the knowledge of the
Company, threatened against the Company or its Subsidiaries, (ii) activity or
--
proceeding by a labor union or representative thereof to organize any employees
of the Company or any of its Subsidiaries, or (iii) lockouts, strikes,
---
slowdowns, work stoppages or threats thereof by or with respect to such
employees. The Company and its Subsidiaries each is in compliance with all Laws
regarding employment, employment practices, terms and conditions of employment
and wages, except for such noncompliance which, individually or in the
aggregate, would not have a Material Adverse Effect.
5.13 Brokers and Finders. Except for Hambrecht and Quist pursuant to an
-------------------
engagement letter, a true and complete copy of which has previously been
delivered to Purchaser, no broker, dealer or financial advisor is entitled to
receive from the Company or any of its Subsidiaries any broker's, finder's or
investment banking fee in connection with this Agreement or the transactions
contemplated hereby.
5.14 Fairness Opinion. The Company has received the opinion (the
----------------
"Fairness Opinion") of Hambrecht and Quist to the effect that, as of the date of
- -----------------
this Agreement, the terms of the Merger and the Merger Consideration are fair
from a financial point of view to the holders of Common Stock. The Company has
been authorized by Hambrecht and Quist to permit the inclusion of the Fairness
Opinion and references thereto, subject to
17
<PAGE>
prior review and consent by Hambrecht and Quist (such consent not to be
unreasonably withheld or delayed), in the Proxy Statement.
5.15 Licenses and Permits. Except as set forth in the Disclosure Letter,
--------------------
the Company and its Subsidiaries have, and/or have caused to be maintained, all
necessary licenses, permits, certificates of need, approvals and authorizations
(collectively, "Permits") from all Governmental Entities required to lawfully
-------
conduct their respective businesses as presently conducted, except for those
Permits the lack of which, individually or in the aggregate, would not have a
Material Adverse Effect, and (a) no Permit is subject to revocation or
-
forfeiture by virtue of any existing circumstances, (b) there is no Litigation
-
pending or, to the knowledge of the Company, threatened to modify or revoke any
Permit, and (c) no Permit is subject to any outstanding order, decree, judgment,
-
stipulation, or investigation that would be likely to affect such Permit, except
for instances of any of the foregoing items (a) through (c) which, individually
or in the aggregate, would not have a Material Adverse Effect.
5.16 Environmental Matters. (a) Except as set forth in the Disclosure
---------------------
Letter, the Company and each of its Subsidiaries' operation and use of its
assets, including its owned and leased real property, are in compliance in all
respects with all applicable Laws relating to the protection of human health or
the environment ("Environmental Laws"), except to the extent that any such
------------------
noncompliance would not have a Material Adverse Effect on the Company. The
Company and each of its Subsidiaries have obtained all environmental, health and
safety permits necessary for the operation of its respective business as
presently conducted, and all such permits are in full force and effect and the
Company and each of its Subsidiaries are in compliance in all respects with the
terms and conditions of each such permit, except, in each case, to the extent
that any such noncompliance would not have a Material Adverse Effect on the
Company. Except as set forth in the Disclosure Letter, neither the Company nor
any of its Subsidiaries has received any notice of, nor is there, any
administrative or judicial investigation, proceeding or action with respect to
any material violation, alleged or proven, of Environmental Laws by the Company
or any of its subsidiaries or otherwise involving its owned or leased real
property.
(b) Except as set forth in the Disclosure Letter, none of the Company or
any of its Subsidiaries has taken or failed to take any action that has resulted
in or will result in any liability or obligation relating to (x) the
-
environmental conditions on, under, or about the assets of the Company or any of
its Subsidiaries or any of their respective owned or leased real property, or
any properties owned, leased, operated or used by the Company or any of its
Subsidiaries or any predecessor of the Company or any of its Subsidiaries at the
present time or in the past, including, without limitation, the air, soil
18
<PAGE>
and groundwater conditions at such properties or (y) the past or present use,
-
management, handling, transport, treatment, generation, storage, disposal or
release of any Hazardous Substances, except in the case of clauses (x) and (y)
above, to the extent such liability or obligation would not have a Material
Adverse Effect.
"Hazardous Substances" means asbestos-containing material and any and all
--------------------
hazardous or toxic substances, materials or wastes as defined or listed under
the Resource Conservation and Recovery Act, the Toxic Substances Control Act,
the Comprehensive Environmental Response, Compensation and Liability Act or any
comparable state statute or any regulation promulgated under any of such federal
or state statutes.
5.17 Material Contracts. The Disclosure Letter sets forth a list as of
------------------
the date hereof of all (i) Contracts for borrowed money or guarantees thereof,
-
other than Contracts entered into in the ordinary course of business consistent
with the past practice of the Company involving less than $25,000 individually
or $250,000 in the aggregate or Contracts between the Company and any of its
wholly owned Subsidiaries or between any of the Company's wholly owned
Subsidiaries, (ii) Contracts involving any rate swap transaction, basis swap,
--
forward rate transaction, commodity swap, commodity option, equity or equity
index swap, equity or equity index option, bond option, interest rate option,
foreign exchange transaction, cap transaction, floor transaction, collar
transaction, currency swap transaction, cross-currency rate swap transaction,
currency option or any other similar transaction (including any option with
respect to any of these transactions), or any combination of these transactions
(each a "Derivative" and collectively, "Derivatives"), other than Derivatives
---------- -----------
entered into in the ordinary course of business consistent with the past
practice of the Company and with the Company's policies regarding Derivatives as
previously disclosed to Purchaser, (iii) Contracts containing covenants by the
---
Company or any Subsidiary restricting its ability or the ability of any of the
affiliates of the Company or any of its Subsidiaries to engage in any line of
business, (iv) Contracts to purchase materials, supplies or other assets, other
--
than purchase orders entered into in the ordinary course of business consistent
with the past practice of the Company and other Contracts involving obligations
of less than $25,000 individually and $250,000 in the aggregate, (v) Contracts
-
to purchase or acquire advertising or other product promotion or brand support
other than spot orders purchased in the ordinary course of business or involving
commitments by the Company of less than $25,000, (vi) Contracts with
--
distributors, brokers or sales agents for the distribution of the products of
the Company, other than Contracts involving or likely to involve payments of
less than $200,000 per year, (vii) Contracts entered into by the Company since
---
January 1, 1993 and in which the Company's surviving liability (including
indemnities) could reasonably be expected to exceed $100,000 and involving the
sale or other disposition by the Company of one or more business units,
divisions or entities (including former
19
<PAGE>
Subsidiaries), (viii) Contracts involving the investment, including by way of
----
capital contribution, loan or advance, by the Company or any of its Subsidiaries
of more than $25,000 in any other person, firm or entity (other than wholly-
owned Subsidiaries), other than investments no longer owned by the Company or
its Subsidiaries, (ix) promotion Contracts in the United States with the
--
Company's ten largest customers having a term of longer than three (3) months,
and (x) other Contracts under which the obligation of the Company and its
-
Subsidiaries is $100,000 or more or are otherwise material to the business of
the Company and its Subsidiaries, taken as a whole (all Contracts described in
each of the categories (i) through (x) above, "Material Contracts"). All
------------------
Contracts to which the Company or any of its Subsidiaries is a party or by which
any of their respective assets are bound are valid and binding, in full force
and effect and enforceable against the parties thereto in accordance with their
respective terms, except where the failure to be so valid and binding, in full
force and effect or enforceable would not individually or in the aggregate have
a Material Adverse Effect. There is not under any such Contract, any existing
default, or event, which after notice or lapse of time, or both, would
constitute a default, by the Company or any of its Subsidiaries, or to the
knowledge of the Company, any other party, other than any such defaults or
events which, individually or in the aggregate, would not have a Material
Adverse Effect.
5.18 Intellectual Property; Technology.
---------------------------------
(a) The Disclosure Letter sets forth a complete and correct list of all
Intellectual Property that is owned by the Company or any Subsidiary (the
"Company-Owned Intellectual Property"), provided that Company-Owned Intellectual
- ------------------------------------
Property shall include, but the Disclosure Letter need not set forth,
inventions, processes, formulae, trade secrets, know-how or confidential
information that are not reduced to tangible form or that are not susceptible to
legal protection by filing or registration with any Governmental Entity.
(b) Except as set forth in the Disclosure Letter, all the Intellectual
Property used by the Company or any Subsidiary or held by it for future use in
connection with, necessary for the conduct of or otherwise material to the
operation of the business of the Company (the "Company Intellectual Property"),
-----------------------------
is owned by the Company or such Subsidiary. Except as set forth in the
Disclosure Letter, the Company or a Subsidiary has the exclusive right to use
the Company Intellectual Property for the life thereof for the purpose or
purposes for which it is being used or intended to be used, free from (i) any
-
Encumbrances and (ii) any requirement of royalty payments, obligations, license
--
fees, charges or other payments, or material conditions or restrictions
whatsoever. Immediately after the Effective Time, the Surviving Corporation
shall own or have
20
<PAGE>
licensed to it all the Company Intellectual Property, in each case free from
Encumbrances and on the same terms and conditions as in effect prior to the
Effective Date.
(c) There is no Company Intellectual Property that the Company does not
either own or have the right to use.
(d) The Disclosure Letter sets forth all written or oral agreements and
arrangements (i) pursuant to which the Company or a Subsidiary has licensed
-
Intellectual Property to, or the use of Intellectual Property is otherwise
permitted (through non-assertion, settlement or similar agreements or otherwise)
with respect to, any other Person, and (ii) pursuant to which the Company or a
--
Subsidiary has had Intellectual Property licensed to it, or has otherwise been
permitted to use Intellectual Property (through non-assertion, settlement or
similar agreements or otherwise). All of the agreements and arrangements set
forth in the Disclosure Letter: (i) are in full force and effect and
-
enforceable in accordance with their terms, and no default exists or is threat
ened thereunder by the Company or a Subsidiary or any other Person, (ii) license
--
or permit that which they purport to license or permit, (iii) are free and clear
---
of all Encumbrances, and (iv) do not contain any change in control or other
--
terms or conditions that will become applicable or inapplicable as a result of
the consummation of the trans actions contemplated by this Agreement or the
Option Agreement.
(e) The conduct of the business of the Company and the Subsidiaries does
not infringe any Intellectual Property or other rights of any Person. None of
the Company Intellectual Property is being infringed, misappropriated or
otherwise used or available for use by any Person without written authority from
the Company, except as set forth in the Disclosure Letter.
(f) No claim or demand of any Person has been made or, to the knowledge
of the Company, threatened, nor is there any litigation that is pending or, to
the knowledge of the Company, threatened, that (i) challenges the rights of the
-
Company in respect of any Company Intellectual Property, (ii) asserts that the
--
Company is infringing or otherwise in conflict with, or is (except as set forth
in the Disclosure Letter) required to pay any royalty, license fee, charge or
other amount with regard to, any Company Intellectual Property, or (iii) claims
---
that any default exists under any agreement or arrangement set forth or required
to be disclosed in the Disclosure Letter. None of the Company Intellectual
Property is subject to any material outstanding order, ruling, decree, judgment
or stipulation by or with any court, tribunal, arbitrator or other Governmental
Entity.
21
<PAGE>
(g) The Company-Owned Intellectual Property has been duly registered
with, filed in or issued by, as the case may be, the United States Patent and
Trademark Office, the United States Copyright Office or other filing offices,
domestic or foreign, to the extent necessary or desirable to ensure full
protection under any applicable Laws. The Disclosure Letter sets forth a
complete list of such Company-Owned Intellectual Property that is registered
with, filed in or issued by, as the case may be, the United States Patent and
Trademark Office, the United States Copyright Office or other filing offices,
domestic or foreign, and such registrations, filings, issuances and other
actions remain in full force and effect. Except as set forth in the Disclosure
Letter, the Company and its Subsidiaries have taken all necessary actions to
ensure full protection of the Company Intellectual Property under any applicable
Law.
(h) The Company or a Subsidiary has valid licenses to all copies of all
Software that it utilizes in connection with the conduct of its business and
that it does not own ("Commercial Software"), and the use by the Company or such
-------------------
Subsidiary of such Commercial Software, including without limitation all
modifications and enhancements thereto (whether created by the Company or by a
third party) is in full compliance with the terms and provisions of such
licenses. The Company or such Subsidiary owns all right, title and interest in
and to all Software marketed or licensed by it to its customers or held for use
or in development for marketing and licensing to its customers (collectively,
the "Company Software"), including but not limited to all Intellectual Property
----------------
rights therein and thereto, except for Commercial Software identified in the
Disclosure Letter as Software incorporated into the Company Software. Set forth
in the Disclosure Letter is a full and complete list of (i) the Company Software
-
and (ii) all Commercial Software utilized by the Company or a Subsidiary in
--
connection with the conduct of its business. None of the Commercial Software or
Company Software, and no use thereof by the Company or permitted use by its
licensees, infringes upon or violates any patent, copyright, trade secret or
other Intellectual Property right of any person or entity, and no claim or
demand with respect to any such infringement or violation has been made or, to
the best knowledge of the Company, threatened. There are no defects in the
Company Software that would prevent such Software from performing in all
material respects the tasks and functions that it was intended to perform except
those which can be cured without a Material Adverse Effect.
(i) The Company has conducted an inventory of all (i) Company Software
-
and (ii) Software owned or licensed by it as well as the hardware and embedded
--
microcontrollers in non-computer equipment used by the Company in connection
with, necessary for or otherwise material to the operation of its business
(collectively, the "Computer Systems") in order to determine which parts of the
----------------
Computer Systems are not Year 2000 Compatible and to estimate the cost of
rendering such Computer Systems
22
<PAGE>
Year 2000 Compatible prior to January 1, 2000. Based on the above-referenced
inventory, the Company represents and warrants that the Computer Systems are
either Year 2000 Compatible or will be Year 2000 Compatible prior to July 1,
1999; the estimated cost of rendering the Computer Systems Year 2000 Compatible
is $50,000, of which $50,000 has been or will be incurred by the Company. "Year
----
2000 Compatible" means that the Computer Systems to the extent required for
- ---------------
their particular use (x) correctly perform date data century recognition, and
-
calculations that accommodate same century and multi-century formulas and date
values; (y) operate or are expected to operate on a basis comparable to their
-
current operation during and after calendar year 2000 A.D., including but not
limited to leap years; and (z) shall not end abnormally or provide invalid or
-
incorrect results as a result of date data which represents or references
different centuries or more than one century.
(j) "Intellectual Property" means the United States and foreign
---------------------
trademarks, service marks, trade names, trade dress, copyrights, and similar
rights, including registrations and applications to register or renew the
registration of any of the foregoing, the United States and foreign letters
patent and patent applications, inventions, processes, designs, formulae, trade
secrets, know-how, confidential information, Software, data and documentation,
and all similar intellectual property rights, tangible embodiments of any of the
foregoing (in any form or medium including electronic media), and licenses of
any of the foregoing.
(k) "Software" means all computer programs, including all source code and
--------
object code versions thereof, in any and all forms and media, whether recorded
on paper, magnetic media or other electronic or non-electronic media (including
data and all related documentation, user manuals, training materials, flow
charts, diagrams, descriptive tests and programs, computer print-outs,
underlying tapes, computer databases and similar items) and computer
applications and operating programs.
5.19 Required Vote of Company Stockholders. Unless the Merger may be
-------------------------------------
consummated in accordance with Section 253 of the DGCL, the only vote of the
stockholders of the Company required to adopt this Agreement and approve the
Merger is the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock (the "Company Stockholder Approval"). No greater or
----------------------------
other vote of the stockholders of the Company is required by Law or the
Certificate of Incorporation or Bylaws of the Company to adopt this Agreement
and the Option Agreement and to approve the Merger and the transactions
contemplated by the Option Agreement.
5.20 State Statutes. The Board of Directors has approved the Merger,
--------------
this Agreement, the Option Agreement, the Loan Agreement and the Stockholders
23
<PAGE>
Agreement, and such approval is sufficient to render inapplicable to the Merger,
this Agreement, the Option Agreement, the Loan Agreement, the Stockholders
Agreement and the transactions contemplated by this Agreement, the Option
Agreement, the Loan Agreement and the Stockholders Agreement, the provisions of
Section 203 of the DGCL to the extent, if any, such Section is applicable to the
Merger, this Agreement, the Option Agreement, the Loan Agreement, the
Stockholders Agreement and the transactions contemplated by this Agreement, the
Option Agreement, the Loan Agreement and the Stockholders Agreement. To the
knowledge of the Company, no other state takeover statute or similar statute or
regulation applies or purports to apply to the Merger, this Agreement, the
Option Agreement, the Loan Agreement the Stockholders Agreement or the
transactions contemplated by this Agreement, the Option Agreement, the Loan
Agreement or the Stockholders Agreement. The provisions of Section 2115 of the
California General Corporation Law do not and shall not apply to the Company,
the Merger or the transactions contemplated by this Agreement, the Option
Agreement, the Loan Agreement or the Stockholders Agreement.
5.21 Disclosures. This Agreement and the Disclosure Letter furnished by
-----------
the Company or any of its Subsidiaries pursuant hereto, taken as a whole, do not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
contained herein, in light of the circumstances under which they were made, not
misleading.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER SUB
Purchaser and Merger Sub hereby jointly and severally represent and
warrant to the Company as of the date hereof and as of the Effective Time as
follows:
6.1. Existence; Good Standing; Corporate Authority. Each of Purchaser
---------------------------------------------
and Merger Sub is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation.
6.2. Authorization, Validity and Effect of Agreements. Each of Purchaser
------------------------------------------------
and Merger Sub has the requisite corporate power and authority to execute and
deliver this Agreement and the Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Option Agreement and the consummation by Purchaser and
Merger Sub of the transactions contemplated hereby and thereby have been duly
and validly authorized by
24
<PAGE>
the respective Boards of Directors of Purchaser and Merger Sub, as applicable,
and by Purchaser as the sole stockholder of Merger Sub, and no other corporate
proceedings on the part of Purchaser or Merger Sub are necessary to authorize
this Agreement or the Option Agreement or to consummate the transactions
contemplated hereby or thereby. Each of this Agreement and the Option Agreement
has been duly and validly executed and delivered by Purchaser and Merger Sub,
and (assuming this Agreement and the Option Agreement each constitutes a valid
and binding obligation of the Company) constitutes the valid and binding
obligation of each of Purchaser and Merger Sub, enforceable against Purchaser
and Merger Sub in accordance with their respective terms.
6.3 Proxy Statement. None of the information supplied by Purchaser or
---------------
Merger Sub for inclusion in the Proxy Statement, at the respective times filed
with the SEC and distributed to stockholders of the Company, will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
6.4 No Violation. Neither the execution and delivery of this Agreement
------------
or the Option Agreement by Purchaser and Merger Sub nor the consummation by them
of the transactions contemplated hereby or thereby will (i) violate, conflict
-
with or result in any breach of any provision of the Certificate of
Incorporation or Bylaws of Merger Sub or Purchaser, in each as amended; (ii)
--
other than the Regulatory Filings and pursuant to the Foreign Antitrust Laws,
require any consent, approval or authorization of, or declaration, filing or
registration with, any Governmental Entity, the lack of which, individually or
in the aggregate, would have a material adverse effect on the ability of
Purchaser or Merger Sub to consummate the transactions contemplated hereby; and
(iii) violate any Laws applicable to Purchaser or Merger Sub or any of their
---
respective assets, except for violations which, individually or in the
aggregate, would not have a material adverse effect on the ability of Purchaser
or Merger Sub to consummate the transactions contemplated hereby.
6.5 Financing. At the Effective Time, Purchaser will cause Merger Sub
---------
to have funds available to it sufficient to consummate the Merger on the terms
contemplated hereby.
6.6 Brokers and Finders. No actions by Purchaser or Merger Sub or by
-------------------
anyone acting on behalf of either of them has given rise to any valid claim
against the Company for any broker's, finder's or investment banking fee in
connection with this Agreement or the transactions contemplated hereby.
25
<PAGE>
ARTICLE 7
COVENANTS
7.1 No Solicitation. (a) The Company and its Subsidiaries shall, and
---------------
shall direct and use reasonable efforts to cause their respective officers,
directors or employees, or any investment banker, financial advisor, attorney,
accountant or other representative to, immediately cease any discussions or
negotiations with any parties other than the Purchaser and Merger Sub that may
be ongoing with respect to an Acquisition Proposal. The Company and its
Subsidiaries shall not, and shall not authorize or permit any of their
respective officers, directors or employees or any investment banker, financial
advisor, attorney, accountant or other representative retained by it to,
directly or indirectly, (i) solicit, initiate or encourage (including by way of
-
furnishing non-public information), or take any other action to facilitate, any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, an Acquisition Proposal or (ii) participate in any
--
discussions or negotiations regarding an Acquisition Proposal; provided,
--------
however, that if, at any time prior to the adoption of this Agreement by the
- -------
holders of Common Stock, the Board of Directors of the Company determines in
good faith, based on the advice of outside counsel, that failure to do so would
constitute a breach of its fiduciary duties to the Company's stockholders under
applicable law, the Company, in response to an Acquisition Proposal that (I) was
-
unsolicited or that did not otherwise result from a breach of this Section
-------
7.1(a), and subject to compliance with Section 7.1(c), and (II) constitutes a
- ------ -------------- --
Superior Proposal, may (x) furnish non-public information with respect to the
-
Company and its Subsidiaries to the person who made such Acquisition Proposal
pursuant to a customary and reasonable confidentiality agreement and (y)
-
participate in negotiations regarding such Acquisition Proposal. Without
limiting the foregoing, it is understood that any violation of the restrictions
set forth in the preceding sentence by any director or officer of the Company or
any of its Subsidiaries or any investment banker, financial advisor, attorney,
accountant or other representative of the Company or any of its Subsidiaries,
acting on behalf of the Company or any of its Subsidiaries, shall be deemed to
be a breach of this Section 7.1(a) by the Company. For purposes of this
--------------
Agreement, "Acquisition Proposal" means any proposal or offer from any person
--------------------
relating to any direct or indirect acquisition or purchase of 10% or more of the
assets of the Company or any of its Subsidiaries or any shares of any class of
outstanding equity securities of the Company or any of its Subsidiaries, any
tender offer or exchange offer that if consummated would result in any person
beneficially owning 10% or more of any class of equity securities of the Company
or any of its Subsidiaries or any merger, consolidation, business combination,
sale of substantially all the assets, recapitalization, liquidation, dissolution
or similar transaction involving the Company or any of its Subsidiaries, other
than the transactions
26
<PAGE>
contemplated by this Agreement. For purposes of this Agreement, a "Superior
--------
Proposal" means any bona fide proposal made by a third party to acquire,
- --------
directly or indirectly, for consideration consisting of cash and/or securities,
100% of the voting power of the Common Stock of or all or substantially all the
assets of the Company and its Subsidiaries and otherwise on terms which the
Board of Directors determines in good faith (based on the written opinion of a
financial advisor of nationally recognized standing (which opinion shall be
provided to the Purchaser)) to be more favorable to the Company's stockholders
than the Merger and for which financing, to the extent required by the terms of
such proposal, is then committed or which, in the good faith judgment of the
Board of Directors, is reasonably capable of being obtained by such third party.
(b) Neither the Board of Directors nor any committee thereof shall (i)
-
withdraw or modify, or propose to withdraw or modify, in a manner adverse to
Purchaser, the approval or recommendation by such Board of Directors or such
committee of this Agreement or the Merger unless there is a Superior Proposal
outstanding, (ii) approve or recommend, or propose to approve or recommend, an
--
Acquisition Proposal unless such Acquisition Proposal is a Superior Proposal or
(iii) cause the Company to enter into any letter of intent, agreement in
---
principle, acquisition agreement or other agreement (an "Acquisition Agreement")
---------------------
with respect to an Acquisition Proposal unless such Acquisition Proposal is a
Superior Proposal, and unless, in each case, the Board of Directors shall have
(x) determined in good faith, based on the advice of outside counsel, that
- --
failure to do so would constitute a breach of its fiduciary duties to the
Company's stockholders under applicable law, and (y) terminated this Agreement
-
pursuant to Section 9.1(c)(ii).
------------------
(c) The Company shall promptly (but in any event within one day) advise
the Purchaser orally and in writing of any Acquisition Proposal or any inquiry
regarding the making of an Acquisition Proposal including any request for
information, the material terms and conditions of such request, Acquisition
Proposal or inquiry and the identity of the person making such request,
Acquisition Proposal or inquiry. The Company will, to the extent reasonably
practicable, keep the Purchaser fully informed of the status and details
(including amendments or proposed amendments) of any such request, Acquisition
Proposal or inquiry.
(d) Nothing contained in this Section 7.1 shall prohibit the Company from
-----------
at any time taking and disclosing to its stockholders a position contemplated by
Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure
to the Company's stockholders if, in the good faith judgment of the Board of
Directors, based upon the advice of outside counsel, failure so to disclose
would constitute a breach of its fiduciary duties to the Company's stockholders
under applicable law; provided, however,
-------- -------
27
<PAGE>
neither the Company nor its Board of Directors nor any committee thereof shall,
except as permitted by Section 7.1(b), withdraw or modify, or propose to
--------------
withdraw or modify, its position with respect to the Merger or this Agreement or
approve or recommend, or propose to approve or recommend, an Acquisition
Proposal; provided, further, that the taking of a position by the Company
-----------------
pursuant to Rule 14e-2(a)(2) or (3) of the Exchange Act in respect of an
Acquisition Proposal shall not be deemed a withdrawal, a modification or a
proposal to do either, of its position with respect to the Merger for purposes
hereof.
7.2. Interim Operations.
------------------
(a) From the date of this Agreement to the Effective Time, except as set
forth in the Disclosure Letter or as otherwise required pursuant to this
Agreement, unless Purchaser has consented in writing thereto, the Company shall,
and shall cause each of its Subsidiaries to:
(i) conduct its operations according to its usual, regular and
ordinary course of business consistent with past practice;
(ii) use its reasonable best efforts to preserve intact their
business organizations and goodwill, to maintain in effect all existing
qualifications, licenses, Permits, approvals and other authorizations
referred to in Sections 5.1 and 5.15, to keep available the services of their
------------ ----
officers and employees and to maintain, to the extent reasonably possible
given the Company's current cash position and loan from Purchaser,
satisfactory relationships with customers, suppliers, distributors, brokers,
sales agents and all other persons having business relationships with them,
including through the payment of additional compensation reasonably
acceptable to Purchaser to such distributors, brokers and sales agents
reasonably calculated to maintain at least the current level of
merchandising, distribution and shelving;
(iii) promptly notify Purchaser upon becoming aware of any
material breach of any representation, warranty or covenant contained in this
Agreement or the occurrence of any event that would cause any representation,
warranty or covenant contained in this Agreement no longer to be true and
correct in all material respects;
(iv) promptly deliver to Purchaser true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement (including the Pending Reports) and any internal monthly
reports prepared for or delivered to the Board of Directors after the date
hereof; and
28
<PAGE>
(v) deliver, within 20 business days after the end of each
accounting month, monthly consolidated financial statements, in the same
format as heretofore furnished to Purchaser, for the Company and its
Subsidiaries for and as of the end of each such month.
(b) From the date of this Agreement to the Effective Time, except as set
forth in the Disclosure Letter, unless Purchaser has consented in writing
thereto, the Company shall not, and shall not permit any of its Subsidiaries to:
(i) amend its Certificate of Incorporation or Bylaws or
comparable governing instruments;
(ii) except with respect to the Option Agreement, the Loan
Agreement or the issuance in the aggregate of 20,000 shares of Common Stock
in the ordinary course of business consistent with the past practice of the
Company, issue, sell, pledge or otherwise dispose of any shares of its
capital stock or other ownership interest in the Company (other than
issuances of Common Stock in respect of any exercise of Options outstanding
on the date hereof and disclosed in the Disclosure Letter) or any of the
Subsidiaries, or any securities convertible into or exchangeable for any such
shares or ownership interest, or any rights, warrants or options to acquire
or with respect to any such shares of capital stock, ownership interest, or
convertible or exchangeable securities; or accelerate any right to convert or
exchange or acquire any securities of the Company or any of its Subsidiaries
for any such shares or ownership interest;
(iii) effect any stock split, reverse stock split, stock dividend,
subdivision, reclassification or similar transaction, or otherwise change its
capitalization as it exists on the date hereof;
(iv) except with respect to the Option Agreement and the Loan
Agreement, grant, confer, award or amend any option, warrant, convertible
security or other right to acquire any shares of its capital stock or take
any action to cause to be exercisable any otherwise unexercisable option
under any stock option plan or restricted stock plan;
(v) declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of Common Stock or other
capital stock or ownership interests (other than such payments by a wholly-
owned Subsidiary to the Company or another wholly-owned Subsidiary);
29
<PAGE>
(vi) directly or indirectly redeem, purchase or otherwise acquire
any shares of its capital stock or the capital stock of any of its
Subsidiaries;
(vii) sell, lease, assign, transfer or otherwise dispose of (by
merger or otherwise) any of its property, business or assets (including,
without limitation, receivables, leasehold interests or Intellectual Property
and including any sale leaseback transaction) except (i) for the sale of
-
inventory in the ordinary course of business, (ii) for sales of other assets
--
(other than assets subject to the Option Agreement) for fair value in the
ordinary course of business provided that the proceeds of such other asset
sales do not exceed $250,000 in any single transaction or $700,000 in the
aggregate prior to the Effective Time, (iii) with respect to the Option
---
Agreement and (iv) the dissolution of the Company's French subsidiary;
--
(viii) settle or compromise any pending or threatened Litigation
without Purchaser's consent (which consent will not be unreasonably withheld
or delayed), other than (a) the Settlement on terms substantially similar to
-
those described in the MOU, and (b) settlements of Litigations which involve
-
solely the payment of money (without admission of liability) not to exceed
$50,000 in any one case or $100,000 in the aggregate;
(ix) make any advance, loan, extension of credit or capital
contribution to, or purchase or acquire (by merger or otherwise) any stock,
bonds, notes, debentures or other securities of, or any assets constituting a
business unit of, or make any other investment in, any person, firm or
entity, except (a) extensions of trade credit and endorsements of negotiable
-
instruments and other negotiable documents in the ordinary course of
business, (b) investments in cash and cash equivalents, (c) payroll and
- -
travel advances in the ordinary course of business and (d) investments in
-
wholly owned Subsidiaries;
(x) make any capital expenditures in the aggregate for the
Company and its Subsidiaries in excess of the amounts specified in the
Company's budget for capital expenditures, a true and complete copy of which
has previously been delivered to Purchaser, or otherwise acquire assets
having a value, in the aggregate, in excess of $50,000 not in the ordinary
course of business;
(xi) incur, assume or create any indebtedness for borrowed money
or the deferred purchase price for property or services or pursuant to any
capital lease or other financing, except (a) indebtedness incurred in the
-
ordinary course of business consistent with past practice for working capital
purposes pursuant to the Company's existing credit facilities as disclosed in
the Disclosure Letter, and
30
<PAGE>
(b) with respect to the Loan and Pledge Agreement, provided the terms of such
- --------
indebtedness have been approved by Purchaser in its reasonable discretion,
and (c) for the incurrence, assumption or creation of indebtedness in the
-
ordinary course of business consistent with the past practice of the Company
not exceeding $100,000 in any one instance or $250,000 in the aggregate at
any one time outstanding; or amend in a manner materially adverse to the
Company, any of the Company's existing credit facilities;
(xii) assume, guarantee or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other person except wholly-owned Subsidiaries of the Company and except for
obligations in the ordinary course of business consistent with the past
practice of the Company not exceeding $100,000 individually and $250,000 in
the aggregate;
(xiii) make any material Tax election (unless required by law or
unless consistent with prior practice) or settle or compromise any material
income tax liability except, in each case, if Purchaser is given reasonable
prior notice thereof;
(xiv) waive or amend any term or condition of any confidentiality
or "standstill" agreement to which the Company is a party and which relates
to a business combination with the Company or the purchase of shares or
assets of the Company;
(xv) grant or amend any stock-related or performance awards
except for such awards in the ordinary cause of business consistent with past
practice of the Company not to exceed $5,000 in the aggregate;
(xvi) except with respect to agreements which are terminable at
will by the Company without any material penalty to the Company, enter into
or amend any legally binding employment, severance, retention, change in
control, consulting or salary continuation agreements with any officers,
directors, employees or former employees or grant any increases in
compensation or benefits to employees other than increases to officers and
employees in the ordinary course of business consistent with the past
practice of the Company;
(xvii) adopt, amend or terminate any employee benefit plan policy,
understanding or arrangement (except as expressly contemplated by this
Agreement);
31
<PAGE>
(xviii) except for purchase orders for the sale of the Company's
products in the ordinary course of business consistent with past practice,
enter into (a) any agreements with distributors or sales agents other than
-
agreements terminable without penalty on less than 30 days' notice, (b) any
-
agreements to distribute products for others or which restrict the ability of
the Company or its Subsidiaries or affiliates to compete or (c) any other
-
agreements, other than agreements relating to product promotions or the Seiko
Epson Agreement, that would constitute Material Contracts; or amend any of
the foregoing agreements as exist on the date hereof;
(xix) amend, change or waive (or exempt any person or entity from
the effect of) the Rights Agreement, except in connection with the
transactions contemplated by this Agreement or the Option Agreement;
(xx) make any material changes in the type or amount of their
insurance coverages;
(xxi) except as may be required by law or generally acceptable
accounting principles and with prior written notice to the Purchaser, change
any accounting principles or practices used by the Company or its
Subsidiaries;
(xxii) effect any material change in the Company's advertising,
product promotion or brand support policies or programs or commit to any
significant new product promotion or advertising campaign except, in each
case, for matters in the ordinary course of business consistent with the past
practice of the Company;
(xxiii) effect any material change in the Company's billing
practices or sales terms, or cause a material acceleration or delay in the
manufacture, shipment or sale of inventory, the collection of accounts or
notes receivable or, to the extent reasonably possible given the Company's
current cash position and loan from Purchaser, the payment of accounts or
notes payable except, in each case, for matters in the ordinary course of
business consistent with the past practice of the Company;
(xxiv) enter into any Contracts for Derivatives, except for spot,
option and forward Contracts entered into in the ordinary course of business
consistent with the past practice of the Company and with the Company's
policies regarding Derivatives as previously disclosed to Purchaser;
(xxv) waive, relinquish, release or terminate any right or claim,
including any such right or claim under any Material Contract or permit any
rights of material value to use any Intellectual Property to lapse or be
forfeited, in each case,
32
<PAGE>
except in the ordinary course of business consistent with the past practice
of the Company;
(xxvi) apply for, consent to, or acquiesce in, the appointment of
a trustee, receiver, sequestrator or other custodian for any substantial part
of the property of the Company or any Subsidiary, or make a general
assignment for the benefit of creditors, or permit or suffer to exist the
commencement of any bankruptcy, reorganization, debt arrangement or other
case or proceeding under any bankruptcy or insolvency law, or any
dissolution, winding up or liquidation proceeding, in respect of the Company
or any Subsidiary; or
(xxvii) agree in writing or otherwise to take any of the foregoing
actions.
7.3 Filings; Other Action. Subject to the terms and conditions herein
---------------------
provided, the Company, Purchaser, and Merger Sub shall: (a) promptly make their
-
respective filings and thereafter make any other required submissions under the
HSR Act with respect to the Merger; (b) cooperate and consult with one another
-
in (i) determining which Regulatory Filings are required or, in the case of
-
Other Antitrust Filings, permitted to be made prior to the Effective Time with,
and which consents, approvals, Permits, authorizations or waivers (collectively,
"Consents") are required or, in the case of Other Antitrust Consents, permitted
--------
to be obtained prior to the Effective Time from Governmental Entities or other
third parties in connection with the execution and delivery of this Agreement,
the assignment of any Contract and the consummation of the transactions
contemplated hereby, including, without limitation, (x) all such Regulatory
-
Filings and Consents as relate to Foreign Antitrust Laws (the "Other Antitrust
---------------
Filings" and the "Other Antitrust Consents," respectively; collectively, the
- ------- ------------------------
"Other Antitrust Filings and Consents"), (y) all Consents required to transfer
- ------------------------------------- -
to the Company any Permits or registrations held on behalf of the Company or any
of its Subsidiaries by or in the name of distributors, brokers or sales agents
and (z) all Consents set forth in Section 5.6 of the Disclosure Letter; (ii)
- --
preparing all Regulatory Filings and all other filings, submissions and
presentations required or prudent to obtain all Consents, including by providing
to the other party drafts of such material reasonably in advance of the
anticipated filing or submission dates; and (iii) timely making all such
---
Regulatory Filings and timely seeking all such Consents (it being understood
that the parties will make or seek to obtain all Other Antitrust Filings and
Consents, whether mandatory or voluntary); and (c) use their reasonable best
-
efforts to take, or cause to be taken, all other action and do, or cause to be
done, all other things necessary, proper or appropriate to consummate and make
effective the transactions contemplated by this Agreement. It is understood
that it is principally the Company's obligation to use its reasonable best
efforts to obtain the Consents described above as soon as practicable following
the date hereof. Each of
33
<PAGE>
Purchaser and the Company shall use its reasonable best efforts to contest any
proceeding seeking a preliminary injunction or other legal impediment to, and to
resolve any objections as may be asserted by any Governmental Entity with
respect to, the Merger under the HSR Act or Foreign Antitrust Laws; provided
--------
that the foregoing shall not require Purchaser to take any action that could
directly or indirectly (x) impose limitations on the ability of Purchaser
-
or Merger Sub (or any of their affiliates or Subsidiaries) effectively
to acquire, operate or hold, or require Purchaser, Merger Sub or the
Company or any of their respective affiliates or Subsidiaries to dispose of or
hold separate, any portion of their respective assets or business that (I) is
-
either material to the business of Purchaser and its Subsidiaries or material to
the business of the Company and its Subsidiaries, or (II) is reasonably likely
--
to have a Material Adverse Effect, (y) restrict any future business activity by
-
Purchaser, Merger Sub, the Company or any of their affiliates or Subsidiaries
that (I) is either material to the business of Purchaser and its Subsidiaries or
-
material to the business of the Company and its Subsidiaries, or (II) is
--
reasonably likely to have a Material Adverse Effect, including, without
limitation, requiring the prior consent of any Governmental Entity to future
transactions by Purchaser, Merger Sub, the Company or any of their affiliates or
Subsidiaries, or (z) otherwise adversely affect Purchaser, Merger Sub, the
-
Company or any of their respective affiliates or Subsidiaries in a manner that
(I) is either material to the business of Purchaser and its Subsidiaries or
- --
material to the business of the Company and its Subsidiaries, or (II) is
--
reasonably likely to have a Material Adverse Effect. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purpose of this Agreement, the proper officers and directors of Purchaser and
the Surviving Corporation shall take all such necessary action.
7.4 Access to Information. From the date of this Agreement to the
---------------------
Closing, upon reasonable notice, the Company shall, and shall cause its
Subsidiaries to, subject to the compliance with applicable laws and
confidentiality obligations to third parties, (i) give Purchaser and its
-
authorized representatives reasonable access during normal business hours to all
books, records, personnel, research and other consultants, offices and other
facilities and properties of the Company and its Subsidiaries and their
accountants and accountants' work papers, (ii) permit Purchaser to make such
--
copies and inspections thereof as Purchaser may reasonably request and (iii)
---
furnish Purchaser with such financial and operating data and other information
with respect to the business and properties of the Company and its Subsidiaries
as Purchaser may from time to time reasonably request; provided that no
investigation or information furnished pursuant to this Section 7.4 shall affect
-----------
any representations or warranties made by the Company herein or the conditions
to the obligations of Purchaser to consummate the transactions contemplated
hereby.
34
<PAGE>
7.5 Publicity. The Company and Purchaser shall, subject to their
---------
respective legal obligations, obtain the prior consent of the other party (which
consent will not be unreasonably withheld or delayed) before issuing any press
release or otherwise making public statements with respect to the transactions
contemplated hereby or by the Option Agreement and in making any filings with
any national securities exchange with respect thereto.
7.6 Further Action. (a) Each party hereto shall, subject to the
--------------
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effect the Merger.
(b) The Company shall not, and the Company shall cause its Subsidiaries
not to, take any action that could reasonably be expected to result in (i) any
-
of the representations and warranties of the Company set forth in this Agreement
that are qualified by materiality becoming untrue, (ii) any of such
--
representations and warranties that are not so qualified becoming untrue in any
material respect or (iii) any of the conditions set forth in Article 8 not being
--- ---------
satisfied (subject to the Company's right to take actions specifically permitted
by Section 7.1). The Company shall use, and the Company shall cause its
-----------
Subsidiaries to use, their reasonable efforts to take, or cause to be taken, all
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable Laws to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
using their reasonable efforts to satisfy the conditions contained in Section
-------
7.10(c) and Article 8.
- ------- ---------
(c) The Company shall confer with Purchaser on a regular and frequent
basis as reasonably requested by Purchaser, report on operational matters and
promptly advise Purchaser orally and, if requested by Purchaser, in writing of
any material adverse change with respect to the Company. The Company shall
promptly notify Purchaser in writing of the occurrence of any event that will or
may result in the failure to satisfy any of the conditions specified in Section
-------
7.10(c) or Section 8. The Company will promptly provide to Purchaser (and its
- ------- ---------
counsel) copies of all filings made by the Company with any Governmental Entity
in connection with this Agreement and the transactions contemplated hereby. The
Company will promptly apprise Purchaser of any developments with respect to the
Settlement, and will provide to Purchaser (and its counsel) copies of all drafts
of documents and all correspondence relating to the Settlement.
35
<PAGE>
7.7 Insurance; Indemnity.
--------------------
(a) For a period of four years after the Effective Time, Purchaser shall
cause to be maintained officers' and directors' liability insurance covering the
parties who are currently covered, in their capacities as officers and
directors, by the Company's existing officers' and directors' liability
insurance policies (the "Current Policies") on terms substantially no less
----------------
advantageous to such parties than such Current Policies; provided, however, that
-------- -------
Purchaser shall not be required, in order to maintain or procure such coverage,
to pay annual premiums in excess of $225,000 (the "Cap"); and provided, further,
--- -------- -------
that if equivalent coverage cannot be obtained, or can be obtained only by
paying an amount in excess of the Cap, Purchaser shall only be required to
obtain such coverage for such four-year period as can be obtained by paying
annual premiums equal to the Cap.
(b) For a period of four years after the Effective Time, the Surviving
Corporation shall indemnify and hold harmless, to the fullest extent permitted
under applicable law, each person who is, or has been at any time prior to the
date hereof or who becomes prior to the Effective Time, an officer or director
of the Company or any of its Subsidiaries against all losses, claims, damages,
liabilities, costs or expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement (collectively, "Losses") in connection
------
with any Litigation arising out of or pertaining to acts or omissions, or
alleged acts or omissions, by them in their capacities as such, which acts or
omissions occurred prior to the Effective Time. Without limiting the foregoing,
the Company and after the Effective Time the Surviving Corporation shall
periodically advance expenses as incurred with respect to the foregoing to the
fullest extent permitted under applicable law provided that the person to whom
the expenses are advanced provides an undertaking to repay such advance if it is
ultimately determined that such person is not entitled to indemnification.
7.8 Restructuring of Merger. Upon the mutual agreement of Purchaser and
-----------------------
the Company, the Merger shall be restructured in the form of a forward
subsidiary merger of the Company into Merger Sub, with Merger Sub being the
surviving corporation, or as a merger of the Company into Purchaser, with
Purchaser being the surviving corporation. In such event, this Agreement shall
be deemed appropriately modified to reflect such form of merger.
7.9 Employees and Employee Benefit Plans.
------------------------------------
(a) From and after the Effective Time, Purchaser shall cause the Surviving
Corporation and any of its Subsidiaries to honor in accordance with their terms
and the
36
<PAGE>
past practice of the Company all existing employment and severance agreements
between the Company or any of its Subsidiaries, except as otherwise provided
herein, and any officer, director, or employee of the Company or any of its
Subsidiaries so long as such agreements shall have been identified to Purchaser
in the Disclosure Letter and to the extent such terms are in effect on the date
hereof or as otherwise provided
(b) The Company will use its reasonable best efforts consistent with
past practice and applicable law to enforce any existing non-compete and
confidentiality provisions contained in agreements with employees and former
employees.
(c) From and for two years after the Effective Time, Purchaser will, or
will cause Merger Sub, as applicable, to continue to provide each employee of
the Company and its Subsidiaries with employee benefits and other terms and
conditions of employment that are, in the aggregate, comparable to the benefits
and terms and conditions provided to each such employee by the Company or any of
its Subsidiaries, as applicable, on the Closing Date.
(d) The Company will use its reasonable best efforts to apply for and
receive from the Internal Revenue Service a favorable determination letter for
the Raster Graphics, Inc. Employees 401(k) Savings Plan & Trust.
7.10 Stockholder Approval; Preparation of Proxy Statement. (a) Subject
----------------------------------------------------
to the provisions of this Agreement, as promptly as practicable following the
satisfaction or waiver by Purchaser of the conditions set forth in Section
-------
7.10(c), the Company will (i) duly call, give notice of, convene and hold a
- ------- -
meeting of its stockholders (the "Stockholder Meeting") for the purpose of
-------------------
obtaining the voting upon the Merger, and (ii) through its Board of Directors,
--
declare the advisability of the Merger and recommend to its stockholders that
the Company Stockholder Approval be given.
(b) Subject to the provisions of this Agreement, as promptly as
practicable following the satisfaction or waiver by Purchaser of the conditions
set forth in Section 7.10(c), the Company will, at Purchaser's request, prepare
---------------
and file a preliminary Proxy Statement (such proxy statement, and any amendments
or supplements thereto, the "Proxy Statement") with the SEC and will use its
---------------
reasonable best efforts to respond to any comments of the SEC or its staff and
to cause the Proxy Statement to be cleared by the SEC as soon as practicable
after responding to all such comments to the satisfaction of the staff. The
Company will notify Purchaser promptly of the receipt of any comments from the
SEC or its staff and of any request by the SEC or its staff for amendments or
supplements to the Proxy Statement or for additional information and will supply
Purchaser with copies of all correspondence between the Company or any of
37
<PAGE>
its representatives, on the one hand, and the SEC or its staff, on the other
hand, with respect to the Proxy Statement or the Merger. The Company agrees to
notify the Purchaser a reasonable time prior to the filing or distribution of
the Proxy Statement of such filing or distribution. The Company shall give the
Purchaser and its counsel (who shall provide any comments thereon as soon as
practicable) the opportunity to review the Proxy Statement prior to its being
filed with the SEC and shall give the Purchaser and its counsel (who shall
provide any comments thereon as soon as practicable) the opportunity to review
all amendments and supplements to the Proxy Statement and all responses to
requests for additional information and replies to comments prior to their being
filed with, or sent to, the SEC. Each of the Company and the Purchaser agrees to
use its reasonable best efforts, after consultation with the other party, to
respond promptly to all such comments of and requests by the SEC. As promptly as
practicable after the Proxy Statement has been cleared by the SEC, the Company
shall mail the Proxy Statement to the stockholders of the Company. If at any
time prior to the Stockholders Meeting there shall occur any event that should
be set forth in an amendment or supplement to the Proxy Statement, the Company
will promptly prepare and mail to its stockholders such an amendment or
supplement. The Company will not mail any Proxy Statement, or any amendment or
supplement thereto, to which Purchaser reasonably objects; provided, that
--------
Purchaser shall identify its objections and fully cooperate with the Company to
create a mutually satisfactory Proxy Statement.
(c) Notwithstanding anything to the contrary in this Agreement, without
the prior written consent of Purchaser, the Company shall neither (i) call a
-
Stockholder Meeting for the purpose of voting on the Merger, nor (ii) file a
--
Proxy Statement with the SEC or otherwise publish a Proxy Statement, unless and
until each of the following conditions has been satisfied: (w) the Settlement
-
shall have been approved by all relevant parties and the appropriate court of
competent jurisdiction in substantially the form described in the MOU; (x) the
-
Company shall have filed with the SEC the Company's Annual Report on Form 10-K
for the Company's 1997 fiscal year, the Company's Quarterly Reports on Form 10-Q
for the quarterly periods ending March 31, 1998 and June 30, 1998, respectively
and, if deemed necessary by the Company's auditors, restatements of the
Company's Quarterly Reports for the quarterly periods ending March 31, 1997,
June 30, 1997, and September 30, 1997, which reports (the "Pending Reports")
---------------
shall comply in form and substance with the Exchange Act; (y) the Company shall
-
be in compliance with all reporting requirements applicable to the Company under
the Securities Act and the Exchange Act except such requirements, the failure of
with which to comply, would not, individually or in the aggregate, have a
Material Adverse Effect and (z) Purchaser shall not have determined in its
-
reasonable discretion that Section 2115 of the California General Corporation
Law applies to the Company, the Merger or any of the transactions contemplated
by the Merger Agreement and the Option Agreement.
38
<PAGE>
(d) The Company shall use its reasonable best efforts to obtain the
Company Shareholder Approval.
(e) Purchaser agrees to cause all shares of Common Stock owned by
Purchaser or any Subsidiary of Purchaser to be voted in favor of the approval of
the Merger.
7.11 Additional Agreements of the Company. (a) The Company shall use
------------------------------------
its reasonable best efforts to file the Pending Reports as promptly as
practicable after the date hereof, but in no event later than (i) October 15,
-
1998 for the Pending Reports for the periods ending in 1997 and (ii) November
--
30, 1998 for the periods ending in 1998. The Company shall provide drafts of
such filings to Purchaser at Purchaser's request and shall consider any comments
suggested by Purchaser; provided, that the Company will not be in breach of the
--------
first sentence of this Section 7.11(a) due to Purchaser's delay in providing
---------------
such comments to the Company.
(b) The Company shall use its reasonable best efforts to insure that the
Settlement shall be approved by all parties and the appropriate court of
competent jurisdiction in substantially the form described in the MOU.
(c) Except with respect to the Option Agreement and the Loan Agreement,
the Company shall (i) maintain the shares of O-Sub free and clear of all
-
Encumbrances for so long as either this Agreement or the Option Agreement
remains in effect; and (ii) promptly (but no later than October 15, 1998)
--
either remove any and all Encumbrances from the other assets subject to the
Option Agreement or provide to Purchaser evidence reasonably satisfactory to
Purchaser that such Encumbrances will be removed prior to the exercise of the
Inkjet Option.
(d) The Company shall use its reasonable best efforts to finalize,
execute and deliver an agreement with Seiko Epson Corporation (the "Seiko Epson
-----------
Agreement") covering the same matters described in the Letter of Intent, dated
- ---------
April 22, 1997, between the Company and Seiko Epson Corporation, as soon as
practicable, but in no event later than November 15, 1998.
(e) The Company shall use its reasonable best efforts (including paying
all delinquent franchise taxes) to (i) restore the Company and its Subsidiaries
-
to good standing in the jurisdiction in which the Company or such Subsidiary, as
applicable, is incorporated or organized, and (ii) restore the Company's and its
--
Subsidiaries' licenses or qualifications to do business as foreign corporations
and restore them to good standing in each jurisdiction in which the character of
the properties owned or leased by it or in
39
<PAGE>
which the transaction of its business makes such licensure, qualification or
good standing necessary. The Company shall use its reasonable best efforts to
maintain the good standing, licensure and qualifications of the Company and its
Subsidiaries in all relevant jurisdictions.
7.12 Transfer Taxes. Any liability for New York State Real Property
--------------
Transfer Tax and similar real property transfer taxes and real property gains
taxes imposed by any other state with respect to the transactions contemplated
by this Agreement, together with applicable interest, penalties and additions
thereto, if any, shall be paid or caused to be paid by the Purchaser.
ARTICLE 8
CONDITIONS
8.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
respective obligation of each party to effect the Merger shall be subject to the
satisfaction or, where permissible, waiver, prior to the Effective Time, of the
following conditions:
(a) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(b) None of the parties hereto shall be subject to any order, judgment,
injunction, decree or ruling, or other action of a court or other Governmental
Entity of competent jurisdiction restraining, enjoining or otherwise prohibiting
the Merger or the transactions contemplated by this Agreement; provided that
--------
each of the parties shall have used its reasonable best efforts to appeal as
promptly as practicable any such order, judgment, injunction, decree, ruling or
other action.
(c) The Company Stockholder Approval shall have been obtained in
accordance with the DGCL and the Company's Certificate of Incorporation and By-
laws.
(d) Other than the filing provided for by Section 1.3, all Regulatory
-----------
Filings and Consents (including the Other Antitrust Filings and Consents) which
are necessary for the consummation of the Merger shall have been made or
obtained, or any waiting period (whether requisite or voluntary) under any
Foreign Antitrust Laws shall have expired, in each case, to the extent that the
failure to make or obtain such Regulatory Filings or Consents or of the waiting
period to have expired, in the aggregate, is reasonably likely, individually or
in the aggregate, to have a Material Delaying Effect (all
40
<PAGE>
such Consents, Regulatory Filings and the lapse of all such waiting periods
being referred to as the "Requisite Regulatory Approvals"), and all such
------------------------------
Requisite Regulatory Approvals shall be in full force and effect. There shall
not be any statute, law, rule or regulation that makes consummation of the
Merger illegal or prohibited.
8.2 Additional Conditions to Obligations of Purchaser and Merger Sub to
-------------------------------------------------------------------
Effect the Merger. The obligations of Purchaser and Merger Sub to effect the
- -----------------
Merger shall be subject to the satisfaction or, where permissible, waiver, prior
to the Effective Time, of the following conditions:
(a) The Settlement shall have been approved by all relevant parties and
the appropriate court of competent jurisdiction in substantially the form
described in the MOU.
(b) (i) The representations or warranties made by the Company in this
-
Agreement shall be true and correct in all respects as of the date hereof, and
shall be true and correct in all respects as of the Closing Date as if made as
of the Closing Date (other than representations and warranties made as of a
specified date), except where the failure to be so true and correct (without
giving effect to any materiality qualifications or thresholds contained in such
representations and warranties), individually and in the aggregate, would not
have a Material Adverse Effect or materially adversely affect the business of
Purchaser in relation to its decision to consummate the transactions
contemplated hereby, and (ii) the Company shall not have breached or failed to
--
comply in any material respect with any of its obligations under this Agreement,
the Loan Agreement or the Option Agreement.
(c) There shall not have been issued, delivered, sold or granted any
shares of Common Stock pursuant to the Rights Agreement.
(d) Since the date hereof, there shall not have occurred any event,
change, effect or development that, individually or in the aggregate, would have
a Material Adverse Effect.
(e) The Seiko Epson Agreement, in form and substance reasonably
satisfactory to Purchaser, shall have been executed and delivered by all parties
thereto.
(f) Each of the Company and its Subsidiaries is validly existing and in
good standing under the laws of its jurisdiction of incorporation and is duly
licensed or qualified to do business as a foreign corporation and is in good
standing under the laws of any other state of the United States or any other
jurisdiction in which the character of
41
<PAGE>
the properties owned or leased by it or in which the transaction of its business
makes such licensure, qualification or good standing necessary.
8.3 Additional Conditions to Obligations of the Company. The
---------------------------------------------------
obligations of the Company to effect the Merger are subject to the satisfaction
or, where permissible, waiver, prior to the Effective Time, of the following
conditions:
(a) (i) The representations or warranties made by Purchaser in this
Agreement shall be true and correct in all respects as of the date hereof, and
shall be true and correct in all respects as of the Closing Date as if made as
of the Closing Date (other than representations and warranties made as of a
specified date), except where the failure to be so true and correct (without
giving effect to any materiality qualifications or thresholds contained in such
representations and warranties), individually and in the aggregate, would not
have a Material Adverse Effect, and (ii) Purchaser shall not have breached or
failed to comply in any material respect with any of its obligations under this
Agreement, the Loan Agreement or the Option Agreement.
(b) Purchaser or Merger Sub shall have deposited the aggregate Merger
Consideration with the Paying Agent.
ARTICLE 9
TERMINATION; AMENDMENT; WAIVER
9.1 Termination. This Agreement may be terminated and the Merger
-----------
contemplated hereby may be abandoned at any time prior to the Effective Time,
notwithstanding approval thereof by the stockholders of the Company, if any:
(a) by mutual written consent of the Company and Purchaser;
(b) by Purchaser or the Company if:
(i) the Effective Time shall not have occurred on or before
February 28, 1999 (provided that the right to terminate this Agreement
--------
pursuant to this clause (i) shall not be available to any party whose failure
to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Effective Time to occur on or before such
date);
42
<PAGE>
(ii) there shall be any statute, law, rule or regulation that
makes consummation of the Merger illegal or prohibited or if any court or
other Governmental Entity of competent jurisdiction shall have issued an
order, judgment, decree or ruling, or taken any other action restraining,
enjoining or otherwise prohibiting the Merger and such order, judgment,
injunction, decree, ruling or other action shall have become final and non-
appealable; provided that the party terminating this Agreement has complied
--------
with the provisions of the penultimate sentence of Section 7.3; or
(iii) the Company Stockholder Approval shall not have been
obtained at a Stockholder Meeting duly convened therefor or at any
adjournment or postponement thereof;
(c) by the Company if:
(i) (x) any of the respective representations or warranties made by
-
Purchaser or Merger Sub in this Agreement shall not have been true and
correct in all respects when made, or shall thereafter have ceased to be true
and correct in all respects as if made as of such later date (other than
representations and warranties made as of a specified date), except where the
failure to be so true and correct (without giving effect to any materiality
qualifications or thresholds contained in such representations and
warranties), individually or in the aggregate, would not have a Material
Adverse Effect, or (y) Purchaser or Merger Sub shall have breached or failed
-
to comply in any material respect with any of its obligations under this
Agreement, which untruth or inaccuracy or breach, in the case of clauses (x)
or (y), is not curable or, if curable, is not cured within 10 business days
after written notice thereof has been given by the Company to Purchaser;
(ii) the Company takes any of the actions described in Section
-------
7.1(b), provided, that the Company has notified Purchaser in writing of its
------ --------
intent to take any such action five days prior to the termination of this
Agreement, and the Acquisition Proposal at stake continues to be a Superior
Proposal notwithstanding any modification by Purchaser of the terms of the
Merger; provided further that the Company has complied with the provisions of
-------- -------
Sections 7.1(b) and (c); and provided further that such termination under
--------------- ---
this Section 9.1(c)(ii) shall not be effective until (x) the Company has paid
------------------ -
to Purchaser or deposited with a mutually acceptable escrow agent an amount
equal to the sum of the Maximum Expense Amount and the Termination Amount;
and (y), the Company has deposited with a mutually acceptable escrow agent
-
the items set forth in Schedule D to the Option Agreement.
43
<PAGE>
(d) by Purchaser if:
(i) (A) the Company fails to file (x) the Pending Reports for the
- -
periods ending in 1997 by October 15, 1998 or (y) the Pending Reports for the
-
periods ending in 1998 by by November 30, 1998, (B) if the Company, upon
-
Purchaser's request (based upon Purchaser's reasonable belief that events are
likely to occur that would enable Purchaser to exercise the Inkjet Option),
has not placed in escrow the items set forth in Schedule D to the Option
Agreement, or (C) if the Seiko Epson Agreement, in form and substance
-
reasonably satisfactory to Purchaser, has not been executed and delivered by
all parties thereto by November 15, 1998.
(ii) (A) the Company has failed by October 15, 1998 to have removed
-
all Encumbrances from the assets subject to the Option Agreement (other than
the O-Sub Shares) or provided to Purchaser evidence reasonably satisfactory
to Purchaser that such Encumbrances will be removed prior to the exercise of
the Inkjet Option or (B) any Encumbrance (other than Encumbrances existing as
-
of the date hereof and Encumbrances created pursuant to the Loan Agreement or
the Option Agreement) has been placed on all or any portion of the O-Sub
Shares or the other assets subject to the Option Agreement, and all such
Encumbrance has not been removed within 10 calendar days after Purchaser has
delivered written notice to the Company requesting that such Encumbrance be
removed.
(iii) (x) Any of the representations or warranties made by the
Company in this Agreement shall not have been true and correct in all
respects when made, or shall thereafter have ceased to be true and correct in
all respects as if made as of such later date (other than representations and
warranties made as of a specified date), except where the failure to be so
true and correct (without giving effect to any materiality qualifications or
thresholds contained in such representations and warranties), individually
and in the aggregate, would not have a Material Adverse Effect or materially
adversely affect the business of Purchaser in relation to its decision to
consummate the transactions contemplated hereby, or (y) the Company shall
-
have breached or failed to comply in any material respect with any of its
obligations under this Agreement, the Loan Agreement or the Option Agreement,
which untruth or inaccuracy or breach, in the case of clauses (x) or (y), is
not curable, or is not cured within 10 business days after written notice
thereof has been given by Purchaser to the Company;
(iv) Any corporation, entity, "group" or "person" (as defined in
the Exchange Act), other than Purchaser or Merger Sub, shall have acquired
beneficial ownership of more than 25% of the outstanding shares of Common
Stock;
44
<PAGE>
(v) Since the date hereof, there shall have occurred any event,
change, effect or development that, individually or in the aggregate, would
have a Material Adverse Effect;
(vi) if the Settlement has been rejected by a court of competent
jurisdiction or otherwise terminated, and a substitute settlement that is
reasonably acceptable to Purchaser has not been entered into and approved by
such court within 30 days of such rejection or termination; or
(vii) if the Company takes any of the actions described in Section
-------
7.1(b) or if the Board of Directors shall have resolved to take any such
------
action.
9.2 Effect of Termination. If this Agreement is terminated and the
---------------------
Merger is abandoned pursuant to Section 9.1 hereof, this Agreement, except for
-----------
the provisions of Section 7.11(c), Section 9.2 and Article 10, shall terminate,
--------------- ----------- ----------
without any liability on the part of any party or its directors, officers or
stockholders. Nothing herein shall relieve any party to this Agreement of
liability for breach of this Agreement or prejudice the ability of the non-
breaching party to seek damages from any other party for any breach of this
Agreement, including without limitation, attorneys' fees and the right to pursue
any remedy at law or in equity.
9.3 Amendment. To the extent permitted by applicable law, this
---------
Agreement may be amended by action taken by or on behalf of the Board of
Directors of the Company and Purchaser at any time before or after adoption of
this Agreement by the stockholders of the Company but, after any such
stockholder approval, no amendment shall be made which decreases the Merger
Consideration or which adversely affects the rights of the Company's
stockholders hereunder without the approval of such stockholders. This
Agreement may not be amended except by an instrument in writing signed on behalf
of all of the parties.
9.4 Extension; Waiver. At any time prior to the Effective Time, the
-----------------
parties hereto, by action taken by or on behalf of the Board of Directors and
Purchaser, may (i) extend the time for the performance of any of the obligations
-
or other acts of the other parties hereto, (ii) waive any inaccuracies in the
--
representations and warranties contained herein by any other applicable party or
in any document, certificate or writing delivered pursuant hereto by any other
applicable party or (iii) waive compliance with any of the agreements or
---
conditions contained herein. Any agreement on the part of any party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
45
<PAGE>
ARTICLE 10
GENERAL PROVISIONS
10.1 Nonsurvival of Representations and Warranties. None of the
---------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time.
10.2 Notices. Any notice required to be given hereunder shall be
-------
sufficient if in writing, and sent by facsimile transmission (with a
confirmatory copy sent by overnight courier), by courier service (with proof of
service), hand delivery or certified or registered mail (return receipt
requested and first-class postage prepaid), addressed as follows:
If to Purchaser or Merger Sub: If to the Company:
Gretag Imaging Group, Inc. Raster Graphics, Inc.
c/o Gretag Imaging, Inc. 3025 Orchard Parkway
2070 Westover Road San Jose, CA 95134
Chicopee, MA 01022
Telephone: (413) 593-6900 Telephone: (408) 232-4000
Facsimile: (413) 788-0940 Facsimile: (408) 232-4100
Attention: William Recker Attention: Rakesh Kumar
With a copy to:
Gretag Imaging Holding AG
Althardstrasse 70
CH-8105 Regensdorf Switzerland
Telephone: (011-411) 842-2092
Facsimile: (011-411) 842-2411
Attention: Dr. Eduard Brunner
With a copy to: With a copy to:
46
<PAGE>
Debevoise & Plimpton Venture Law Group
875 Third Avenue 2800 Sand Hill Road
New York, New York 10022 Menlo Park, CA 94025
Telephone: (212) 909-6000 Telephone: (650) 854-4488
Facsimile: (212) 909-6836 Facsimile: (650) 854-1121
Attention: Christopher Smeall, Esq. Attention: Edmund S. Ruffin, Jr., Esq.
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
10.3 Assignment; Binding Effect. Neither this Agreement nor any of the
--------------------------
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties; provided, however, that either Purchaser
-------- -------
or Merger Sub (or both) may assign its rights hereunder to an affiliate but
nothing shall relieve the assignor from its obligations hereunder. Subject to
the preceding sentence, this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
Notwithstanding anything contained in this Agreement to the contrary, except for
the provisions of Sections 4.2(a) and 4.2(d), nothing in this Agreement,
--------------- ------
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
10.4 Entire Agreement. This Agreement, the Disclosure Letter, the Option
----------------
Agreement, the Loan Agreement and any other documents delivered by the parties
in connection herewith constitute the entire agreement among the parties with
respect to the subject matter hereof or therewith and supersede all prior
agreements and understandings among the parties with respect thereto.
10.5 Fees and Expenses.
-----------------
(a) Except as provided in Section 10.5(b), whether or not the Merger is
---------------
consummated, all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
(b) If this Agreement is terminated by the Company pursuant to Section
-------
9.1(b)(iii) or 9.1(c)(ii) or by Purchaser pursuant to 9.1(d)(i)(A)(x) (but only
- -------------------------
if all the relevant Pending Reports continue not to be filed on November 30,
1998), 9.1(d)(iii),
47
<PAGE>
9.1(d)(vi) or 9.1(d)(vii), the Company shall pay Purchaser as promptly as
practicable in same-day funds an aggregate amount equal to the Purchaser
Expenses. "Purchaser Expenses" shall mean the documented reasonable
------------------
out-of-pocket expenses of Purchaser, Merger Sub and their respective affiliates
incurred in connection with or arising out of the Merger, this Agreement, the
Option Agreement (including the exercise thereof), the Loan Agreement (other
than those expenses explicitly covered therein) and the transactions
contemplated hereby and thereby (including, without limitation, amounts paid or
payable to investment bankers (if any), information agents, lending banks, fees
and expenses of counsel, accountants and consultants and printing and mailing
expenses, regardless of when such expenses are incurred); provided, that in no
--------
event shall Purchaser Expenses exceed $1,000,000 (the "Maximum Expense Amount");
----------------------
and provided further, that if (a) for any reason the Purchaser is unable to
----------------
consummate the purchase of the Inkjet Business (as defined in the Option
Agreement) in accordance with the Option Agreement at the Combined Closing Date
(as defined in the Option Agreement) following any termination of this Agreement
pursuant to Section 9.1(b)(iii), 9.1(c)(ii), 9.1(d)(iii) or 9.1(d)(vii) or (b)
at any time following the consummation of the purchase of such Inkjet Business
Purchaser is required to rescind or unwind such purchase or pay damages to the
Company or any other Person (whether pursuant to a judgment or award or by
reason of any settlement of any judicial or arbitral proceeding) as a result of
or in connection with such purchase, then the Company shall promptly pay to
Purchaser the sum of $500,000 (the "Termination Amount") in immediately
------------------
available funds in addition to the Purchaser Expenses.
(ii) If this Agreement is terminated by the Company pursuant to Section
-------
9.1(c)(i), Purchaser shall pay the Company as promptly as practicable in same-
- ---------
day funds an aggregate amount equal to the Company Expenses. "Company Expenses"
----------------
shall mean the documented reasonable out-of-pocket expenses of the Company and
its affiliates incurred in connection with or arising out of the Merger, this
Agreement, the Option Agreement and the transactions contemplated hereby and
thereby (including, without limitation, amounts paid or payable to investment
bankers, information agents, lending banks, fees and expenses of counsel,
accountants and consultants and printing and mailing expenses, regardless of
when such expenses are incurred); provided that in no event shall Company
--------
Expenses exceed $1,000,000; and provided further that Company Expenses shall not
-------- -------
include any fees and expenses that would have been incurred by the Company or
its affiliates regardless of whether Purchaser and the Company had negotiated
and executed this Agreement or the Option Agreement (including, without
limitation, fees and expenses paid or payable to accountants with respect to the
preparation, restatement and filing of the Pending Reports, and amounts paid or
payable to investment bankers, counsel and consultants for advice given with
respect to the general solicitation of potential acquirors of the Company).
48
<PAGE>
(c) Each of the Company and Purchaser acknowledges that the agreements
contained in Section 10.5(b) are an integral part of the transactions
---------------
contemplated by this Agreement, and that, without these agreements, Purchaser,
on the one hand, and the Company on the other would not enter into this
Agreement; accordingly, if the Company or Purchaser fails to promptly pay any
amounts owing pursuant to this Section 10.5(b) when due, the Company or
---------------
Purchaser shall in addition thereto pay to Purchaser or the Company, as the case
may be, all costs and expenses (including, pursuant to Section 10.5(b), fees and
---------------
disbursements of counsel) incurred in collecting such amounts, together with
interest on such amounts (or any unpaid portion thereof) from the date such
payment was required to be made until the date such payment is received by
Purchaser or the Company, as the case may be, at the prime rate of Citibank,
N.A. as in effect from time to time during such period.
10.6 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws. Each of the Company, Purchaser and Merger Sub hereby
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the courts of the State of Delaware and of the United States of America
located in the State of Delaware (the "Delaware Courts") for any litigation
---------------
arising out of or relating to this Agreement and the transactions contemplated
hereby (and agrees not to commence any litigation relating thereto except in
such courts), waives any objection to the laying of venue of any such litigation
in the Delaware Courts and agrees not to plead or claim in any Delaware Court
that such litigation brought therein has been brought in an inconvenient forum.
10.7 Headings. Headings of the Articles and Sections of this Agreement
--------
are for the convenience of the parties only, and shall be given no substantive
or interpretive effect whatsoever.
10.8 Interpretation. In this Agreement, unless the context otherwise
--------------
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa. Whenever the words "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation." As used in this Agreement, the words "Subsidiary," "affiliate" and
---------- ---------
"associate" shall have the meanings ascribed thereto in Rule 12b-2 under the
---------
Exchange Act. For purposes of this Agreement, one party shall be considered
"wholly owned" by another party if all of the shares of its outstanding capital
stock, other than directors' qualifying shares, are beneficially owned by such
other party. As used in this Agreement, the words "to the knowledge of the
Company" shall mean the
49
<PAGE>
knowledge of the directors and senior officers of the Company, after reasonable
investigation.
10.9 Investigations. No action taken pursuant to this Agreement,
--------------
including, without limitation, any investigation by or on behalf of any party,
shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or agreements
contained in this Agreement.
10.10 Severability. Any term or provision of this Agreement which is
------------
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
10.11 Enforcement of Agreement.
------------------------
(a) The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with its specific terms or was otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically the terms and
provisions hereof in any Delaware Court, this being in addition to any other
remedy to which they are entitled at law or in equity.
(b) The prevailing party in any judicial action shall be entitled to
receive from the other party reimbursement for the prevailing party's reasonable
attorneys' fees and disbursements, and court costs.
10.12 Counterparts. This Agreement may be executed by the parties hereto
------------
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
50
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
RASTER GRAPHICS, INC.
By: /s/ Rak Kumar
----------------------
Name: Rak Kumar
Title: President & CEO
GRETAG IMAGING GROUP, INC.
By: /s/ Dr. Eduard Brunner
----------------------
Name: Dr. Eduard Brunner
Title: Treasurer
GRETAG ACQUISITION CORP.
By: /s/ Dr. Eduard Brunner
----------------------
Name: Dr. Eduard Brunner
Title: Treasurer
51
<PAGE>
EXHIBIT 10.20
EXECUTION COPY
================================================================================
LOAN AND PLEDGE AGREEMENT
between
RASTER GRAPHICS, INC.
(the "Borrower")
and
GRETAG IMAGING GROUP, INC.
(the "Lender")
Dated as of October 6, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
SECTION 1. DEFINITIONS.............................................. 1
1.1. Defined Terms............................................ 1
SECTION 2. AMOUNT AND TERMS OF LOAN; CLOSING........................ 4
2.1. Loan..................................................... 4
2.2. Closing.................................................. 4
SECTION 3. PAYMENT OF LOAN; INTEREST;TRANSFER....................... 6
3.1. Repayment of the Loans................................... 6
3.2. Interest................................................. 6
3.3. Terms of Payment......................................... 6
3.4. Computation of Interest and Fees......................... 7
3.5. Indemnity................................................ 7
3.6. Optional Prepayment...................................... 7
3.7. Termination of Committed Amount.......................... 7
SECTION 4. PLEDGE OF COLLATERAL..................................... 7
4.1. Pledge of Collateral..................................... 7
4.2. Delivery of Collateral................................... 8
4.3. Further Assurances....................................... 8
4.4. Voting Rights; Dividends, etc............................ 8
4.5. Covenants of the Borrower................................ 8
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE
BORROWER............................................... 9
5.1. Corporate Status and Licensing........................... 9
5.2. Corporate Power and Authority; Enforceable Obligations... 9
5.3. Compliance with Law and Other Instruments................ 9
5.4. Litigation............................................... 10
5.5. Consents................................................. 10
5.6. Financial Information.................................... 10
5.7. Taxes, Assessments and Fees.............................. 10
5.8. Capitalization........................................... 10
5.9. Accuracy of Information.................................. 11
5.10. Absence of Default....................................... 11
5.11. Obligations Pari Passu................................... 11
5.12. Withholding Tax.......................................... 11
i
<PAGE>
5.13. Title to Properties...................................... 11
5.14. Material Adverse Change.................................. 11
5.15. Title to Collateral; First Priority Lien................. 11
5.16. Authorized Stock......................................... 11
SECTION 6. CONDITIONS PRECEDENT..................................... 12
6.1. Borrower Approval........................................ 12
6.2. Documentation............................................ 12
6.3. Changes, Etc............................................. 12
6.4. Corporate Proceedings of the Borrower.................... 12
6.5. Borrower Incumbency Certificate.......................... 13
6.6. Representations and Warranties........................... 13
6.7. Performance; No Default.................................. 13
6.8. Governmental Approvals................................... 13
6.9. Legal Opinions........................................... 13
6.10. Compliance Certificate................................... 13
6.11. Security Arrangements.................................... 13
6.12. Option Agreement......................................... 13
6.13. Additional Matters....................................... 13
SECTION 7. COVENANTS................................................ 14
7.1. Senior Obligations....................................... 14
7.2. Limitation of Liens...................................... 14
7.3. Use of Proceeds.......................................... 14
7.4. Constitutive Documents; Preservation of Existence, Etc.;
Conduct of Business...................................... 14
7.5. Compliance with Applicable Law........................... 15
7.6. Notices.................................................. 15
7.7. Further Assurances....................................... 15
7.8. Sale; Merger............................................. 15
7.9. Appointment as Attorney-in-Fact.......................... 15
7.10. Maintenance of Shares.................................... 16
SECTION 8. EVENTS OF DEFAULT........................................ 16
8.1. Events of Default........................................ 16
8.2. Remedies on Default, Etc................................. 17
8.3. Exercise of Remedies..................................... 19
SECTION 9. TAXES.................................................... 19
9.1. Excluded Taxes........................................... 19
9.2. Additional Amounts; Indemnified Taxes.................... 19
ii
<PAGE>
9.3. Other Taxes.............................................. 20
SECTION 10. STOCK OPTION............................................. 20
10.1. Grant of Stock Option.................................... 20
10.2. Exercise of Stock Option................................. 21
10.3. Stock Option Closing..................................... 21
SECTION 11. MISCELLANEOUS........................................... 22
11.1. Amendments and Waivers.................................. 22
11.2. Notices................................................. 22
11.3. No Waiver; Cumulative Remedies.......................... 23
11.4. Survival of Representations and Warranties.............. 23
11.5. Payment of Expenses and Taxes........................... 23
11.6. Successors and Assigns; Assignments..................... 24
11.7. Severability............................................ 24
11.8. Integration............................................. 24
11.9. CONSENT TO JURISDICTION................................. 24
11.10. Right to Set-Off........................................ 24
11.11. Payments................................................ 25
11.12. No Partnership; Etc..................................... 25
11.13. Enforcement of Agreement................................ 25
11.14. GOVERNING LAW........................................... 25
11.15. WAIVERS OF JURY TRIAL................................... 26
11.16. Counterparts............................................ 26
EXHIBIT A Form of Promissory Note
EXHIBIT B Initial Note
iii
<PAGE>
LOAN AND PLEDGE AGREEMENT
October 6, 1998
Gretag Imaging Group, Inc.
c/o Gretag Imaging, Inc.
2070 Westover Road
Chicopee, MA 01022
Dear Sirs:
Raster Graphics, Inc. (the "Borrower"), a Delaware corporation, agrees
--------
with Gretag Imaging Group, Inc. (together with its successors and permitted
assigns, the "Lender"), a company organized under the laws of Delaware, as
------
follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms shall
-------------
have the following meanings:
"Agreement": this Loan and Pledge Agreement, as amended, supplemented or
---------
otherwise modified from time to time.
"Applicable Law": as to any Person, the Certificate of Incorporation and
--------------
By-Laws or other constituent documents, organizational, or governing documents
of such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding such Person or any of its property or to which such Person or any
of its property is subject.
"Borrower": as defined in the preamble hereto.
--------
"Borrower Common Stock": as defined in subsection 10.1(a).
---------------------
"Borrower Obligations": the collective reference to the unpaid principal
--------------------
of and interest on the Loans and all other obligations and liabilities of the
Borrower to the Lender, whether direct or indirect, absolute or contingent, due
or to become due, or now existing or hereafter incurred, which may arise out of,
or in connection with, the Loan Agreement, and which shall include the unpaid
principal of and any accrued interest on
<PAGE>
the Initial Note and all such obligations and liabilities of the Borrower
arising out of the Initial Note.
"Business Day": a day other than a Saturday, Sunday or other day on which
------------
commercial banks in New York, New York, or Zurich, Switzerland, are authorized
or required by law to close.
"Closing Amount": as defined in subsection 2.2(a).
--------------
"Closing Date": as defined in subsection 2.2(a).
------------
"Closing Notice": as defined in subsection 2.2(a).
--------------
"Collateral": as defined in subsection 4.1.
----------
"Committed Amount": U.S. Dollars 5,000,000.
----------------
"Default": any of the events specified in section 8, whether or not any
-------
requirement for the giving of notice, the lapse of time, or both, or any other
condition, has been satisfied.
"Event of Default": any of the events specified in section 8, provided
----------------
that any requirement for the giving of notice, the lapse of time, or both, or
any other condition, has been satisfied.
"Excluded Taxes": as defined in subsection 9.1.
--------------
"Financial Statements": as defined in subsection 5.6.
--------------------
"Governmental Authority": any nation or governmental entity, any state or
----------------------
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Indemnified Liabilities": as defined in subsection 11.5.
-----------------------
"Indemnified Taxes": as defined in subsection 9.2(d).
-----------------
"Initial Note": as defined in subsection 2.2(c).
------------
"Inkjet Option": as defined in the Option Agreement.
-------------
"Lender": as defined in the preamble hereto.
------
2
<PAGE>
"Lien": as to any Person as at any date, any mortgage, lien, pledge,
----
adverse claim, charge, security interest or other encumbrance existing on such
date in or on, or any interest or title existing on such date of any vendor,
lessor, lender or other secured party to or of, such Person under any
conditional sale or other title retention agreement or capital lease with
respect to, any property or asset of such Person, or the signing or filing of
any financing statement which names such Person as debtor, or the signing of any
then effective security agreement authorizing any other party as the secured
party thereunder to file any financing statement.
"Loan": any loan made by the Lender to the Borrower hereunder on a
----
Closing Date.
"Merger": as defined in the Merger Agreement.
------
"Merger Agreement": as defined in subsection 3.1.
----------------
"Option Agreement": as defined in subsection 4.5.
----------------
"O-Sub": as defined in subsection 4.1.
-----
"O-Sub Shares": as defined in subsection 4.1.
------------
"Other Taxes": as defined in subsection 9.3.
-----------
"Outstanding Note Obligations": as defined in subsection 10.1(d).
----------------------------
"Pending Reports": as defined in the Merger Agreement.
---------------
"Person": any individual, Borrower, corporation, firm, partnership, joint
------
venture, limited liability company, association, organization, state or agency
of a state or other entity, whether or not having a separate legal personality.
"Promissory Note": as defined in subsection 2.2(b).
---------------
"Settlement": as defined in the Merger Agreement.
----------
"Settlement Deposit": as defined in subsection 2.2(a).
------------------
"Stock Option": as defined in subsection 10.1(a).
------------
"Stock Option Closing": as defined in subsection 10.3(a).
--------------------
3
<PAGE>
"Stock Option Closing Date": as defined in subsection 10.3(a).
-------------------------
"Stock Option Consideration": as defined in subsection 10.1(b).
--------------------------
"Stock Option Notice Date": as defined in subsection 10.2.
------------------------
"Stock Option Shares": as defined in subsection 10.1(a).
-------------------
"Subsidiary": at any particular time, any Person whose affairs and
----------
policies the Borrower controls or has the power to control, whether by ownership
of share capital, contract, the power to appoint or remove members of the
governing body of that Person or otherwise, except that the Company's French
subsidiary shall be excluded from this definition.
"Subsidiary Stock Option": as defined in the Option Agreement.
-----------------------
"SVB Facility": as defined in subsection 2.2(a).
------------
"Total Obligations": as defined in subsection 2.2(a).
-----------------
"U.S. Dollars": the freely transferable lawful currency of the United
------------
States.
SECTION 2. AMOUNT AND TERMS OF LOAN; CLOSING
2.1 Loan. The Borrower shall borrow from the Lender and, subject to the
----
terms and conditions hereof, the Lender shall lend to the Borrower, an amount up
to the sum of the Committed Amount; provided that immediately following the loan
--------
of any Closing Amount on the related Closing Date, the sum of the aggregate
amount of all Closing Amounts and any outstanding accrued interest thereon shall
not exceed the Committed Amount.
2.2 Closing. (a) On each of the dates (collectively referred to as the
-------
"Closing Dates") specified by the Borrower by irrevocable notice to the Lender
-------------
(each, a "Closing Notice"), the Borrower shall borrow from the Lender the
--------------
principal amount (each, a "Closing Amount") specified in the Closing Notice
--------------
relating to such Closing Date, and the Lender shall lend the Closing Amount to
the Borrower; provided (i) the date of execution of this Agreement shall be a
-------- -
Closing Date on which the Borrower shall borrow from the Lender the principal
amount of $500,000; (ii) except as expressly provided in this Section 2.2(a),
--
each of the Closing Amounts shall be in the amount of not more than $500,000;
(iii) the sum of the aggregate amount of all the Closing Amounts (including the
- ----
principal amount of $500,000 loaned under the Initial Note) and any outstanding
accrued interest
4
<PAGE>
thereon as of any Closing Date (collectively, the "Total Obligations" from time
-----------------
to time), shall not exceed the Committed Amount, and the sum of the Total
Obligations and the aggregate principal amount and any accrued interest (the
"SVB Amount") outstanding under the Borrower's credit facility with Silicon
Valley Bank, or any refinancing or modification thereof, shall not exceed
$6,000,000; (iv) except as expressly provided in this Section 2.2(a), no Closing
--
Date may occur less than 14 calendar days following the immediately preceding
Closing Date, if any; (v) except as expressly provided in this Section 2.2(a), a
-
Closing Notice with respect to a Closing Date may not be delivered less than 5
Business Days prior to such Closing Date; (vi) no Closing shall occur following
--
February 28, 1999; provided further if the Borrower is obligated to deposit
--------
$850,000 (the "Settlement Deposit") in escrow in connection with the execution
------------------
and delivery of a memorandum of understanding relating to the Settlement
satisfactory in form and substance to Lender and its counsel, the Borrower may
specify a Closing Date in a Closing Notice not less than 5 Business Days
following such notice to borrow from the Lender, and the Lender shall, subject
to subsection 2.2(a)(iii) and (iv), lend to the Borrower, the Settlement Deposit
in accordance with subsection 7.3 hereof. Borrower shall give notice to Silicon
Valley Bank prior to each Closing Date of the Closing Amount and the Total
Obligations.
(b) Each Closing shall take place at the offices of Debevoise & Plimpton,
875 Third Avenue, New York, New York, at 11:00 a.m. (New York time) on the
Closing Date. At each Closing, the Borrower shall deliver to the Lender a
promissory note, in the form of Exhibit A hereto, with respect to the Closing
Amount (each delivered note, a "Promissory Note"). If on any Closing Date the
---------------
Borrower shall fail to borrow from the Lender the amount specified in the
relevant Closing Notice as provided herein, or if at any Closing any of the
conditions to such Closing specified in Section 6 shall not have been fulfilled
to the satisfaction of the Lender, or waived by the Lender, the Lender shall, at
its election, be relieved of all further obligations to advance any funds
hereunder, without thereby waiving any other rights it may have by reason of
such failure or nonfulfillment.
(c) Upon the execution of this Agreement, that certain Promissory Note,
dated September 23, 1998, pursuant to which the Borrower borrowed $500,000 from
the Lender and which is attached as Exhibit B hereto (the "Initial Note"), shall
------------
be deemed for purposes of this Agreement to be a Loan made pursuant to this
Agreement and any reference to "Loan", "Promissory Note", "Closing Amount" or
"Borrower Obligations" shall be construed to include such Initial Note, the
amount advanced thereunder and/or the obligations of the Borrower thereunder, as
the context requires, and the amounts loaned pursuant to the Initial Note shall
be deemed to have been loaned under this Agreement as part of the Committed
Amount.
5
<PAGE>
SECTION 3. PAYMENT OF LOAN; INTEREST;
TRANSFER
3.1 Repayment of the Loans. The outstanding Loans and all accrued
----------------------
interest thereon shall be payable forthwith upon written demand from the Lender
to the Borrower, provided that, except upon the occurrence of an Event of
--------
Default, the Lender shall not make such demand unless and until either the
Merger Agreement, dated as of the date hereof, among Borrower, Gretag Imaging
Group, Inc. and Gretag Acquisition Corp. (the "Merger Agreement") shall have
----------------
been terminated (for whatever reason) or the Merger shall have occurred.
3.2 Interest. (a) The Borrower shall pay interest to the Lender on the
--------
unpaid principal amount of each Closing Amount from the Closing Date with
respect to such Closing Amount until the full payment thereof, payable upon
written demand in accordance with Section 3.1, at an interest rate per annum
equal to 8.5% per annum.
(b) If all or a portion of (i) the principal amount of the Loan, (ii) any
- --
interest payable thereon or (iii) any other amount payable hereunder shall not
---
be paid when due (whether at the stated maturity, by acceleration or otherwise),
such overdue amount shall bear interest from the date such amount is due until
such amount is paid in full, at an interest rate per annum equal to the lesser
of (a) 1.5 times the interest rate then payable to the Borrower in accordance
with Section 3.2(a) with respect to the amount so unpaid and (b) the maximum
-
amount permitted by law.
3.3 Terms of Payment. (a) The Borrower shall cause to be paid all sums
----------------
with respect to the Loan, whether on account of principal, interest, fees or
otherwise, to the account of the Lender specified in subsection 11.11 or as
otherwise specified in writing by the Lender from time to time.
(b) All payments to be made by the Borrower hereunder, whether on account
of principal, interest, fees or otherwise, shall be made in U.S. Dollars prior
to 11:00 A.M., New York time, on the due date thereof.
(c) The Borrower shall make all payments hereunder regardless of any right
of set-off, defense or counterclaim, including, without limitation, any defense
or coun terclaim based on (i) any law, rule or policy which is now or hereafter
-
promulgated by any Governmental Authority and which may adversely affect the
Borrower's obligation to make, or the right of the Lender to receive, such
payments, and (ii) any other similar events impeding, preventing or delaying the
--
parties hereto or any other Person from performing their respective obligations
hereunder or under any other contract or agreement.
6
<PAGE>
(d) Any amounts paid by or on behalf of the Borrower to the Lender under
this Agreement shall be applied as follows: first to the payment in full of all
-----
obligations then due under this Agreement other than those in respect of
principal of and interest on the Loans, second to the payment in full of accrued
------
and unpaid interest on the Loans, and third to the payment of principal of the
-----
Loans in inverse order of the Closing Dates thereof.
3.4 Computation of Interest and Fees. (a) Interest shall be calculated
--------------------------------
on the basis of a 360-day year for the actual days elapsed.
(b) Each determination of an interest rate by the Lender pursuant to any
provision of this Agreement shall be conclusive and binding on the Borrower in
the absence of manifest error.
3.5 Indemnity. The Borrower agrees to indemnify the Lender and its
---------
successors and assigns and to hold the Lender and its successors and assigns
harmless from any loss or expense which the Lender or its successors and assigns
may sustain or incur as a con sequence of (a) failure of the Borrower to borrow
-
the amount specified in the Closing Notice after the Borrower has delivered the
Closing Notice, or (b) any prepayment by the Borrower of principal of or
-
interest on the Loan, or any fee or other amount due hereunder upon acceleration
after an Event of Default or pursuant to any other provision of this Loan
Agreement.
3.6 Optional Prepayment. The Borrower may prepay the Loan in whole or
-------------------
in part at any time, without penalty but with interest to the date of
prepayment.
3.7 Termination of Committed Amount. Upon any prepayment hereunder the
-------------------------------
Committed Amount shall be terminated forthwith.
SECTION 4. PLEDGE OF COLLATERAL
4.1 Pledge of Collateral. As security for the complete and punctual
--------------------
satisfaction by the Borrower of the Borrower Obligations, the Borrower hereby
pledges, assigns, hypothecates, transfers and delivers to the Lender all of the
outstanding shares of capital stock (the "O-Sub Shares") of Onyx Graphics
------------
Corporation ("O-Sub") and any proceeds therefrom and all other or additional
-----
stock or securities or property paid or distributed in respect of such shares by
way of (i) dividend or other distribution, (ii) stock split, spin off, split-up,
- --
reclassification, combination of shares or other corporate rearrangement and
(iii) any consolidation, merger, exchange of stock, conveyance of assets,
- ----
liquidation or other corporate reorganization (together with the O-Sub Shares,
the "Collateral") and grants to the Lender a first lien on, and security
----------
interest in, the Collateral, provided, that if
--------
7
<PAGE>
an Event of Default occurs, Lender exercises its remedies as set forth in
Section 8.2 and Lender becomes the owner of the O-Sub Shares, the account
receivable on O-Sub's balance sheet from Borrower shall be canceled up to an
aggregate amount of $1,500,000; provided, that in no event shall the net
--------
equity on O-Sub's balance sheet be less than $1,100,000.
4.2 Delivery of Collateral. All certificates or instruments
----------------------
representing or evidencing the Collateral shall be delivered to and held by the
Lender as secured party or its designee until such time as the Borrower
Obligations have been satisfied in full.
4.3 Further Assurances. The Borrower agrees that at any time, and from
------------------
time to time, the Borrower will promptly execute and deliver all further
instruments and documents, and take all other action that may be necessary or
desirable or that the Lender may request, in order to perfect and protect any
security interest granted or purported to be granted hereby or to enable the
Lender to exercise its rights and remedies hereunder.
4.4 Voting Rights; Dividends, etc. (a) So long as no Event of Default
-----------------------------
shall have occurred and be continuing, the Borrower shall be entitled to
exercise any and all voting and other consensual rights pertaining to the
Collateral for any purpose not inconsistent with the terms of this Agreement or
any Promissory Note issued hereunder.
(b) So long as no Event of Default shall have occurred and be continuing,
the Borrower shall be entitled to receive and retain any and all cash dividends
paid in respect of the Collateral.
(c) Upon the occurrence and during the continuance of an Event of Default
(i) all rights of the Borrower to exercise the voting and other consensual
-
rights and to receive and retain dividends which it would otherwise be entitled
to receive and retain pursuant to Section 4.4(a) and (b), respectively, shall
cease, and all such rights shall thereupon become vested in the Lender who shall
thereupon have the sole right to exercise such voting and other consensual
rights and to receive and retain dividends and interest paid in respect of the
Collateral, and (ii) all dividends which are received by the Borrower contrary
--
to the provisions of the preceding clause (i) shall be received in trust for the
benefit of the Lender and shall be segregated from other funds of the Borrower
and forthwith paid over to the Lender as Collateral in the same form as so
received (with any necessary endorsement).
4.5 Covenants of the Borrower. Until the Borrower Obligations have been
-------------------------
satisfied in full, the Borrower will not sell, assign, transfer, convey, or
otherwise dispose of, or grant any option with respect to, the Collateral or
create or permit to exist any Lien upon or with respect to the Collateral except
to the Lender, its affiliates or any Person approved by the Lender or pursuant
to the Asset and Subsidiary Stock Option Agreement,
8
<PAGE>
dated as of the date hereof, between the Borrower and Gretag Imaging Group, Inc.
(the "Option Agreement").
----------------
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE BORROWER
To induce the Lender to enter into this Agreement and to make the Loan,
the Borrower hereby represents and warrants to the Lender as of the date hereof,
each Closing Date and the Stock Option Closing Date that:
5.1 Corporate Status and Licensing. The Borrower and each of its
------------------------------
Subsidiaries is a corporation duly organized and validly existing under the laws
of the jurisdiction of incorporation or organization. The Borrower and each of
its Subsidiaries has the corporate power and authority to own its property and
to transact the business in which it is engaged or presently proposes to engage,
and is duly qualified or licensed as a foreign corporation in good standing in
each jurisdiction in which the failure so to qualify or be licensed would have a
material adverse effect on the Borrower or O-Sub.
5.2 Corporate Power and Authority; Enforceable Obligations. The
------------------------------------------------------
Borrower has all necessary power to execute, deliver and perform the terms and
provisions of this Agreement, and the transactions contemplated hereby, and has
taken all necessary internal action to authorize the execution, delivery and
performance of this Agreement. This Agreement has been duly executed and
delivered on behalf of the Borrower and constitutes a legal, valid and binding
obligation of the Borrower enforceable in accordance with its terms. The
Borrower has furnished to the Lender complete and correct copies of its
constitutive documents, and such constitutive documents are in full force and
effect and have not been modified or amended.
5.3 Compliance with Law and Other Instruments. Neither the Borrower nor
-----------------------------------------
any of its Subsidiaries is in default under any agreement that is material to O-
Sub or Borrower to which it is a party, and neither the execution, delivery or
performance of this Agreement, nor the consummation of the transactions
contemplated hereby, nor compliance with the terms and provisions hereof, will
contravene any provision of law, statute, rule or regulation to which the
Borrower is subject, or any judgment, decree, franchise, order or permit
applicable to the Borrower, or will conflict or will be inconsistent with or
will result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default under, or result in the creation or
imposition of (or the obligation to create or impose) any Lien upon any of the
property or assets of the Borrower or any of its Subsidiaries pursuant to, the
terms of any indenture, mortgage, deed of trust, agreement or other instrument
to which the Borrower or any such Subsidiary is a party or bound or to which
they may be subject, or violate any provision of the constitutive documents of
the Borrower or any such Subsidiary.
9
<PAGE>
5.4 Litigation. Except as set forth on Schedule 5.4 hereto, there are
----------
no actions, suits or proceedings pending or, to the best of the Borrower's
knowledge, threatened, against or affecting the Borrower or any of its
Subsidiaries before any court, tribunal or before any governmental or
administrative body or agency.
5.5 Consents. No consent of any other party (including, without
--------
limitation, creditors of the Borrower) and no order, permission, consent,
approval, license, autho rization, registration or validation of, or notice to
or filing with, or exemption by, any Governmental Authority is required to
authorize, or is required in connection with, the execution, delivery and
performance by the Borrower of this Agreement, or the taking of any action
contemplated hereby, including, without limitation, the pledge by the Borrower
of the Collateral, the issuance and delivery of the Stock Option Shares pursuant
to Section 10 or the validity or enforceability of this Agreement or, if any of
the foregoing are required, they have been obtained and are in full force and
effect and certified copies of which have been delivered to the Lender and to
counsel to the Lender.
5.6 Financial Information. Except as set forth on Schedule 5.6, the
---------------------
audited financial statements of the Borrower and its Subsidiaries as of December
31, 1996 are, and, when filed with the SEC, the audited financials contained in
the Pending Reports (the "Financial Statements") will be, including in each case
--------------------
the related schedules and notes, complete and correct in all material respects
and fairly present the financial condition of the Borrower and its Subsidiaries
as of the date[s] thereof and the results of their operations for the periods
therein stated and have been prepared in accordance with generally accepted
accounting principles in the jurisdiction in which the Financial Statements were
prepared, consistently applied throughout the periods involved.
5.7 Taxes, Assessments and Fees. Each of the Borrower and its
---------------------------
Subsidiaries has filed or caused to be filed all U.S. federal income tax returns
and all other material returns required to be filed, and have paid all taxes
shown to be due and payable on said returns or on any assessments made against
such Person or any of their respective proper ties, and all other taxes,
assessments, fees or other charges imposed on such Person or any of their
respective properties by any Governmental Authority; and no material tax liens
or material liens with respect to any assessments, fees or other charges have
been filed and, to the knowledge of such Person, no claims are being asserted
with respect to any such taxes, assessments, fees or other charges.
5.8 Capitalization. Schedule 5.8 hereto contains the complete and
--------------
correct description of the capitalization of the Borrower and O-Sub, including a
list of all Persons owning the outstanding capital stock, stock options and
instruments exchangeable or convertible into or exercisable for any capital
stock of O-Sub, together with the quantities thereof held by each such Person.
The O-Sub Shares are duly authorized, valid, issued, fully-paid and non-
assessable.
10
<PAGE>
5.9 Accuracy of Information. Neither this Agreement, nor any
-----------------------
certificate or written statement of factual information furnished to the Lender
by or on behalf of the Borrower in connection herewith, contains or will contain
as of their respective dates any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements taken as a whole
contained herein and therein not misleading.
5.10 Absence of Default. No Default or Event of Default has occurred and
------------------
is continuing.
5.11 Obligations Pari Passu. The Borrower Obligations rank at least pari
---------------------- ----
passu in right of payment with all its other indebtedness except that amounts
- -----
owing under the SVB Facility, including additional amounts borrowed thereunder
in accordance herewith and any accrued interest thereon, shall be prior in right
of payment to the payment obligations of the Borrower hereunder.
5.12 Withholding Tax. There is no U.S. tax, levy, impost, deduction,
---------------
charge or withholding imposed, levied or made on or by virtue of the execution
or delivery of this Agreement.
5.13 Title to Properties. Subject to subsection 4.2, the Borrower and
-------------------
its Subsidiaries have good title to all of their respective properties and
assets referred to in the Financial Statements (except properties and assets
disposed of since the relevant date in the ordinary course of business).
5.14 Material Adverse Change. Except as described in Schedule 5.14,
-----------------------
since December 31, 1996, there has been no occurrence or development resulting,
or likely to result, in a material adverse effect on the Borrower or its
Subsidiaries.
5.15 Title to Collateral; First Priority Lien. The Borrower is the legal
----------------------------------------
and beneficial owner of the Collateral free and clear of any Lien except for the
Lien created by this Agreement and by the Option Agreement. The pledge of the
Collateral pursuant to this Agreement creates a valid and perfected first
priority security interest in the Collateral, securing the payment of the
Borrower Obligations.
5.16 Authorized Stock. The Borrower has taken all necessary corporate
----------------
and other action to authorize and reserve for issuance and to permit it to issue
and deliver, and, has reserved for issuance, such number of shares of Borrower
Common Stock necessary for delivering the Stock Option Shares upon the exercise
of the Stock Option. The authorized capital stock of the Company is sufficient
to permit the issuance of enough shares to consummate the exercise of the Stock
Option pursuant to Section 10. The Stock Option Shares, upon issuance, will be
duly and validly issued, fully paid and nonassessable, will be delivered free
and clear of any and all Liens and will not give rise
11
<PAGE>
to any preemptive rights on the part of any Person. Upon issuance of the Stock
Option Shares, the holder of such Stock Option Shares shall have the same rights
(including, without limitation, voting rights) as the existing holders of
Borrower Common Stock.
SECTION 6. CONDITIONS PRECEDENT
The agreement of the Lender to disburse any Closing Amount is subject to
the satisfaction or waiver by the Lender, immediately prior to or concurrently
with the Closing Date with respect to such Closing Amount, of the following
conditions precedent:
6.1 Borrower Approval. All necessary internal approval on the part of
-----------------
the Borrower and all necessary or appropriate permits, approvals,
authorizations, consents and waivers from creditors of the Borrower shall have
been received in connection with the execution of this Agreement, and the
consummation of the transactions contemplated hereby (including, without
limitation, any necessary powers-of-attorney).
6.2 Documentation. The Lender shall have received this Agreement and
-------------
the Promissory Note(s), executed and delivered by a duly authorized officer of
the Borrower. Each of this Agreement and the Promissory Note(s) shall be in form
and substance satis factory to the Lender, shall be in full force and effect
and shall be in accordance with the requirements of all applicable law.
6.3 Changes, Etc. Except as described in Schedule 5.14, since December
------------
31, 1996, there shall have been no occurrence or development resulting, or
likely to result, in a material adverse effect on the Borrower or its
Subsidiaries (it being expressly understood that the transactions contemplated
by this Agreement shall not be deemed to have a material adverse effect on
Borrower or its Subsidiaries), and the Borrower shall have delivered to the
Lender an Officer's Certificate, dated as of the Closing Date, certifying that
the condition set forth in this subsection has been fulfilled.
6.4 Corporate Proceedings of the Borrower. The Lender shall have
-------------------------------------
received evidence, in form and substance satisfactory to the Lender, that all
necessary corporate and other approval on the part of the Borrower was taken
with respect to (a) the execution, delivery and performance of this Agreement,
-
and (b) the transactions contemplated hereunder, certified by an authorized
-
officer of the Borrower as of a date not earlier than ten days prior to the
Closing Date, which certificate shall be in form and substance satisfactory to
the Lender and shall state that the evidence thereby certified have not been
amended, modified, revoked or rescinded; provided that in the case of a Closing
--------
Date occurring as of the date hereof, the notice period specified in clause (b)
of this subsection shall be waived by the Lender.
12
<PAGE>
6.5 Borrower Incumbency Certificate. The Lender shall have received a
-------------------------------
certificate of the Borrower, as to the incumbency and signature of the officers
of the Borrower executing this Agreement, satisfactory in form and substance to
the Lender, executed by an authorized officer of the Borrower.
6.6 Representations and Warranties. Each of the representations and
------------------------------
warranties made by the Borrower in or pursuant to this Agreement shall be true
and correct in all material respects on and as of the Closing Date as if made on
and as of the Closing Date.
6.7 Performance; No Default. The Borrower shall have performed and
-----------------------
complied in all respects with all agreements and conditions contained in this
Agreement required to be performed or complied with by it prior to or at the
Closing, and at the Closing, and after giving effect to the consummation of the
transactions contemplated hereby, no condition or event shall exist which
constitutes a Default or Event of Default under this Agreement.
6.8 Governmental Approvals. Each order, permission, consent, approval,
----------------------
license, authorization, or validation of, or notice to or filing with, or
exemption by, any Governmental Authority which is required to authorize, or is
required in connection with, the execution, delivery and performance by the
Borrower or the Lender of this Agreement or the taking of any action
contemplated hereby shall have been made or obtained, and each such order,
permission, consent, approval, license, authorization, registration, validation,
notice, filing and exemption shall be in full force and effect.
6.9 Legal Opinions. The Lender shall have received executed opinions,
--------------
addressed to the Lender and dated the Closing Date, from Venture Law Group
covering such matters incident to the transactions contemplated by this Loan
Agreement as the Lender may reasonably require.
6.10 Compliance Certificate. The Borrower shall have delivered to the
----------------------
Lender an Officer's Certificate, dated the Closing Date, certifying that the
conditions specified in this Section 6 have been fulfilled.
6.11 Security Arrangements. The Lender shall have a duly perfected first
---------------------
priority security interest in the Collateral.
6.12 Option Agreement. The Option Agreement shall not have been
----------------
terminated.
6.13 Additional Matters. All proceedings in connection with the
------------------
documents contemplated hereby and all documents, instruments and other legal
matters in connection with the transactions contemplated by this Agreement shall
be satisfactory in form and substance to the Lender and to counsel to the
Lender, and the Lender and
13
<PAGE>
counsel to the Lender shall have received counterpart originals or certified or
other types of copies of all such documents and legal opinions in respect of any
aspect or con sequence of the transactions contemplated hereby as it shall
reasonably request.
SECTION 7. COVENANTS
The Borrower covenants that, from the date hereof and for so long as any
amount of principal of or interest on the Loans is outstanding and owing to the
Lender hereunder, or any other sum is outstanding and owing to the Lender
hereunder:
7.1 Senior Obligations. The Borrower shall ensure that the Borrower
------------------
Obligations under this Agreement at all times rank at least pari passu with all
---- -----
other present and future indebtedness of the Borrower except that amounts owing
under the Borrower's credit facility (the "SVB Facility") with Silicon Valley
------------
Bank, including additional amounts borrowed thereunder and accrued interest
thereon in accordance herewith, shall be prior in right of payment to the
payment obligations of the Borrower hereunder. The Borrower shall not effect
any additional borrowing under the SVB Facility if the aggregate amount of
principal and accrued interest owing under the SVB Facility, after giving effect
to such borrowing, plus the aggregate amount of principal and accrued interest
owing hereunder, would exceed $6,000,000. To the extent it is deemed to be
necessary, the Lender and Silicon Valley Bank will negotiate in good faith a
debt and subordination agreement mutually satisfactory to the Lender and Silicon
Valley Bank in each party's sole discretion.
7.2 Limitation of Liens. The Borrower shall not create or permit to
-------------------
subsist any Lien upon the whole or any part of the O-Sub Shares or proceeds
thereof (except Liens created by this Agreement or the Option Agreement).
7.3 Use of Proceeds. Unless otherwise agreed to by Lender in writing,
---------------
Borrower hereby covenants that if the Settlement Deposit is advanced to the
Borrower pursuant to this Agreement on any Closing Date, such Settlement Deposit
shall be used solely to make the necessary deposit of $850,000 in escrow in
connection with the execution and delivery of a memorandum of understanding
relating to the Settlement. If requested by the Lender, Lender shall pay on
behalf of Borrower the Settlement Deposit directly to the escrow account
established for the purposes of such deposit. The Borrower shall use all other
proceeds of the Loan solely to meet such of its current payment obligations in
the ordinary course of business which cannot be met from other funds available
to the Borrower.
7.4 Constitutive Documents; Preservation of Existence, Etc.; Conduct of
-------------------------------------------------------------------
Business. The Borrower shall not permit any provision of the constitutive
- --------
documents of
14
<PAGE>
it or any of its Subsidiaries to be amended without the written consent of
the Lender if such amendment would directly or indirectly prevent the Borrower
from performing, or materially adversely affect its ability to perform, its
obligations under this Agreement. The Borrower shall at all times preserve and
keep in full force and effect, and cause each of its Subsidiaries to preserve
and keep in full force and effect, its existence as a company and its rights and
franchises. The Borrower shall, and shall cause each of its Subsidiaries to,
comply with all contractual obligations binding on it or its property and
Applicable Law.
7.5 Compliance with Applicable Law. The Borrower shall, and shall cause
------------------------------
each of its Subsidiaries to, timely comply with all Applicable Law and shall,
and shall cause each of its Subsidiaries to, procure, maintain and comply with
all permits, licenses and other authorizations required for the conduct of its
business except where the failure to do so would have only a de minimis effect
-- -------
on the Borrower and its Subsidiaries, taken as a whole.
7.6 Notices. The Borrower will promptly give notice to the Lender of:
-------
(a) the occurrence of any Default or Event of Default; and
(b) any (i) default or event of default under any contractual obligation
-
of the Borrower or any of its Subsidiaries or (ii) litigation, investigation
--
or proceeding which may exist at any time involving the Borrower or any of
its Subsidiaries.
7.7 Further Assurances. The Borrower, at its own cost, expense and
------------------
liability, shall cause to be promptly and duly taken, executed, acknowledged and
delivered all such further acts, documents and assurances as may from time to
time be necessary in order to protect the Lender's rights under this Agreement,
including, without limitation, the exercise of the Stock Option, and otherwise
as may reasonably be requested by the Lender in order to carry out the intent
and purposes of this Agreement and the transac tions contemplated hereby.
7.8 Sale; Merger. Except pursuant to the Merger Agreement or the Option
------------
Agreement, neither the Borrower nor any of its Subsidiaries shall enter into any
merger or consolidation, or liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution), or lease, convey, sell, assign, transfer or
otherwise dispose of, in a single transaction or a series of related
transactions, a material portion of its property, business or assets, or make
any material change in its present method of conducting business.
7.9 Appointment as Attorney-in-Fact. Borrower hereby irrevocably
-------------------------------
constitutes and appoints Lender and any officer or agent thereof, with full
power of substitution, as Borrower's attorney-in-fact, with full irrevocable
power and authority in the place and
15
<PAGE>
stead of Borrower and in the name of Borrower or otherwise, from time to time in
the Lender's discretion, to execute and deliver any and all bills of sale,
assignments or other instruments which the Lender may deem necessary or
advisable to effectuate any sale, transfer, assignment or delivery in exercise
of any or all of the remedies hereunder whether pursuant to power of sale or
otherwise, and to take any other action to accomplish the purposes of this
Agreement, including, without limitation, to ask, demand, collect, sue for,
recover, compound, receive and give acquittance and receipt for moneys due and
to become due under or in connection with the Collateral, to receive, endorse,
and collect any drafts or other instruments, documents and chattel paper in
connection therewith, to file any claims or take any action or institute any
proceedings which the Lender may deem to be necessary or desirable for the
collection thereof, Borrower hereby ratifying and confirming all that such
attorney or any substitute shall lawfully do by virtue hereof. This power of
attorney is a power coupled with an interest and shall be irrevocable.
Nevertheless, if so requested by the Lender or any purchaser, Borrower shall
ratify and confirm any such sale, assignment, transfer or delivery by executing
and delivering to the Lender or such purchaser all bills of sale, assignments,
releases and other proper instruments to effect such ratification and
confirmation as may be designated in any such request.
7.10 Maintenance of Shares. Prior to the Stock Option Closing Date, the
---------------------
Borrower shall not, and shall cause its Subsidiaries not to, take any action
that could reasonably be expected to result in the representations and
warranties of the Borrower set forth in subsection 5.16 in this Agreement
becoming untrue.
SECTION 8. EVENTS OF DEFAULT
8.1 Events of Default. If one or more of the following events shall
-----------------
have occurred (whatever the reason for such event and whether it shall be
voluntary or invol untary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) Non-payment. The Borrower fails to pay any principal of or any
-----------
interest on the Loan or any other amount payable by the Borrower under this
Agreement, as and when the same shall become due and payable, whether at
stated maturity, by man datory prepayment, by acceleration or otherwise; and
such default, if due to any technical or administrative error, is not
remedied within five days;
(b) Breach of Other Obligations. Any of the representations and
---------------------------
warranties of Borrower hereunder proves to have been incorrect in any
material respect or the Borrower defaults in performance or observance of, or
compliance with, any of its other obligations set out in this Agreement, or
any Promissory Note, which default is
16
<PAGE>
incapable of remedy or, if such default is in the reasonable opinion of the
Lender capable of remedy, is not in the reasonable opinion of the Lender
remedied within 30 days after notice of such default shall have been given to
the Borrower by the Lender, or any representation or warranty referred to in
section 5 hereof proves to have been incorrect or untrue in any material
respect when made or deemed made;
(c) Involuntary Bankruptcy. Any decree or order by a court of competent
----------------------
jurisdiction shall have been entered (and such decree or order shall have
continued undischarged or undismissed and unstayed for a period of at least
60 days) (i) ad judging the Borrower bankrupt or insolvent, (ii) constituting
- --
an order for relief with respect to the Borrower in any involuntary
bankruptcy or insolvency case, (iii) ap proving as properly filed a petition
---
seeking reorganization of, or an arrangement or adjustment with respect to,
the Borrower under any applicable bankruptcy or insolvency law, or (iv)
--
appointing a receiver, custodian, liquidator or trustee or assignee in the
bankruptcy, liquidation, reorganization or insolvency of the Borrower or of
any of its properties; or
(d) Voluntary Bankruptcy. The Borrower or any of its Subsidiaries
--------------------
initiates or consents to proceedings relating to it under any bankruptcy,
reorganization, in solvency, moratorium, intervention law or law with
similar effect, or under any other law for the relief of, or relating to,
debtors, or makes or enters into a conveyance, assignment, arrangement, or
composition with or for the benefit of its creditors or appoints or applies
for the appointment of an administrator, receiver, trustee, in tervenor, or
assignee for the benefit of creditors (or other similar official) to take
possession or control or a substantial part of all of its undertaking or
assets, or takes any proceeding under any law for a readjustment or deferment
of its indebtedness or any part of it;
(x) the Lender may by notice to the Borrower declare the Commitment to be
terminated forthwith; whereupon the Commitment shall immediately terminate; or
(y) the Lender may by notice to the Borrower, declare the outstanding principal
amount of the Loan (with accrued interest thereon) and all other amounts owing
under this Agreement to be due and payable forthwith, whereupon the same shall
immediately become due and payable.
8.2 Remedies on Default, Etc. Subject to subsection 8.3, (a) if an
------------------------
Event of Default shall occur and be continuing, the Lender may exercise, in
addition to all other rights and remedies granted to it in this Agreement, all
rights and remedies of a secured party under the applicable Uniform Commercial
Code or any other applicable law. Without limiting the generality of the
foregoing, to the extent permitted by applicable law, the Lender, without demand
of performance or other demand, presentment, protest,
17
<PAGE>
advertisement or notice of any kind (except any notice required by law referred
to below) to or upon the Borrower or any other Person (all and each of which
demands, defenses, advertisements and notices are hereby waived), may in such
circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give
option or options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in one
or more parcels at public or private sale or sales, at any exchange, broker's
board or office of the Lender or elsewhere upon such terms and conditions as it
may deem advisable and at such prices as it may deem best, for cash or on credit
or for future delivery without assumption of any credit risk. The Lender shall
have the right upon any such public sale or sales, and, to the extent permitted
by law, upon any such private sale or sales, to purchase the whole or any part
of the Collateral so sold, free of any right or equity of redemption in the
Borrower, which right or equity is hereby waived or released. The Lender shall
apply the net proceeds of any action taken by it pursuant to this Section, after
deducting all reasonable costs and expenses of every kind incurred in
connection therewith or incidental to the care or safekeeping of any of the
Collateral or in any way relating to the Collateral or the rights of the Lender
hereunder, including, without limitation, reasonable attorneys' fees and
disbursements, to the payment in whole or in part of the Borrower Obligations,
first, to the payment of any Borrower Obligations other than principal or
- -----
interest, second, to the payment of all interest accrued on the Loans, and
------
third, to the payment of the outstanding principal of the Loans, in inverse
- -----
order of the dates on which such Loans were advanced, and only after such
application and after the payment by the Lender of any other amount required by
any provision of law, including, without limitation, Section 9-504(1)(c) of the
Code, need the Lender account for the surplus, if any, to the Lender. To the
extent permitted by applicable law, the Borrower waives all claims, damages and
demands it may acquire against the Lender arising out of the exercise by them of
any rights hereunder, except to the extent arising as a result of the gross
negligence or willful misconduct of the Lender. If any notice of a proposed sale
or other disposition of Collateral shall be required by law, such notice shall
be deemed reasonable and proper if given at least 10 days before such sale or
other disposition.
(b) Upon the occurrence of any Event of Default, the Lender's remedies
shall be, to the fullest extent of the law, cumulative, and no right, power or
remedy conferred by this Agreement upon the Lender shall be exclusive of any
right, power or remedy referred to herein or therein or now or hereafter
available at law, in equity, by statute or otherwise. In case of a default in
the payment of any principal of or interest on the Loan, the Borrower shall pay
to the Lender such further amount as shall be sufficient to cover all losses,
expenses, liabilities or costs actually sustained or incurred by the Lender as a
result of such Event of Default. No course of dealing and no delay on the part
of the Lender in exercising any right shall operate as a waiver thereof or
otherwise prejudice the Lender's rights, powers or remedies.
18
<PAGE>
(c) Notwithstanding any provision of this Agreement to the contrary, this
Agreement, and the pledge of the Collateral hereunder, in no way limit, modify
or amend the rights of the Borrower pursuant to the Option Agreement, including,
without limitation, the right of the Borrower to exercise the Inkjet Option or
the Subsidiary Stock Option at such price determined thereunder.
8.3 Exercise of Remedies. In the event that the Merger Agreement has
--------------------
been terminated, prior to exercising any remedies hereunder the Lender shall
seek repayment of outstanding amounts hereunder through the exercise of either
the Inkjet Option or the Subsidiary Stock Option and shall not exercise such
remedies unless and until (a) the Lender is unable to exercise either such
-
option by reason of any temporary restraining order, preliminary or permanent
injunction or other similar prohibition being in effect, or by reason of any
statute, rule, regulation or order having been enacted or entered which would
make such exercise illegal or of which such exercise would constitute a
violation; or (b) the Lender has otherwise been unable to exercise one or the
-
other of such options in accordance with the Option Agreement by the date
designated for closing thereunder in the absence of breach on the part of the
Lender thereunder.
SECTION 9. TAXES
9.1 Excluded Taxes. Any and all payments by the Borrower under this
--------------
Agreement (including, without limitation, all payments of principal, interest,
premium and fees) shall be made free and clear of, and without deduction or
withholding for or on account of, any and all present or future taxes, levies,
imposts, deductions, charges, fees, duties or withholdings, now or hereafter
imposed, levied, collected, withheld or assessed by the United States (or any
political subdivision or taxing authority of the United States), or any related
surcharge, penalties, interest or expenses (all such taxes, levies, imposts and
charges and all such deductions, withholdings, penalties, interest and
liabilities being "Excluded Taxes"), unless such deduction or withholding is
--------------
required by applicable law.
9.2 Additional Amounts; Indemnified Taxes. If any deduction or
-------------------------------------
withholding of Excluded Taxes is required by law to be made from or in respect
of any sum payable hereunder or in respect of the Loan (or if the Borrower is
required by law to make, or otherwise makes, any direct payment to any
Governmental Authority on account of Excluded Taxes):
(a) the Borrower shall pay to the Lender such additional amount as may be
necessary so that after all required deductions and withholdings (including
deductions and withholdings applicable to additional sums payable under this
sec tion) the Lender receives on the due date thereof an amount equal to the
sum it would have received had no such deductions or withholdings been made;
19
<PAGE>
(b) the Borrower shall make such deductions or withholdings (or direct
payment);
(c) the Borrower shall pay the full amount deducted or withheld to the
relevant Governmental Authority before penalties attach thereto or interest
accrues thereon (but if any such penalties or interest accrues, the Borrower
shall pay such amounts when due to the appropriate Governmental Authority);
and
(d) the Borrower shall furnish, promptly after the date of such
withholding or deduction (or direct payment), to the Lender, in respect of
which such deductions (or payments) are made, an original certificate of the
official receipt issued by such Authority confirming the payment to such
Authority of all amounts required to be deducted or paid;
provided that no such additional amounts shall be payable for or on account of
- --------
net income taxes imposed on the Lender by reason of the receipt of payments
under this Agreement (Excluded Taxes, other than such net income taxes, known
herein as "Indemnified Taxes"); provided further however that Section 9.2(a)
----------------- -------- -------
shall not apply in the case of any assignment of a Loan or any portion thereof
after the date hereof by the Lender to any assignee that is not entitled to a
zero rate of withholding with respect to interest pursuant to an applicable tax
treaty or other provision of law.
9.3 Other Taxes. The Borrower shall pay any and all present or future
-----------
stamp, value added, transfer, capital, documentary, and excise taxes and other
similar charges or levies, including interest and penalties with respect
thereto, by reason of the preparation, execution, issuance, delivery, amendment,
supplement, waiver, modification or enforcement of this Agreement or any
document contemplated hereby ("Other Taxes").
-----------
SECTION 10. STOCK OPTION
10.1 Grant of Stock Option. (a) Subject to the terms and conditions set
---------------------
forth herein, the Borrower hereby grants to Purchaser an irrevocable option (the
"Stock Option") to purchase such number of shares of the Borrower's common
------------
stock, par value $0.001 per share ("Borrower Common Stock") determined pursuant
---------------------
to Section 10.1(b).
(b) The number of shares (the "Stock Option Shares") of Borrower Common
-------------------
Stock to be sold to the Purchaser upon exercise of the Stock Option shall be the
number of shares such that (a) the ratio of (i) the number of Stock Option
- -
Shares to (ii) the sum of the number of Stock Option Shares and 10,226,744, is
--
equal to (b) the ratio of (i) the Stock Option Consideration to (ii) the sum of
- - --
the Stock Option Consideration plus $13,314,248.50.
20
<PAGE>
(c) In the event of any change in Borrower Common Stock by reason of a
stock dividend, split-up, merger, recapitalization, combination, exchange of
shares, or similar transaction, the type and number of the Stock Option Shares
shall be adjusted appropriately, and proper provision shall be made in the
agreements governing such transaction, so that the Lender shall receive upon
exercising the Stock Option the number and class of shares that Lender would
have received in respect of Borrower Common Stock if the exercise of the Stock
Option had been consummated immediately prior to such event or the record date
therefor, as applicable.
10.2 Exercise of Stock Option. (a) Lender may exercise the Stock
------------------------
Option, at any time by providing to the Company a written notice (the date of
which being herein referred to as the "Stock Option Notice Date") to that effect
------------------------
specifying the amount of consideration (the "Stock Option Consideration") to be
--------------------------
paid, which shall not exceed the greater of $5,000,000 and the Outstanding Note
Obligations, and a date not earlier than two Business Days from the Stock Option
Notice Date for the closing of the purchase of the Stock Option Shares. The
parties hereto agree and acknowledge that upon exercise of the Stock Option and
payment of the Stock Option Consideration, such Stock Option Consideration shall
be deemed to be additional purchase price for the equity of the Company.
(b) The Lender shall pay the Stock Option Consideration by the
cancellation of, in the following order, in an aggregate amount up to the Stock
Option Consideration: first, any obligations of the Borrower other than those in
-----
respect of principal of and interest on any outstanding Loans, second any
------
accrued interest on any outstanding Loans through the date of such cancellation
and third any outstanding principal under the Loans (cancelled in inverse order
-----
of the Closing Dates thereof) (together the "Outstanding Note Obligations"), the
----------------------------
balance, if any, of such Stock Option Consideration to be paid in cash.
10.3 Stock Option Closing. (a) The closing of the purchase of the Stock
--------------------
Option Shares (the "Stock Option Closing") shall take place at 10:00 a.m., New
--------------------
York City time at the offices of Debevoise & Plimpton, 875 Third Avenue, New
York, New York 10022 on the date specified by Lender in the Stock Option Notice
(or such other date upon which the parties hereto may mutually agree) (the
"Stock Option Closing Date").
- --------------------------
(b) At the Stock Option Closing:
(1) the Borrower shall issue and deliver or cause to be delivered to
the Lender or its designee the Stock Option Shares in the form of a stock
certificate or certificates therefor in good form for delivery and free
and clear of all Liens, registered in the name of the Lender or its
designee; and
21
<PAGE>
(2) the Lender shall (A) deliver or cause to be delivered to the
-
Borrower such instruments, in form and substance reasonably satisfactory
to the Borrower, as are necessary or appropriate in the reasonable
judgment of the Borrower to effect the cancellation of the Outstanding
Note Obligations in an aggregate amount up to the Stock Option
Consideration and (B) deliver or cause to be delivered the excess of the
-
Stock Option Amount over such Outstanding Note Obligations, if any, in
immediately available funds by wire transfer to the account of the
Borrower specified in subsection 11.11.
(c) Certificates for the Stock Option Shares delivered at the Stock
Option Closing shall have typed or printed thereon a restrictive legend which
shall read substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE SOLD ONLY IF SO
REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
SECTION 11. MISCELLANEOUS
11.1 Amendments and Waivers. Neither this Agreement nor any terms hereof
----------------------
may be amended, supplemented, modified or waived other than pursuant to a
written instrument executed by the Lender. The Lender may, from time to time,
(a) enter into with the Borrower written amendments, supplements or
- --
modifications hereto for the purpose of adding any provisions to this Agreement
or changing in any manner the rights of the Lender or of the Borrower hereunder
or (b) waive by an instrument, on such terms and conditions as the Lender may
-
specify in such instrument, any of the requirements of this Agreement or any
Default or Event of Default and its consequences. In the case of any waiver,
the Borrower and the Lender shall be restored to their former positions and
rights hereunder, and any Default or Event of Default waived shall be deemed to
be cured and not continuing; no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereon.
11.2 Notices. Any notice required to be given hereunder shall be
-------
sufficient if in writing, and sent by facsimile transmission (with a
confirmatory copy sent by overnight courier), by courier service (with proof of
service), hand delivery or certified or registered mail (return receipt
requested and first-class postage prepaid), addressed as follows:
22
<PAGE>
<TABLE>
<CAPTION>
If to Lender: Gretag Imaging Group, Inc. If to the Borrower: Raster Graphics, Inc.
c/o Gretag Imaging, Inc. 3025 Orchard Parkway
2070 Westover Road San Jose, CA 95134
Chicopee, MA 01022
<S> <C>
Telephone: (413) 593-6900 Telephone: (408) 232-4000
Facsimile: (413) 788-0940 Facsimile: (408) 232-4100
Attention: William Recker Attention: Rakesh Kumar
With a copy to:
Gretag Imaging Holding AG
Althardstrasse 70
CH-8105 Regensdorf Switzerland
Telephone: (011-411) 842-2092
Facsimile: (011-411) 842-2411
Attention: Dr. Eduard Brunner
With a copy to: With a copy to:
Debevoise & Plimpton Venture Law Group
875 Third Avenue 2800 Sand Hill Road
New York, New York 10022 Menlo Park, CA 94025
Telephone: (212) 909-6000 Telephone: (650) 854-4488
Facsimile: (212) 909-6836 Facsimile: (650) 854-1121
Attention: Christopher Smeall, Esq. Attention: Edmund S. Ruffin, Jr., Esq.
</TABLE>
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
11.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay
------------------------------
in exercising, on the part of the Lender, any right, remedy, power or privilege
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges herein provided are
cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.
11.4 Survival of Representations and Warranties. All representations and
------------------------------------------
warranties made hereunder, and in any document, certificate or statement
delivered
23
<PAGE>
pursuant hereto or in connection herewith shall survive the execution and
delivery of this Agreement and the making of the Loan or the exercise of the
Stock Option hereunder; provided the representations and warranties shall not
--------
survive the first anniversary of the Stock Option Closing Date.
11.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or
----------------------------- -
reim burse the Lender for all its costs and expenses incurred in connection with
the enforce ment or preservation of any rights under this Agreement and any
such other documents, including, without limitation, the reasonable fees and
disbursements of counsel and (b) to pay, indemnify, and hold the Lender harmless
-
from and against any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, ex penses or disbursements of any
kind or nature whatsoever with respect to the execution, delivery, enforcement,
performance and administration of this Agreement and any such other documents
(all the foregoing in this clause (b), collectively, the "Indemnified
-----------
Liabilities"), provided that the Borrower shall have no obligation hereunder to
- -----------
the Lender with respect to the Indemnified Liabilities arising from the gross
negligence or willful misconduct of the Lender. The agreements in this
subsection shall survive repayment of the Loan and all other direct amounts
payable hereunder.
11.6 Successors and Assigns; Assignments. This Agreement shall be
-----------------------------------
binding upon and inure to the benefit of the Borrower and the Lender and their
respective successors and assigns. The Lender may assign or transfer any of its
rights or obligations under this Agreement to an affiliate; the Borrower may not
assign or transfer any of its rights or obligations under this Agreement without
the prior written consent of the Lender.
11.7 Severability. Any provision of this Agreement which is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11.8 Integration. This Agreement, the Promissory Notes, if issued, the
-----------
Option Agreement and the Merger Agreement represent the complete and integrated
agreement of the Borrower and the Lender with respect to the subject matter
hereof, and there are no promises, undertakings, representations or warranties
by the Lender relative to subject matter hereof not expressly set forth or
referred to herein.
11.9 CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY AND
-----------------------
UNCONDITIONALLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY NEW YORK STATE
OR FEDERAL COURT SITTING IN THE CITY OF NEW YORK IN ANY ACTION OR PROCEEDING
ARISING OUT OF
24
<PAGE>
OR RELATING TO THIS AGREEMENT, AND THE BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING
MAY BE HEARD AND DETER MINED IN SUCH NEW YORK STATE COURT OR, TO THE EXTENT
PERMITTED BY LAW, IN SUCH FEDERAL COURT. THE BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, ANY
DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING
IN ANY SUCH COURT AND ANY RIGHT OF JURISDICTION ON ACCOUNT OF THE PLACE OF
RESIDENCE OR DOMICILE OF THE BORROWER.
11.10 Right to Set-Off. Any deposits or other sums at any time credited
----------------
or due from Borrower may be applied to, or set off against, the Lender's
obligations to the Borrower under this Agreement, at any time after the
occurrence and during the continuance of any Event of Default.
11.11 Payments. All payments to be made under this Agreement shall be
--------
made in U.S. Dollars, by wire transfer of immediately available funds, to:
If to the Borrower:
------------------
Account No. 0103161970
----------
Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
If to the Lender:
----------------
Account No. 26881373
--------
Bank of Boston
1350 Main Street
Springfield, MA 01103
Each party shall promptly notify the other in the manner provided herein of any
change in their respective payment information set forth in this section,
provided that such change shall not be effective until the fifth Business Day
- --------
following receipt by the other party.
11.12 No Partnership; Etc. Nothing contained in this Agreement shall be
-------------------
deemed or construed to create a partnership, tenancy-in-common, joint tenancy or
joint venture between the Lender and the Borrower or any other Person. The
Lender shall not be in any way responsible or liable for the debts, losses,
obligations or duties of the Borrower or any other Person with respect to this
Agreement or otherwise.
25
<PAGE>
11.13 Enforcement of Agreement. The parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which they are entitled at law or in equity.
11.14 GOVERNING LAW. THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF
-------------
THE PARTIES HEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
CONFLICTS OF LAWS RULE OF SUCH STATE.
11.15 WAIVERS OF JURY TRIAL. THE BORROWER AND THE LENDER HEREBY
---------------------
IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.
11.16 Counterparts. This Agreement may be executed by the parties hereto
------------
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
RASTER GRAPHICS, INC.
By: /s/ Rak Kumar
------------------------
Name: Rak Kumar
Title: President and CEO
GRETAG IMAGING GROUP, INC.
By: /s/ Dr. Eduard Brunner
------------------------
Name: Dr. Eduard Brunner
Title: Treasurer
27
<PAGE>
Exhibit A
Loan and Pledge Agreement
FORM OF PROMISSORY NOTE
RASTER GRAPHICS INC.
PROMISSORY NOTE
No. 2
U.S.[$ ] ________, 199_
SPECTRUM, a corporation organized under the laws of the state of Delaware
(the "Borrower"), for value received hereby unconditionally promises to pay, ON
--------
DEMAND by the Lender (in accordance with the terms and conditions of the Loan
Agreement), to the order of Gretag Imaging Group, Inc. (the "Lender") the
------
principal amount of [ ] Dollars (U.S.$[ ]), with accrued interest
(computed on the basis of a 360-day year for the actual number of days,
including the first day but excluding the last day, occurring in the period for
which interest is payable) on the unpaid portion of such principal amount for
the period commencing on the date hereof until such principal amount shall
become due and payable, at the rate per annum specified in the Loan Agreement.
Any payment of principal or accrued interest payable hereunder which is not paid
when due, shall bear interest from the due date until paid in full at the rate
per annum specified in the Loan Agreement for such late payments.
Payments of principal and accrued interest on this Promissory Note shall
be made in lawful money of the United States of America at the place specified
in the Loan Agreement or otherwise specified by the Lender with five business
days' written notice to the Company.
This Promissory Note is one of the Company's Notes due on demand (the
"Promissory Notes") issued pursuant to that certain Loan and Pledge Agreement,
- -----------------
dated October 5, 1998 between Borrower and Lender (as the same may be amended
from time to time, the "Loan Agreement"). The Lender is entitled to the
--------------
benefits of the Loan Agreement and may enforce the agreements of the Company
contained therein and exercise the rights and remedies provided for thereby or
otherwise available in respect thereof.
The Borrower hereby waives presentment, demand, protest, dishonor and
notice of any kind in connection with this Promissory Note.
<PAGE>
This Promissory Note may be assigned by the Lender to an affiliate, but
may not be assigned by the Borrower without the prior written consent of the
Lender. This Promissory Note shall bind the successors and permitted assigns of
the undersigned.
This Promissory Note is deemed to be made and delivered in New York, New
York and shall be governed by and construed in accordance with the laws of the
State of New York without giving effect to the conflicts of laws and rules of
such state.
IN WITNESS WHEREOF, the undersigned has duly executed this Promissory Note
as of the date and year first above written.
RASTER GRAPHICS, INC.
_________________________
By:
Title:
2
<PAGE>
EXHIBIT 10.21
EXECUTION COPY
================================================================================
ASSET AND SUBSIDIARY STOCK OPTION AGREEMENT
between
GRETAG IMAGING GROUP, INC.
and
RASTER GRAPHICS, INC.
Dated as of October 6, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
THE OPTION
1.1 Grant of the Option................................................. 1
1.2 Exercise of Options................................................. 2
1.3 Sale and License of Inkjet Business; Sale of Shares................. 3
1.4 Purchase Prices..................................................... 5
1.5 Closing............................................................. 5
ARTICLE II
COVENANTS OF THE PARTIES
2.1 Escrow Agent........................................................ 7
2.2 Employees; Transitional Services.................................... 7
2.3 Inventory........................................................... 7
2.4 HSR Filings; Approvals.............................................. 8
2.5 Right of Inspection................................................. 8
2.6 Consents............................................................ 8
2.7 Interim Operations.................................................. 8
2.8 Further Assurances.................................................. 10
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1 Existence; Good Standing; Corporate Authority....................... 11
3.2 Authorization, Validity and Effect of Agreements.................... 11
3.3 Compliance with Laws................................................ 11
3.4 Capitalization, etc................................................. 11
3.5 Assets.............................................................. 12
3.6 No Violation........................................................ 12
3.7 Merger Agreement.................................................... 13
i
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
4.1 Existence; Good Standing............................................ 13
4.2 Authorization, Validity and Effect of Agreements.................... 13
ARTICLE V
MISCELLANEOUS
5.1 Survival........................................................... 14
5.2 Amendment.......................................................... 14
5.3 Notices............................................................ 14
5.4 Assignment; Binding Effect......................................... 15
5.5 Entire Agreement................................................... 15
5.6 Expenses........................................................... 15
5.7 Governing Law...................................................... 15
5.8 Investigations..................................................... 16
5.9 Termination........................................................ 16
5.10 Severability....................................................... 16
5.11 Arbitration........................................................ 16
5.12 Indemnification.................................................... 17
5.13 Counterparts....................................................... 19
SCHEDULE A Business Assets
SCHEDULE B Ink and Paper After-Market Business
SCHEDULE C Excluded Liabilities
SCHEDULE D Escrowed Items
ii
<PAGE>
DEFINITIONS
Defined Term Section Reference
------------ -----------------
"Agreement" First Paragraph
---------
"Business Assets" Section 1.1(b)
---------------
"Business Liabilities" Section 1.3(a)(iv)
--------------------
"Closing" Section 1.5(a)
-------
"Closing Date" Section 1.5(a)
------------
"Company" First Paragraph
-------
"Company Indemnitees" Section 5.12(b)
-------------------
"Disclosure Letter" Merger Agreement
-----------------
"Effective Time" Merger Agreement
--------------
"Encumbrance" Merger Agreement
-----------
"Excluded Liabilities" Section 1.3(a)(iv)
--------------------
"Governmental Entity" Merger Agreement
-------------------
"HSR Act" Section 2.4
-------
"Indemnified Party" Section 5.12(c)
-----------------
"Indemnifying Party" Section 5.12(c)
------------------
"Ink and Paper After-Market Business" Section 1.1(b)
-----------------------------------
"Inkjet Business" Section 1.1(b)
---------------
"Inkjet Option" Section 1.1(b)
-------------
"Inkjet Option Purchase Price" Section 1.1(b)
----------------------------
"Intellectual Property" Merger Agreement
---------------------
"Laws" Merger Agreement
----
"Loan and Pledge Agreement" Section 1.4(a)
-------------------------
"Losses" Section 5.12(a)
------
"Material Adverse Effect" Section 3.1
-----------------------
"Merger Agreement" Second Paragraph
----------------
"Merger Sub" Second Paragraph
----------
"Notes" Loan and Pledge Agreement
-----
"Notice of Exercise" Section 1.2
------------------
"O-Sub" Section 1.1(a)
-----
"O-Sub Shares" Section 1.1(a)
------------
"Promissory Notes" Loan and Pledge Agreement
----------------
"Purchaser" First Paragraph
---------
"Purchaser Indemnitees" Section 5.12(a)
---------------------
"Secondary Assets" Section 1.1(b)
----------------
"Subsidiary Stock Option" Section 1.1(a)
-----------------------
"Subsidiary Purchase Price" Section 1.4(b)
-------------------------
iii
<PAGE>
ASSET AND SUBSIDIARY STOCK OPTION AGREEMENT
ASSET AND SUBSIDIARY STOCK OPTION AGREEMENT, dated as of October 6,
1998 (this "Agreement") between Raster Graphics, Inc., a Delaware corporation
---------
(the "Company"), and Gretag Imaging Group, Inc., a Delaware corporation
-------
("Purchaser").
- -----------
WHEREAS, the Company, Purchaser and Gretag Acquisition Corp., a
Delaware corporation (the "Merger Sub"), are, concurrently with the execution of
----------
this Agreement, entering into an Agreement and Plan of Merger (the "Merger
------
Agreement");
- ---------
WHEREAS, the Company designs, manufactures, markets, sells, services
and supports inkjet printer products;
WHEREAS, the Company owns all the shares of capital stock of O-Sub;
WHEREAS, as a condition to their willingness to enter into the Merger
Agreement, Purchaser and the Merger Sub have requested that the Company agree,
and, as an inducement to Purchaser and Merger Sub to enter into the Merger
Agreement, the Company has agreed, to grant the Inkjet Option and the Subsidiary
Stock Option to Purchaser on the terms and subject to the conditions set forth
herein; and
WHEREAS, certain capitalized terms not defined herein shall have the
meanings ascribed to them in the Merger Agreement;
NOW, THEREFORE, to induce Parent to enter into, and in consideration
of the entering into of, the Merger Agreement and of the mutual covenants and
agreements set forth herein, the parties agree as follows:
ARTICLE I
THE OPTION
1.1 Grant of the Option. The Company hereby grants to Purchaser:
-------------------
(a) the irrevocable right and option (the "Subsidiary Stock Option")
-----------------------
as further set forth herein to purchase for the Subsidiary Purchase
Price all of the issued and outstanding shares of common stock, par value $0.001
per share (the "O-Sub Shares"), of Onyx Graphics Corporation ("O-Sub") on the
------------ -----
terms set forth herein; and
<PAGE>
(b) the irrevocable right and option as further set forth herein
(the "Inkjet Option") to purchase for the Inkjet Option Purchase Price (i) all
------------- -
of the assets (not including the Secondary Assets) (the "Business Assets") used
---------------
or held for use in connection with, necessary for the conduct of or otherwise
material to the Inkjet Business, including, without limitation, all rights,
contracts, goodwill, studies, prepaid advertising, endorsements, commercial and
retail inventories, supplies, customer lists, contractual rights, Intellectual
Property, machinery, equipment, molds, parts, spare parts, components, tooling,
fixture and equipment specifications, studies, blueprints and drawings, printed
materials, quality specifications and instructions, design specifications,
process specifications for labor and equipment, work in process and all other
property, assets and rights of every kind, nature and description, real,
personal or mixed, tangible or intangible (including goodwill), whether accrued,
contingent or otherwise, and whether now existing or hereinafter acquired and
wherever situated as more fully described in Schedule A; and (ii) the right and
--
license to use the Secondary Assets, solely in connection with the Inkjet
Business as it is now or may in the future be conducted.
"Inkjet Business" means the design, manufacture, sales, service and
---------------
support of the Company's inkjet printer products, provided that the Inkjet
--------
Business shall not include the Ink and Paper After-Market Business.
"Ink and Paper After-Market Business" means the Company's after-market
-----------------------------------
ink and paper business for the Company's inkjet printer products, as more fully
described in Schedule B.
"Secondary Assets" means the Intellectual Property of the Company that
----------------
is, in the Company's reasonable determination, subject to Purchaser's reasonable
agreement therewith, used primarily in connection with or held for use primarily
in connection with the operation of any business of the Company other than the
Inkjet Business.
1.2 Exercise of Options. Subject to the provisions set forth below,
-------------------
Purchaser shall have the right:
(a) to exercise the Inkjet Option upon the termination of the Merger
Agreement pursuant to Section 9.1(b)(iii), 9.1(c)(ii), 9.1(d)(iii) or
9.1(d)(vii), thereof; provided that the Purchaser has not exercised the
--------
Subsidiary Stock Option; and provided further that if the Merger Agreement is
-------- -------
terminated pursuant to Section 9.1(d)(iii), Purchaser may exercise the Inkjet
Option only if (i) the breach or breaches of representations, warranties or
covenants that were the reason for such termination would, individually or in
the aggregate, have a Material Adverse Effect or a Material Delaying
2
<PAGE>
Effect, and (ii) such breach or breaches were not caused solely by actions or
inactions of the Purchaser;
(b) to exercise the Subsidiary Stock Option upon the termination of
the Merger Agreement for whatever reason; provided that the Purchaser has not
--------
exercised the Inkjet Option.
Purchaser may elect to exercise the Inkjet Option or the Subsidiary
Stock Option by giving written notice (the "Notice of Exercise") to the Company
------------------
stating that it has elected to exercise the Inkjet Option or the Subsidiary
Stock Option, as the case may be; provided that such Notice of Exercise is given
--------
within 90 days of the occurrence of any of the events set forth in subsections
(a) or (b) above. If Purchaser has not exercised the Inkjet Option or the
Subsidiary Stock Option during such 90-day period, the Inkjet Option and the
Subsidiary Stock Option shall expire and shall no longer be of any force or
effect.
1.3 Sale and License of Inkjet Business; Sale of Shares. (a)
---------------------------------------------------
Subject to the terms and conditions of this Agreement, if the Inkjet Option has
been exercised, on the Closing Date:
(i) The Company shall sell, transfer, convey, assign and deliver to
Purchaser, and Purchaser shall purchase, acquire and accept from the
Company, all of the Company's right, title and interest in and to the
Business Assets.
(i) The Company shall grant, and hereby grants upon the Closing, to
Purchaser a perpetual, worldwide, nontransferable, royalty-free and fully
paid-up right and license to use the Secondary Assets solely in connection
with the Inkjet Business as it is now or may in the future be conducted.
The parties shall negotiate in good faith a license agreement containing
customary and commercially reasonable terms relating to the maintenance of
the Secondary Assets, infringement, indemnification, confidentiality and
other terms, provided that the failure to agree upon such license agreement
--------
shall not affect the rights granted in this Section 1.3(a)(ii).
(iii) Solely to the extent any of the Business Assets are currently
used by the Company in connection with any business of the Company (other
than the Inkjet Business) as currently conducted, Purchaser shall grant,
and hereby grants upon the Closing, to the Company a perpetual, worldwide,
nontransferable (except for transfers in connection with the sale of the
Company, provided the transferee assumes in writing all of the obligations
of the Company under such
3
<PAGE>
license, including, without limitation, the confidentiality and non-
competition obligations contained therein), royalty-free and fully paid-up
right and license to use the Business Assets in connection with such
business of the Company. The parties shall negotiate in good faith to a
license agreement containing customary and commercially reasonable terms
relating to the maintenance of the Business Assets, infringement,
indemnification, confidentiality and other terms, provided that the failure
--------
to agree upon such license agreement shall not affect the rights granted in
this Section 1.3(a)(iii). Notwithstanding anything to the contrary
contained herein, for a period of five years commencing on the date of the
exercise of the Inkjet Option, the Company shall have no right anywhere in
the world to use or permit other persons or entities to use any of the
Business Assets in connection with any business similar to or competitive
with the Inkjet Business.
(iv) Purchaser shall assume all liabilities and obligations
associated with the Inkjet Business (including without limitation all
contracts and commitments), other than liabilities and obligations
associated with the Secondary Assets, but excluding any long-term
indebtedness and all other such liabilities and obligations as are or have
been incurred outside the ordinary course of business of the Inkjet
Business, including, without limitation, the liabilities identified in
Schedule C (collectively, the "Excluded Liabilities"); provided that, by
--------------------
mutual agreement, the Company and Purchaser shall make such adjustments as
to which of such rights, contracts, properties, assets, goodwill and
business are to be purchased and which of such liabilities and obligations
are to be assumed as shall be necessary to settle the obligations, rights
and accounts existing between the Inkjet Business on the one hand and the
Company and its affiliates and other divisions on the other hand at the
time of the Closing so that such obligations, rights and accounts are
settled and canceled as of the Closing and are not transferred to or
assumed by Purchaser. The liabilities and obligations to be assigned and
assumed pursuant to this subsection 1.3(a)(iv) are hereinafter referred to
as the "Business Liabilities."
--------------------
(b) Subject to the terms and conditions of this agreement, if the
Subsidiary Stock Option has been exercised, on the Closing Date:
(i) The Company shall sell to Purchaser, and Purchaser shall purchase,
the O-Sub Shares.
4
<PAGE>
(ii) As of the Closing Date, the account receivable from the Company
up to $1,500,000 on O-Sub's balance sheet shall be canceled, provided that
--------
the net equity on O-Sub's balance sheet shall in no event be less than
$1,100,000.
(c) As promptly as practicable following the Closing Date with respect
to the exercise of the Subsidiary Stock Option, the parties shall negotiate in
good faith a distribution agreement with commercially reasonable terms for the
distribution of software products from O-Sub to the Company for resale with the
Company's products.
1.4 Purchase Prices. (a) The aggregate purchase price to be paid by
---------------
Purchaser for the sale of the Business Assets and the license rights granted
under Section 1.3(a)(ii) to the Secondary Assets upon exercise of the Inkjet
Option and at the Closing shall be $6,000,000 (the "Inkjet Option Purchase
----------------------
Price"), plus the grant of the license described in Section 1.3(c) and the
assumption of the Business Liabilities. The Purchaser may pay the Inkjet Option
Purchase Price, upon its election, by the cancellation, in an aggregate amount
up to the Inkjet Option Purchase Price, of (i) outstanding Promissory Notes
under the Loan and Pledge Agreement dated as of the date hereof, between the
Company and Purchaser (the "Loan and Pledge Agreement"), and (ii) any accrued
-------------------------
interest thereon through the date of such cancellation, the balance, if any, of
such Inkjet Option Purchase Price to be paid in cash.
(b) The purchase price to be paid by the Purchaser for the sale of the
O-Sub Shares upon exercise of the Subsidiary Stock Option and at the Closing
shall be $5,000,000 (the "Subsidiary Purchase Price"). The Purchaser may pay the
-------------------------
Subsidiary Purchase Price, upon its election in an aggregate amount up to the
Subsidiary Purchase Price, by (i) the cancellation of any outstanding Promissory
Notes under the Loan and Pledge Agreement, and (ii) any accrued interest thereon
through the date of such cancellation, the balance, if any, of such Subsidiary
Purchase Price to be paid in cash.
1.5 Closing. (a) The closing of the purchase of the Inkjet Business
-------
pursuant to the Inkjet Option, or the O-Sub shares pursuant to the Subsidiary
Stock Option, as the case may be (the "Closing"), shall take place at 10:00
-------
a.m., New York City time at the offices of Debevoise & Plimpton, 875 Third
Avenue, New York, New York 10022 on a date (the "Closing Date") that is the
------------
later of (i) the date of the expiration or termination of any applicable waiting
-
period under the HSR Act and (ii) the fifteenth business day after the delivery
--
of an applicable Notice of Exercise (or such other date upon which the parties
hereto may mutually agree).
5
<PAGE>
(b) At the Closing, if the Inkjet Option has been exercised:
(i) the Company shall deliver to Purchaser (A) such duly executed
-
bills of sale, deeds, endorsements, assignments and other instruments of
conveyance and transfer, in form and substance satisfactory to Purchaser,
as are necessary or appropriate in the judgment of Purchaser to vest in
Purchaser good and marketable title to the Business Assets and to grant the
license described in Section 1.3(a)(ii) and (B) all contracts, commitments,
-
books, records, lists, files and other data in the possession of the
Company or any of its subsidiaries or affiliates relating to the Inkjet
Business including, but not limited to, all contracts, commitments, books,
records, lists, files and other data in the possession of the Company or
any of its subsidiaries or affiliates relating to the Business Assets and
the Secondary Assets;
(ii) Purchaser will assume the Business Liabilities;
(iii) Purchaser will (A) deliver or cause to be delivered the Inkjet
-
Option Purchase Price in immediately available funds by wire transfer to a
bank account of the Company designated by the Company prior to the date of
the Closing; or (B) if Purchaser elects, (I) deliver to the Company such
- -
instruments, in form and substance reasonably satisfactory to the Company,
as are necessary or appropriate in the reasonable judgment of the Company
to effect the cancellation of the outstanding Promissory Notes, and any
accrued interest thereon through the date of such cancellation, and (II)
--
deliver or cause to be delivered the excess of the Inkjet Option Purchase
Price over the aggregate amount of obligations canceled pursuant to clause
(B)(I) of this Section 1.5(b) in immediately available funds by wire
transfer to a bank account of the Company designated by the Company prior
to the date of the Closing.
(iv) Purchaser shall deliver to the Company such instruments, in
form and substance reasonably satisfactory to the Company, as are necessary
or appropriate in the reasonable judgment of the Company to effect the
assumption of the Business Liabilities and to grant the license described
in Section 1.3(a)(iii).
(c) At the Closing, if the Subsidiary Stock Option has been exercised:
(i) the Company shall deliver or cause to be delivered to Purchaser
the O-Sub Shares in the form of a stock certificate or certificates
therefor in good form for delivery and free and clear of all Encumbrances,
registered in the name of Purchaser or its designee against payment
therefor;
6
<PAGE>
(ii) Purchaser will (A) deliver or cause to be delivered the
-
Subsidiary Purchase Price in immediately available funds by wire transfer
to a bank account of the Company designated by the Company prior to the
date of the Closing; or (B) if Purchaser elects, (I) deliver to the Company
- -
such instruments, in form and substance reasonably satisfactory to the
Company, as are necessary or appropriate in the reasonable judgment of the
Company to effect the cancellation of the outstanding Promissory Notes, and
any accrued interest thereon through the date of such cancellation, and
(II) deliver or cause to be delivered the excess of the Inkjet Option
--
Purchase Price over the aggregate amount of obligations canceled pursuant
to clause (B)(I) of this Section 1.5(c) in immediately available funds by
wire transfer to a bank account of the Company designated by the Company
prior to the date of the Closing.
ARTICLE II
COVENANTS OF THE PARTIES
2.1 Escrow Agent. If at any time Purchaser reasonably believes that
------------
events are likely to occur that would enable Purchaser to exercise the Inkjet
Option, Purchaser may request that the Company, and the Company shall, promptly
after such request, place in escrow with a mutually acceptable escrow agent
(which would include any commercial bank or trust company having net capital of
not less than $100 million) all or some, at Purchaser's option, of the items set
forth in Schedule D. If the Inkjet Option is exercised, all such items shall be
delivered by such escrow agent to Purchaser at the Closing in conformity with
this Agreement upon tender of payment to the Company of the Inkjet Option
Purchase Price (whether pursuant to Section 1.5(b)(iii)(A) or Section
1.5(b)(iii)(B)).
2.2 Employees; Transitional Services. If the Inkjet Option is
--------------------------------
exercised, Purchaser and the Company shall (a) use their reasonable best efforts
-
to cause all employees and managers of the Company primarily engaged in the
Inkjet Business to become employees of Purchaser or any of its subsidiaries
conducting the Inkjet Business, (b) use their reasonable best efforts to cause
-
all part-time personnel, and other third parties currently performing services
for the Inkjet Business to continue to do so, and (c) execute a transitional
-
services agreement with commercially reasonable consideration providing for such
head offices and other services as Purchaser deems reasonably necessary for the
continued operation and smooth uninterrupted transition of the Inkjet Business
during a six-month transition period. The Company shall be responsible for any
severance and related payments owing to or becoming due to Company employees
primarily engaged in the Inkjet Business who do not become employees of
Purchaser.
7
<PAGE>
2.3 Inventory. If the Inkjet Option is exercised, the Company hereby
---------
agrees that Purchaser shall have the right to acquire the inventory to be
acquired hereunder in the form existing as of the Closing Date, provided that
such inventory shall exclude after-market ink, toner, paper and related
supplies.
2.4 HSR Filings; Approvals. The Company and Purchaser shall each use
----------------------
its reasonable best efforts promptly to prepare and to make such filings (if
any) and to provide such information (if any) as may be required under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") with
-------
respect to the purchase of the Inkjet Business pursuant to the Inkjet Option or
the O-Sub Shares pursuant to the Subsidiary Stock Option.
2.5 Right of Inspection. At any time prior to the Closing or the
-------------------
termination of this Agreement, Purchaser shall have the right, at all reasonable
times during regular business hours, to inspect the books, records, and
properties of the Company primarily related to the Inkjet Business or of the O-
Sub solely for the purpose of determining whether to exercise the Inkjet Option
or the Subsidiary Stock Option. Purchaser will keep all information derived from
such inspection confidential, except as required by applicable law or to the
extent that such information is otherwise publicly available.
2.6 Consents. If the Inkjet Option is exercised, the Company shall,
--------
and shall cause each of its Subsidiaries and affiliates to: give all required
notices and use its reasonable best efforts to obtain prior to the Closing all
material licenses, permits, consents, approvals, authorizations, qualifications
and orders of Governmental Entities and other persons relating to the Inkjet
Business as may be required in order to enable the Company to perform its
obligations hereunder, including, without limitation, all consents and approvals
required to permit it to make the sale and licenses to Purchaser contemplated
herein and to enable Purchaser to enjoy after the Closing all rights and
benefits presently enjoyed by the Company in respect of the Inkjet Business;
provided that no contract shall be amended to increase the amount payable
- --------
thereunder in order to obtain any such consent, approval or authorization or
otherwise without obtaining the prior written consent of Purchaser. In the
event any such consent or approval is not obtained on or prior to the Closing
Date, the Company shall continue to use its reasonable best efforts to obtain
any such consent or approval after the Closing Date until such time as such
consent or approval has been obtained, and the Company will cooperate with
Purchaser in any lawful and economically feasible arrangement to provide that
Purchaser shall receive the interest of the Company in the benefits of the
Business Assets and the license described in Section 1.3(a)(ii) notwithstanding
the failure to obtain such consents or approval.
8
<PAGE>
2.7 Interim Operations. Until the earlier of the Closing or the
------------------
termination of this Agreement, the Company shall, and shall cause its
subsidiaries to, unless Purchaser shall otherwise consent in writing, conduct
the operations of the Inkjet Business and of O-Sub according to their respective
usual, regular and ordinary course of business consistent with past practice and
use reasonable best efforts to preserve intact their respective business
organizations and goodwill, to keep available the services of their officers and
employees and to maintain satisfactory relationships with customers, suppliers,
distributors, brokers, sales agents and all other persons having business
relationships with them, including through the payment of additional
compensation reasonably acceptable to Purchaser to such distributors, brokers
and sales agents reasonably calculated to maintain at least the current level of
merchandising, distribution and shelving. Without limiting the generality of
the foregoing, until the earlier of the Closing or the termination of this
Agreement, unless Purchaser shall otherwise consent in writing, the Company
will:
(a) not pledge, sell, lease, assign, transfer or otherwise dispose of
(by merger or otherwise) any of (i) the O-Sub Shares (other than pursuant
-
to the Loan and Pledge Agreement) or (ii) the Business Assets or Secondary
--
Assets (including, without limitation, receivables, leasehold interests or
third party licenses or assignments of Intellectual Property and including
any sale leaseback transaction) except for the sale of inventory in the
ordinary course of business;
(b) not effect any stock split, reverse stock split, stock dividend,
subdivision, reclassification of the O-Sub Shares, or otherwise change the
capitalization of the O-Sub as it exists on the date hereof;
(c) preserve and maintain all the properties used in or relating to
the Business Assets and Secondary Assets in a normal state of repair, order
and condition, reasonable wear and use excepted;
(d) keep all the Business Assets and Secondary Assets insured (to the
extent presently insured) against any loss, either by fire, other casualty,
or theft and give notice to Purchaser of any loss involving any of the
Business Assets or Secondary Assets if such loss is at least $50,000 or
more and discuss with Purchaser whether the proceeds of any claim made in
connection with the loss should be used to replace any property damage or
loss. Any proceeds not used to replace lost or damaged property shall be
for the account of Purchaser if the Inkjet Option is exercised and
consummated at the Closing;
9
<PAGE>
(e) not enter into any contract, agreement or commitment relating to
all or any part of the business conducted by O-Sub, the Business Assets or
Secondary Assets except for contracts, agreements or commitments in the
ordinary course of business consistent with past practice;
(f) maintain all the books, accounts and records relating to O-Sub and
the Inkjet Business in the usual, regular and ordinary manner, on a basis
consistent with prior years;
(g) promptly advise Purchaser in writing of any material adverse
change in the business, operations, financial condition or prospects of O-
Sub or the Inkjet Business or in the Business Assets, Secondary Assets or
Business Liabilities;
(h) comply in all material respects with the provisions of all laws,
regulations, ordinances and judicial decrees applicable to the conduct of
O-Sub and the Inkjet Business;
(i) promptly notify Purchaser of the institution of any legal
proceeding which may individually or in the aggregate have a material
adverse effect on the business, operations, properties, financial condition
or prospects of O-Sub and the Inkjet Business taken as a whole;
(j) prosecute and maintain all Intellectual Property used or held for
use in connection with the Inkjet Business or the business of O-Sub; and
(k) not take or omit to take any other action nor enter into any
agreement which would have the effect of (i) frustrating the purpose of
-
this Agreement or (ii) preventing or disabling the Company from delivering
--
the Business Assets, the Secondary Assets upon exercise of the Inkjet
Option, delivering the O-Sub Shares upon exercise of the Subsidiary Stock
Option or otherwise performing its obligations under this Agreement.
2.8 Further Assurances. Each party hereto, prior to and following
------------------
the Closing, shall cause to be promptly and duly taken, executed, acknowledged
and delivered all such further acts, documents, instruments and assurances as
may from time to time be necessary in order to protect the Company's and
Purchaser's rights under this Agreement and otherwise as may reasonably be
requested by the Company and Purchaser in order to carry out the intent and
purposes of this Agreement and the transactions contemplated hereby.
10
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser, as of the
date hereof and as of the Closing Date, as follows:
3.1 Existence; Good Standing; Corporate Authority. Each of the
---------------------------------------------
Company and O-Sub is (i) a corporation duly incorporated, validly existing and
-
in good standing under the laws of its jurisdiction of incorporation and (ii) is
--
duly licensed or qualified to do business as a foreign corporation and is in
good standing under the laws of any other state of the United States or any
other jurisdiction in which the character of the properties owned or leased by
it or in which the transaction of its business makes such licensure,
qualification or good standing necessary, except where the failure to be so in
good standing or to be so licensed or qualified, individually or in the
aggregate, would not have a material adverse effect on the business, operations,
results of operations, assets, financial condition or prospects of the Company
or O-Sub (a "Material Adverse Effect"). Each of the Company and O-Sub has the
-----------------------
requisite corporate power and authority to own, operate and lease its properties
and carry on its business (including, in the case of Purchaser, the Inkjet
Business) as now conducted.
3.2 Authorization, Validity and Effect of Agreements. The Company
------------------------------------------------
has the requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors, and no other corporate proceedings on the
part of the Company or its stockholders are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by the Company, and (assuming
this Agreement constitutes a valid and binding obligation of Purchaser)
constitutes the valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms.
3.3 Compliance with Laws. Except as set forth in Schedule 3.3,
--------------------
neither the Company nor O-Sub is in violation of any Laws of any Governmental
Entity applicable to the Company, O-Sub or any of their respective properties or
assets (including the Inkjet Business), except for violations which,
individually or in the aggregate, would not have a Material Adverse Effect.
11
<PAGE>
3.4 Capitalization, etc. The Company owns all of the O-Sub Shares,
-------------------
and each of the O-Sub Shares is duly authorized, validly issued, fully paid and
nonassessable and owned by the Company free and clear of all Encumbrances
(except for any Encumbrance pursuant to the Loan and Pledge Agreement). There
are no other shares of capital stock of O-Sub, no securities of O-Sub
convertible or exchangeable for shares of capital stock or voting securities of
O-Sub, and no existing options, warrants, calls, subscriptions, convertible
securities, or other rights, agreements or commitments that obligate the Company
or O-Sub to issue, transfer or sell any shares of capital stock of, or equity
interests in, O-Sub. There are no outstanding obligations of the Company or O-
Sub to repurchase, redeem or otherwise acquire any shares of capital stock of O-
Sub.
3.5 Assets. (a) The Company owns and has good title or has the right
------
to use all the Business Assets and Secondary Assets (except as may be disposed
of in the ordinary course of business after the date hereof and in accordance
with this Agreement), in each case free and clear of any and all Encumbrances.
The Business Assets and the Secondary Assets, taken as a whole, constitute all
the properties and assets used or held for use in connection with, necessary for
the conduct of or otherwise material to the Inkjet Business as reasonably
conducted and as conducted during the past twelve months (except inventory sold,
cash disposed of, accounts receivable collected, prepaid expenses realized,
contracts fully performed, and properties or assets replaced by equivalent or
superior properties or assets, in each case in the ordinary course of business).
There are no assets or properties used in the operation of the Inkjet Business
and owned by any Person other than the Company that will not as of the Closing
Date be leased or licensed to Purchaser under valid, current leases or license
arrangements. The Business Assets and Secondary Assets are in all material
respects adequate for the purposes for which such assets are currently used or
are held for use, and are in reasonably good repair and operating condition
(subject to normal wear and tear) and, to the knowledge of the Company, there
are no facts or conditions affecting such assets that could, individually or in
the aggregate, interfere in any material respect with the use, occupancy or
operation thereof as currently used, occupied or operated, or their adequacy for
such use.
(b) Neither the purchase and sale of the Business Assets and the
licenses contemplated hereby upon the exercise of the Inkjet Option, nor the
purchase and sale of the O-Sub Shares upon the exercise of the Subsidiary Stock
Option would constitute the sale of "substantially all" of the Company's
properties and assets pursuant to Section 271 of the DGCL, and such Section 271
shall not be applicable to any of the transactions contemplated by this
Agreement. Neither the Inkjet Business nor O-Sub represents more than 45% of
(i) the book value of the Company's assets, (ii) the Company's revenues, or
(iii) the Company's profit, in each case on a consolidated basis.
12
<PAGE>
3.6 No Violation. Except as set forth in Schedule 3.6, neither the
------------
execution and delivery by the Company of this Agreement nor the consummation by
the Company of the transactions contemplated hereby will: (i) violate, conflict
-
with or result in a breach of any provisions of the Certificate of Incorporation
or Bylaws (or comparable constituent documents) of the Company or O-Sub; (ii)
--
violate, conflict with, result in a breach of any provision of, constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, result in the termination or in a right of
termination of, accelerate the performance required by or benefit obtainable
under, result in the triggering of any payment or other obligations pursuant to,
result in the creation of any Encumbrance upon any of the Inkjet Business, the
O-Sub Shares or the O-Sub business (other than any Encumbrance created
hereunder) under, or result in there being declared void, voidable, subject to
withdrawal, or without further binding effect, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, plan, agreement or other instrument,
commitment or obligation to which the Company or O-Sub is a party, by which the
Company or O-Sub or any of their respective properties is bound, or under which
the Company or any of its subsidiaries or any of their respective properties is
entitled to a benefit, except for any of the foregoing matters which
individually or in the aggregate would not have a Material Adverse Effect or
prevent or materially delay the consummation of the transactions contemplated
hereby.
3.7 Merger Agreement. Each of the representations and warranties
----------------
made by the Company in the Merger Agreement (including the relevant exceptions
set forth in the Disclosure Letter) are true and correct to the extent they
relate to the conduct of O-Sub and the Inkjet Business or to the O-Sub Shares,
the Business Assets or the Secondary Assets.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to the Company, as of the
date hereof and as of the Closing Date, as follows:
4.1 Existence; Good Standing. Purchaser is a corporation duly
------------------------
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation.
4.2 Authorization, Validity and Effect of Agreements. Purchaser has
------------------------------------------------
the requisite corporate power and authority to execute and deliver this
Agreement and to
13
<PAGE>
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the consummation by Purchaser and Merger Sub of
the transactions contemplated hereby and thereby have been duly and validly
authorized by the Board of Directors of Purchaser and no other corporate
proceedings on the part of Purchaser are necessary to authorize this Agreement
or to consummate the transactions contemplated hereby or thereby. This Agreement
has been duly and validly executed and delivered by Purchaser, and (assuming
this Agreement constitutes a valid and binding obligation of the Company)
constitutes the valid and binding obligation of Purchaser, enforceable against
Purchaser in accordance with its respective terms.
ARTICLE V
MISCELLANEOUS
5.1 Survival. The representations and warranties contained in this
--------
Agreement shall not survive the Effective Time or the expiration of both the
Inkjet Option and the Subsidiary Stock Option in accordance with the terms of
this Agreement, but shall survive for a period of two years following the
Closing Date (except with respect to the representations contained in Section
3.7 that relate to Sections 5.10 and 5.11 of the Merger Agreement which shall
survive until the expiration of the applicable statute of limitations).
5.2 Amendment. This Agreement may not be amended, modified or
---------
supplemented except by an instrument in writing signed on behalf of all of the
parties.
5.3 Notices. Any notice required to be given hereunder shall be
-------
sufficient if in writing, and sent by facsimile transmission (with a
confirmatory copy sent by overnight courier), by courier service (with proof of
service), hand delivery or certified or registered mail (return receipt
requested and first-class postage prepaid), addressed as follows:
<TABLE>
<S> <C>
If to Purchaser: Gretag Imaging Group, Inc. If to the Company: Raster Graphics, Inc.
c/o Gretag Imaging, Inc. 3025 Orchard Parkway
2070 Westover Road San Jose, CA 95134
Chicopee, MA 01022
Telephone: (413) 593-6900 Telephone: (408) 232-4000
Facsimile: (413) 788-0940 Facsimile: (408) 232-4100
Attention: William Recker Attention: Rakesh Kumar
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
With a copy to:
Gretag Imaging Holding AG
Althardstrasse 70
CH-8105 Regensdorf Switzerland
Telephone: (011-411) 842-2092
Facsimile: (011-411) 842-2411
Attention: Dr. Eduard Brunner
With a copy to: With a copy to:
Debevoise & Plimpton Venture Law Group
875 Third Avenue 2800 Sand Hill Road
New York, New York 10022 Menlo Park, CA 94025
Telephone: (212) 909-6000 Telephone: (650) 854-4488
Facsimile: (212) 909-6836 Facsimile: (650) 854-1121
Attention: Christopher Smeall, Esq. Attention: Edmund S. Ruffin, Jr., Esq.
</TABLE>
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
5.4 Assignment; Binding Effect. Neither this Agreement nor any of
--------------------------
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party; provided, however, that (a) Purchaser may
-------- ------- -
assign its rights hereunder to an affiliate or to any purchaser of any portion
of the business of O-Sub or the Inkjet Business after the Closing, and (b) the
-
Company may assign its rights hereunder to any purchaser of any portion of the
business of the Company other than the Inkjet Business or the business of O-Sub.
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Notwithstanding anything contained in this Agreement to the
contrary, nothing in this Agreement, except Section 5.12, expressed or implied,
is intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
5.5 Entire Agreement. This Agreement (including the Exhibits and
----------------
Schedules hereto), the Loan and Pledge Agreement and the Merger Agreement and
any other
15
<PAGE>
documents delivered by the parties in connection herewith or therewith
constitute the entire agreement among the parties with respect to the subject
matter hereof and thereof and supersede all prior agreements and understandings
among the parties with respect thereto. Termination of the Merger Agreement or
the Loan and Pledge Agreement shall in no way limit the applicability of any
reference herein to, or any incorporation herein by reference of, any such
document or any section in any such document.
5.6 Expenses. Except as otherwise set forth in this Agreement or the
--------
Merger Agreement, each party shall pay its own expenses incurred in connection
with this Agreement.
5.7 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York without regard to its rules
of conflict of laws.
5.8 Investigations. No action taken pursuant to this Agreement,
--------------
including, without limitation, any investigation by or on behalf of any party,
shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or agreements
contained in this Agreement.
5.9 Termination. This Agreement and the Inkjet Option and the
-----------
Subsidiary Stock Option granted hereto shall expire upon the earlier of (a) the
-
Effective Time and (b) 90 days after either such option becomes exercisable
-
pursuant to Section 1.2.
5.10 Severability. Any term or provision of this Agreement which is
------------
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is unenforceable, the provision shall be interpreted to apply to
the fullest extent possible to permit the provisions of this Agreement to be
enforceable.
5.11 Arbitration. (a) Any dispute, controversy or claim arising
-----------
out of, relating to, or in connection with, this contract, or the breach,
termination or validity thereof, shall be finally settled by arbitration. The
arbitration shall be conducted in accordance with the CPR Institute for Dispute
Resolution Rules for Non-Administered Arbitration of International Disputes in
effect at the time of the arbitration, except as
16
<PAGE>
they may be modified herein or by mutual agreement of the parties. The seat of
the arbitration shall be New York, NY and it shall be conducted in the English
language, provided that either party may submit testimony or documentary
--------
evidence in German and shall, on the request of the other party, furnish a
translation or interpretation into the other language of any such testimony or
documentary evidence. The neutral organization designated to perform the
functions specified in Rule 6 and Rules 7.7(b), 7.8 and 7.9 shall be the CPR
Institute for Dispute Resolution. Notwithstanding Section 5.7, the arbitration
and this clause shall be governed by the Federal Arbitration Act, 9 U.S.C.
(S)(S) 1 et seq.
(b) The arbitration shall be conducted by one arbitrator. The
arbitrator shall be selected as provided in the rules specified above.
(c) In addition to the authority conferred on the arbitration
tribunal by the rules specified above, the arbitration tribunal shall have the
authority to order such production of documents as may reasonably be requested
by either party or by the tribunal itself.
(d) The arbitral award shall be in writing, state the reasons for the
award, and be final and binding on the parties. The award shall include an
award of costs, including reasonable attorneys' fees and disbursements. The
arbitration tribunal shall have the authority to make such orders for interim
relief, including injunctive relief, as it may deem just and equitable.
Judgment upon the award may be entered by any court having jurisdiction thereof
or having jurisdiction over the relevant party or its assets.
(e) The parties hereto agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with its specific terms or was otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to which they are
entitled at law or in equity.
5.12 Indemnification. (a) By the Company. The Company covenants
--------------- --------------
and agrees to defend, indemnify and hold harmless Purchaser, its affiliates and
the officers, directors, employees, agents, advisers and representatives of each
such Person (collectively, the "Purchaser Indemnitees") from and against, and
---------------------
pay or reimburse Purchaser Indemnitees for, any and all claims, liabilities,
obligations, losses, fines, costs, royalties, proceedings, deficiencies or
damages (whether absolute, accrued, conditional or otherwise and whether or not
resulting from third party claims), including out-of-pocket expenses and
reasonable attorneys' and accountants' fees incurred in the
17
<PAGE>
investigation or defense of any of the same or in asserting any of their
respective rights hereunder (collectively, "Losses"), resulting from or arising
------
out of:
(i) any inaccuracy of any representation or warranty made by the
Company herein or in connection herewith;
(ii) any failure of the Company to perform any covenant or agreement
hereunder or fulfill any other obligation in respect hereof; and
(iii) if the Inkjet Option is exercised and consummated at the
Closing, the Excluded Liabilities.
The Company's aggregate indemnification obligations with respect to
any claim for indemnification pursuant to clauses (i) and (ii) of the first
sentence of this Section 5.12(a) shall not exceed $5,000,000.
(b) By Purchaser. Purchaser covenants and agrees to defend,
-----------
indemnify and hold harmless the Company, its affiliates and the officers,
directors, employees, agents, advisers and representatives of each such Person
(collectively, the "Company Indemnities") from and against any and all Losses
-------------------
resulting from or arising out of:
(i) any inaccuracy in any representation or warranty made by
Purchaser herein;
(ii) any failure of Purchaser to perform any covenant or agreement
hereunder or fulfill any other obligation in respect hereof; and
(iii) if the Inkjet Option is exercised and consummated at the
Closing, the Assumed Liabilities.
except to the extent such Losses result from or arise out of the Excluded
Liabilities or constitute Losses for which the Company is required to indemnify
Purchaser Indemnitees under Section 5.12(a). Purchaser's aggregate
indemnification obligations with respect to any claim for indemnification
pursuant to clauses (i) and (ii) of the first sentence of this Section 5.12(b)
shall not exceed $5,000,000.
(c) Indemnification Procedures. In the case of any claim asserted by
--------------------------
a third party against a party entitled to indemnification under this Agreement
(the "Indemnified Party"), notice shall be given by the Indemnified Party to the
-----------------
party required to provide indemnification (the "Indemnifying Party") promptly
------------------
after such Indemnified
18
<PAGE>
Party has actual knowledge of any claim as to which indemnity may be sought, and
the Indemnified Party shall permit the Indemnifying Party (at the expense of
such Indemnifying Party) to assume the defense of any claim or any litigation
resulting therefrom, provided that (i) the counsel for the Indemnifying Party
-
who shall conduct the defense of such claim or litigation shall be reasonably
satisfactory to the Indemnified Party, (ii) the Indemnified Party may
--
participate in such defense at such Indemnified Party's expense, and (iii) the
---
omission by any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its indemnification obligation under this
Agreement. Except with the prior written consent of the Indemnified Party, no
Indemnifying Party, in the defense of any such claim or litigation, shall
consent to entry of any judgment or order, interim or otherwise, or enter into
any settlement with respect to such claim or litigation. In the event that the
Indemnified Party shall in good faith determine that the conduct of the defense
of any claim subject to indemnification hereunder or any proposed settlement of
any such claim by the Indemnifying Party might be expected to affect adversely
the ability of Purchaser to conduct its business, or that the Indemnified Party
may have available to it one or more defenses or counterclaims that are
inconsistent with one or more of those that may be available to the Indemnifying
Party in respect of such claim or any litigation relating thereto, the
Indemnified Party shall have the right at all times to take over and assume
control over the defense, settlement, negotiations or litigation relating to any
such claim at the sole cost of the Indemnifying Party, provided that if the
Indemnified Party does so take over and assume control, the Indemnified Party
shall not settle such claim or litigation without the written consent of the
Indemnifying Party, such consent not to be unreasonably withheld. In the event
that the Indemnifying Party does not accept the defense of any matter as above
provided, the Indemnified Party shall have the full right to defend against any
such claim or demand and shall be entitled to settle or agree to pay in full
such claim or demand. In any event, the Indemnifying Party and the Indemnified
Party shall cooperate in the defense of any claim or litigation subject to this
Section 5.12 and the records of each shall be available to the other with
respect to such defense.
5.13 Counterparts. This Agreement may be executed by the parties
------------
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all, of the parties
hereto.
19
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and
caused the same to be duly delivered on their behalf on the day and year first
written above.
RASTER GRAPHICS, INC.
By: /s/ RAK KUMAR
----------------------------------
Name: Rak Kumar
Title: President and CEO
GRETAG IMAGING GROUP, INC.
By: /s/ DR. EDUARD BRUNNER
----------------------------------
Name: Dr. Eduard Brunner
Title: Treasurer
20
<PAGE>
EXHIBIT 10.22
RASTER GRAPHICS, INC.
1997 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1997 Stock Option Plan are
--------------------
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business. Options
granted hereunder shall be Nonstatutory Stock Options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" shall mean the Board or any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
-----
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" shall mean the Committee appointed by the Board of
---------
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed. The Committee members shall not be required to be Board members.
(e) "Common Stock" shall mean the Common Stock of the Company.
------------
(f) "Company" shall mean Raster Graphics, Inc., a Delaware
-------
corporation.
(g) "Consultant" shall mean any person who is engaged by the Company
----------
or any Parent or Subsidiary to render consulting services and is compensated for
such consulting services, excluding any Officers, Named Executives and
Directors.
(h) "Continuous Status as an Employee or Consultant" shall mean the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Board; provided that such leave is for a period
of not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(i) "Director" shall mean a member of the Board.
--------
(j) "Employee" shall mean any person who is employed by the Company or
--------
any Parent or Subsidiary of the Company, excluding any Officers, Named
Executives and Directors. Notwithstanding the foregoing, an Officer who was not
previously employed by the Company and for whom an Option grant is an inducement
essential to the Officer's entering into an employment relationship or contract
with the Company, shall be treated as an Employee for purposes of the Option
grant made to the Officer in connection with commencement of the Officer's
employment with the Company.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(l) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock as quoted on such exchange or system for the last market
trading day prior to the date of determination (if for a given day no sales were
----------------------------------
reported, the closing bid on that day shall be used), as such price is reported
in The Wall Street Journal or such other source as the Administrator deems
-----------------------
reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the bid and asked prices for the Common Stock; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
-1-
<PAGE>
(m) "Named Executive" shall mean any individual who, on the last day
---------------
of the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four highest compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(n) "Nonstatutory Stock Option" shall mean an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable option
agreement. "Incentive Stock Option" shall mean an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable option agreement.
(o) "Officer" shall mean a person who is appointed or elected by the
-------
Board of Directors as an officer of the Company, including but not limited to a
person who is an officer of the Company within the meaning of Section 16 of the
Exchange Act and the rules and regulations promulgated thereunder.
(p) "Option" shall mean a stock option granted pursuant to the Plan.
------
(q) "Optioned Stock" shall mean the Common Stock subject to an Option.
--------------
(r) "Optionee" shall mean an Employee or Consultant who receives an
--------
Option.
(s) "Parent" shall mean a "parent corporation," whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.
(t) "Plan" shall mean this 1997 Stock Option Plan.
----
(u) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange
----------
Act as the same may be amended from time to time, or any successor provision.
(v) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(w) "Subsidiary" shall mean a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 400,000 shares of Common Stock. The Shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. Notwithstanding any other provision of the Plan, shares
issued under the Plan and later repurchased by the Company shall not become
available for future grant or sale under the Plan.
4. Administration of the Plan.
--------------------------
(a) Composition of Administrator. The Plan shall be administered by
----------------------------
(A) the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the legal requirements relating to
the administration of nonstatutory stock option plans, if any, of applicable
securities laws and the Code (collectively, the "Applicable Laws"). If a
Committee has been appointed pursuant to this Section 4(a), such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of any Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies (however caused)
and remove all members of a Committee and thereafter directly administer the
Plan, all to the extent permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, the specific duties delegated by, or
limitations of authority imposed by, the Board to or on such Committee, the
Administrator shall have the authority, in its discretion:
(i) to grant Options under the Plan;
-2-
<PAGE>
(ii) to determine, upon review of relevant information and in
accordance with Section 2(l) of the Plan, the Fair Market Value of the Common
Stock;
(iii) to determine the exercise price per share of Options to be
granted, which exercise price shall be determined in accordance with Section
8(a) of the Plan;
(iv) to determine the Employees or Consultants to whom, and the
time or times at which, Options shall be granted and the number of shares to be
represented by each Option;
(v) to interpret the Plan;
(vi) to approve forms of agreement for use under the Plan;
(vii) to determine the terms and provisions of each Option
granted (which need not be identical) and, with the consent of the holder
thereof, modify or amend each Option;
(viii) to accelerate or defer (with the consent of the Optionee)
the exercise date of any Option;
(ix) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted by the Administrator; and
(x) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options granted under the Plan.
5. Eligibility.
-----------
(a) Options may be granted only to Employees and Consultants. An
Employee or Consultant who has been granted an Option may, if Optionee is
otherwise eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option agreement as
a Nonstatutory Stock Option.
(c) The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with Optionee's right or the Company's right to
terminate Optionee's employment or consulting relationship at any time, with or
without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board of Directors. It shall continue in effect for a term of ten (10) years
unless sooner terminated under Section 14 of the Plan.
7. Term of Option. The term of each Nonstatutory Stock Option shall be ten
--------------
(10) years from the date of grant thereof or such shorter term as may be
provided in the Nonstatutory Stock Option Agreement.
8. Exercise Price and Consideration.
--------------------------------
(a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the
Administrator, but shall be no less than 85% of the fair market value per Share
on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator and may consist entirely of (1) cash, (2) check, (3)
promissory note, (4) other Shares of Common Stock which (i) either have been
owned by the Optionee for more than six (6) months on the date of surrender or
were not acquired, directly or indirectly, from the Company, and (ii) have a
fair market value on the date of surrender equal to the aggregate exercise price
of the Shares as to which said Option shall be exercised, (5) delivery of a
properly executed exercise notice together with irrevocable instructions to a
broker to deliver promptly to the Company the amount of sale or loan proceeds
required to pay the exercise price, or (6) any combination of such methods of
payment. In making its determination as to the type of consideration to accept,
the Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
-3-
<PAGE>
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. In the event
--------------------------------------------------
of termination of an Optionee's Continuous Status as an Employee or Consultant,
such Optionee may, but only within thirty (30) days (or such other period of
time, not exceeding six (6) months, as is determined by the Administrator) after
the date of such termination (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement), exercise
Optionee's Option to the extent that Optionee was entitled to exercise it at the
date of such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of such termination, or if Optionee does not
exercise such Option (which Optionee was entitled to exercise) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of Section
----------------------
10(b) above, in the event of termination of an Optionee's Continuous Status as
an Employee or Consultant as a result of Optionee's total and permanent
disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only
within twelve (12) months (but in no event later than the date of expiration of
the term of such Option as set forth in the Option Agreement), from the date of
such termination (but in no event later than the date of expiration of the term
of such Option as set forth in the Option Agreement), exercise Optionee's Option
to the extent Optionee was entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the
Option at the date of termination, or if Optionee does not exercise such Option
(which Optionee was entitled to exercise) within the time specified herein, the
Option shall terminate.
(d) Death of Optionee. In the event of termination of an Optionee's
-----------------
Continuance Status as an Employee or Consultant as a result of the death of an
Optionee, the Option may be exercised, at any time within twelve (12) months
following the date of death (but in no event later than the date of expiration
of the term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise the
Option at the date of death. To the extent that Optionee was not entitled to
exercise the Option at the date of death, or if Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
10. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution; provided, that the Administrator
--------
may in its discretion grant transferable Nonstatutory Stock Options pursuant to
option agreements specifying (i) the manner in which such Nonstatutory Stock
Options are transferable and (ii) that any such transfer shall be subject to the
Applicable Laws. The designation of a beneficiary by an Optionee will not
constitute a transfer. An Option may be exercised, during the lifetime of the
Optionee, only by the Optionee or a transferee permitted by this Section 11.
11. Adjustments Upon Changes in Capitalization or Merger.
----------------------------------------------------
(a) Adjustments. Subject to any required action by the shareholders
-----------
of the Company, the number of shares of Common Stock covered by each outstanding
Option, and the number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon
-4-
<PAGE>
cancellation or expiration of an Option, and the price per share of Common Stock
covered by each such outstanding Option, shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Administrator, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
(b) Corporate Transactions. In the event of the proposed dissolution
----------------------
or liquidation of the Company, the Option will terminate immediately prior to
the consummation of such proposed action, unless otherwise provided by the
Administrator. The Administrator may, in the exercise of its sole discretion in
such instances, declare that any Option shall terminate as of a date fixed by
the Administrator and give each Optionee the right to exercise Optionee's Option
as to all or any part of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless such successor corporation
does not agree to assume the Option or to substitute an equivalent option, in
which case the Administrator shall, in lieu of such assumption or substitution,
provide for the Optionee to have the right to exercise the Option as to all of
the Optioned Stock, including Shares as to which the Option would not otherwise
be exercisable. If the Administrator makes an Option fully exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee that the Option shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option will terminate upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option. Notice of the determination shall be given to each
Employee or Consultant to whom an Option is so granted within a reasonable time
after the date of such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not adversely affect Options already granted
(except to the extent contemplated by such Options) and such Options shall
remain in full force and effect, unless mutually agreed otherwise between the
Optionee and the Board (or other body then administering the Plan), which
agreement must be in writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
16. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Administrator shall approve.
-5-
<PAGE>
17. Information to Optionees. The Company shall provide to each Optionee
------------------------
upon request, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports and other information which are
provided to all shareholders of the Company.
18. Withholding Taxes. As a condition to the exercise of Options granted
-----------------
hereunder, the Optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of such Option. The Company shall not be required to issue any Shares
under the Plan until such obligations are satisfied.
19. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current
compensation, or (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a fair market value equal to the amount required to be withheld. For this
purpose, the fair market value of the Shares to be withheld shall be determined
on the date that the amount of tax to be withheld is to be determined (the "Tax
Date").
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
-6-
<PAGE>
EXHIBIT 10.23
EXECUTION COPY
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT dated as of October 6, 1998, among GRETAG
IMAGING GROUP, INC., a Delaware corporation ("Purchaser"), GRETAG ACQUISITION
---------
CORP., a Delaware corporation and wholly owned subsidiary of Purchaser ("Merger
------
Sub") and the individuals and other parties listed on Schedule A attached hereto
- ---
(each, a "Stockholder" and, collectively, the "Stockholders").
----------- ------------
WHEREAS Purchaser, Merger Sub and Raster Graphics, Inc., a Delaware
corporation (the "Company"), propose to enter into an Agreement and Plan of
-------
Merger dated as of the date hereof (as the same may be amended or supplemented,
the "Merger Agreement") providing for the merger of Merger Sub with and into the
----------------
Company (the "Merger") pursuant to which each share of common stock, par value
------
$0.001 per share, of the Company (the "Common Stock") will be converted into the
------------
right to receive cash in the amount of $1.2968 per share, without interest (the
"Merger Consideration");
--------------------
WHEREAS each Stockholder owns the number of shares of Common Stock set
forth opposite his or its name on Schedule A attached hereto (such shares of
Common Stock, together with any other shares of capital stock of the Company
acquired by such Stockholders after the date hereof and during the term of this
Agreement (including, without limitation through the exercise of any stock
options, warrants or similar instruments), being collectively referred to herein
as the "Subject Shares");
--------------
WHEREAS, as an essential condition and inducement to their willingness
to enter into the Merger Agreement, Purchaser and Merger Sub have requested that
each Stockholder enter into this Agreement, and each Stockholder has agreed to
do so; and
WHEREAS, capitalized terms used herein without definition shall have
the respective meanings specified therefor in the Merger Agreement.
NOW, THEREFORE, to induce Purchaser and Merger Sub to enter into, and
in consideration of their entering into, the Merger Agreement, and in
consideration of the premises and the representations, warranties and agreements
contained herein, the parties agree as follows:
1. Representations and Warranties of each Stockholder. Each
--------------------------------------------------
Stockholder hereby, severally and not jointly, represents and warrants to
Purchaser and Merger Sub as of the date hereof in respect of himself or itself
as follows:
<PAGE>
(a) Authority. The Stockholder has all requisite power and authority
---------
to enter into this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly and validly authorized,
executed and delivered by the Stockholder and constitutes the valid and
binding obligation of the Stockholder enforceable against such Stockholder
in accordance with its terms. Neither the execution and delivery by the
Stockholder of this Agreement nor the consummation by the Stockholder of
the transactions contemplated hereby will violate or conflict in any
material respect with, result in a breach of any material provision of or
constitute a default under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust or any material license,
franchise, permit, lease, contract, agreement or other instrument,
commitment or obligation to which the Stockholder is a party or by which
the Stockholder is bound. No trust of which such Stockholder is a trustee
requires the consent of any beneficiary to the execution and delivery of
this Agreement or to the consummation of the transactions contemplated
hereby.
(b) The Subject Shares. The Stockholder is the record and beneficial
------------------
owner of, or is trustee of a trust that is the record holder of, and whose
beneficiaries are the beneficial owners of, and has good and marketable
title to, the Subject Shares set forth opposite his or its name on Schedule
A attached hereto, free and clear of any claims, liens, encumbrances and
security interests whatsoever. The Stockholder does not own, of record or
beneficially, any shares of capital stock of the Company other than the
Subject Shares set forth opposite his or its name on Schedule A attached
hereto. The Stockholder has the sole right to vote such Subject Shares,
and none of such Subject Shares is subject to any voting trust or other
agreement, arrangement or restriction with respect to the voting of such
Subject Shares, except as contemplated by this Agreement.
2. Representation and Warranty of Purchaser and Merger Sub.
-------------------------------------------------------
Purchaser and Merger Sub each hereby represents and warrants to each Stockholder
that it has all requisite power and authority to enter into this Agreement and
to consummate the transactions contemplated hereby. This Agreement has been
duly and validly authorized, executed and delivered by each of Purchaser and
Merger Sub and constitutes the valid and binding obligation of each of Purchaser
and Merger Sub enforceable against each of Purchaser and Merger Sub in
accordance with its terms. Neither the execution and delivery by each of
Purchaser and Merger Sub of this Agreement nor the consummation by each of
Purchaser and Merger Sub of the transactions contemplated hereby will: (a)
-
violate or conflict in any material respect with, result in a breach of any
material provision of, constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, result in the
termination or in a right of termination of, accelerate the performance required
by or benefit obtainable under, result in the vesting,
2
<PAGE>
triggering or acceleration of any payment or other obligations pursuant to, or
result in there being declared void, voidable, subject to withdrawal, or
without further binding effect, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust or any material license,
franchise, permit, lease, contract, agreement or other instrument, commitment
or obligation to which each of Purchaser and Merger Sub is a party, by which
each of Purchaser and Merger Sub or any of its properties is bound, or under
which each of Purchaser and Merger Sub or any of its properties is entitled to
a benefit; (b) other than the filings required under the HSR Act or any
-
Exchange Act filings, require any consent, approval or authorization of, or
declaration, filing or registration with, any Governmental Entity; or (c)
-
violate in any material respect any Laws applicable to each of Purchaser and
Merger Sub.
3. Covenants of Each Stockholder. Until the termination of this
-----------------------------
Agreement in accordance with Section 7, each Stockholder severally and not
jointly agrees as follows:
(a) At any meeting of Stockholders of the Company called to vote upon
the Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval (including
by written consent) with respect to the Merger and the Merger Agreement is
sought, the Stockholder shall vote (or cause to be voted) the Subject
Shares in favor of the Merger, the adoption by the Company of the Merger
Agreement (as it may be amended from time to time, provided that such
amendment is not materially adverse to such Stockholder) and the approval
of the terms thereof and each of the other transactions contemplated by the
Merger Agreement. Any vote cast in accordance with this Section 3(a) or in
accordance with Section 3(b) shall be cast in such manner as will insure
that such vote is duly counted for purposes of determining whether a quorum
is present and for purposes of determining the result of such vote.
(b) (i) At any meeting of Stockholders of the Company or at any
adjournment thereof or in any other circumstances upon which the
Stockholder's vote, consent or other approval is sought, the Stockholder
shall vote (or cause to be voted) the Subject Shares against (A) any
-
Acquisition Proposal as such term is defined in Section 7.1(a) of the
Merger Agreement or (B) any amendment of the Company's certificate of
-
incorporation or by-laws or other proposal or transaction involving the
Company, which amendment or other proposal or transaction would be
reasonably likely to impede, frustrate, prevent or nullify the Merger, the
Merger Agreement (as it may be amended from time to time, provided such
amendment is not materially adverse to such Stockholder), or any of the
other transactions contemplated by the Merger Agreement or change in any
manner the
3
<PAGE>
voting rights of the Common Stock. The Stockholder further agrees not to
enter into any agreement inconsistent with the foregoing.
(ii) At any meeting of Stockholders of the Company or at any
adjournment thereof or in any other circumstances upon which the
Stockholder's vote, consent or other approval is sought, the Stockholder
shall vote (or cause to be voted) the Subject Shares (A) in favor of any
-
proposal approving any of the transactions contemplated by the Asset and
Subsidiary Stock Option Agreement (the "Option Agreement"), dated the date
----------------
hereof, between the Company and Purchaser, and (B) against any proposal or
-
transactions that would be reasonably likely to impede, frustrate, prevent
or nullify the Option Agreement or any transactions contemplated thereby.
(c) The Stockholder shall not, prior to the earliest of (i) the
-
Effective Time and (ii) the termination of the Merger Agreement in
--
accordance with its terms, (x) sell, transfer, give, pledge, assign or
-
otherwise dispose of (including by gift) (collectively, "Transfer"),
--------
consent to any Transfer of, any or all of such Stockholder's Subject Shares
or any interest therein or enter into any contract, option or other
arrangement (including any profit sharing arrangement) with respect to the
Transfer of, the Subject Shares to any person other than pursuant to the
terms of the Merger or (y) enter into any voting arrangement, whether by
-
proxy, voting agreement or otherwise, in connection with, directly or
indirectly, any Acquisition Proposal and agrees not to commit or agree to
take any of the foregoing actions.
(d) In the event that Purchaser, Merger Sub or any affiliate thereof
commences a tender offer for all or any portion of the Common Stock at a
purchase price per share equal to or greater than the Merger Consideration,
such Stockholder shall validly tender such Stockholder's Subject Shares and
shall not withdraw Subject Shares so tendered.
(e) Until after the Merger is consummated or the Merger Agreement is
terminated, the Stockholder shall use reasonable efforts to take, or cause
to be taken, all actions, and to do, or cause to be done, and to assist and
cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by the
Merger Agreement (as it may be amended from time to time, provided such
amendment is not materially adverse to such Stockholder).
4
<PAGE>
(f) Such Stockholder, and any beneficiary of a revocable trust for
which such Stockholder serves as trustee, shall not take any action to
revoke or terminate such trust or take any other action which would
restrict, limit or frustrate in any way the transactions contemplated by
this Agreement. Each such beneficiary hereby acknowledges and agrees to be
bound by the terms of this Agreement applicable to it.
4. Further Assurances. Each Stockholder will, from time to time,
------------------
execute and deliver, or cause to be executed and delivered, such additional or
further consents, documents and other instruments as Purchaser may reasonably
request for the purpose of effectively carrying out the transactions
contemplated by this Agreement.
5. Certain Events. Each Stockholder agrees that this Agreement and
--------------
the obligations hereunder shall attach to such Stockholder's Subject Shares and
shall be binding upon any person or entity to which legal or beneficial
ownership of such Subject Shares shall pass, whether by operation of law or
otherwise, including without limitation such Stockholder's heirs, guardians,
administrators or successors. In the event of any stock split, stock dividend,
merger, reorganization, recapitalization or other change in the capital
structure of the Company affecting the Company Common Stock, or the acquisition
of additional shares of Company Common Stock or other voting securities of the
Company by any Stockholder, the number of Subject Shares listed in Schedule A
beside the name of such Stockholder shall be adjusted appropriately and this
Agreement and the obligations hereunder shall attach to any additional shares of
Company Common Stock or other voting securities of the Company issued to or
acquired by such Stockholder.
6. Assignment. Neither this Agreement nor any of the rights,
----------
interests or obligations hereunder shall be assigned by any of the parties
without the prior written consent of the other parties, except that Merger Sub
or Purchaser (or both of them) may assign, as contemplated by Section 10.3 of
the Merger Agreement, in its sole discretion, any and all of its rights,
interests and obligations hereunder to any affiliate, provided that Merger Sub
or Purchaser will remain liable for its obligations hereunder in the event of
any assignment pursuant to this Section 6. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
7. Termination. This Agreement, and all rights and obligations of
-----------
the parties hereunder, shall terminate upon the date upon which the Merger
Agreement is terminated in accordance with its terms, provided that if the
--------
Merger Agreement has been terminated for any reason, Sections 3(b)(ii), 4, 5, 6,
7, 8, 9, 10 and 11 shall survive for one year following such termination.
5
<PAGE>
8. Grant of Irrevocable Proxy; Appointment of Proxy. (a) Each
-------------------------------------------------
Stockholder hereby irrevocably grants to, and appoints, Purchaser and William
Recker in his capacity as an officer of Purchaser, and any individual who shall
hereafter succeed to such office of Purchaser, and each of them individually,
such Stockholder's proxy and attorney-in-fact (with full power of substitution),
for and in the name, place and stead of such Stockholder, to vote such
Stockholder's Subject Shares, or grant a consent or approval in respect of such
Subject Shares (i) in connection with any of the matters set forth in Sections
-
3(a) and 3(b), and (ii) against any transaction or proposal that would be
--
reasonably likely to result in a breach of any covenant, representation or
warranty or any other obligation or agreement of the Company under or with
respect to the Merger Agreement (as it may be amended from time to time,
provided such amendment is not materially adverse to such Stockholder), the
Option Agreement, the Merger or any of the transactions contemplated by the
Merger Agreement or the Option Agreement.
(b) Such Stockholder represents that any proxies heretofore given in
respect of such Stockholder's Subject Shares are not irrevocable, and that any
such proxies are hereby revoked.
(c) Such Stockholder hereby affirms that the irrevocable proxy set
forth in this Section 8 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance of
the duties of the Stockholder under this Agreement. Such Stockholder hereby
further affirms that the irrevocable proxy is coupled with an interest and may
under no circumstances be revoked. Such Stockholder hereby ratifies and
confirms all that such irrevocable proxy may lawfully do or cause to be done by
virtue hereof. Such irrevocable proxy is executed and intended to be
irrevocable in accordance with the provisions of Section 212(e) of the DGCL.
9. General Provisions.
------------------
(a) Amendments. This Agreement may not be amended except by an
- ----------
instrument in writing signed by each of the parties hereto.
(b) Notice. All notices and other communications hereunder shall be
- ------
in writing and shall be deemed given if hand delivered or sent by overnight
courier (providing proof of delivery) to Purchaser or Merger Sub in
accordance with Section 10.2 of the Merger Agreement and to the
Stockholders at their respective addresses set forth on Schedule A attached
hereto (or at such other address for a party as shall be specified by like
notice).
6
<PAGE>
(c) Interpretation. When a reference is made in this Agreement to
- --------------
Sections, such reference shall be to a Section to this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include", "includes"
or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".
(d) Counterparts. This Agreement may be executed in one or more
- ------------
counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more of the counterparts have been
signed by each of the parties and delivered to the other party, it being
understood that each party need not sign the same counterpart.
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement
- ----------------------------------------------
(including the documents and instruments referred to herein) (i)
-
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to
the subject matter hereof and (ii) is not intended to confer upon any
--
person other than the parties hereto any rights or remedies hereunder.
(f) Governing Law. This Agreement shall be governed by, and
- -------------
construed in accordance with, the laws of the State of Delaware regardless
of the laws that might otherwise govern under applicable principles of
conflicts of law thereof.
(g) Voidability. If prior to the execution hereof, the Board of
- -----------
Directors of the Company shall not have duly and validly authorized and
approved this Agreement, the Merger Agreement and the transactions
contemplated hereby and thereby, so that the execution and delivery hereof
by Purchaser or Merger Sub would trigger the provisions of Section 203 of
the DGCL, then this Agreement shall be void and unenforceable until such
time as such authorization and approval shall have been duly and validly
obtained.
10. Stockholder Capacity. No person executing this Agreement who is
--------------------
or becomes during the term hereof a director or officer of the Company makes any
agreement or understanding herein in his capacity as such director or officer.
Each Stockholder signs solely in his capacity as the record holder and
beneficial owner of, or the trustee of a trust whose beneficiaries are the
beneficial owners of, such Stockholder's Subject Shares and nothing herein shall
limit or affect any actions taken by a Stockholder in his capacity as an officer
or director of the Company.
7
<PAGE>
11. Enforcement. The parties agree that irreparable damage would
-----------
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in a Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit such party to the
-
personal jurisdiction of any Federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated hereby, (b) agrees that such party will
-
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, (c) agrees that such party will not bring
-
any action relating to this Agreement or the transactions contemplated hereby in
any court other than a Federal court sitting in the state of Delaware or a
Delaware state court and (d) waives any right to trial by jury with respect to
-
any claim or proceeding related to or arising out of this Agreement or any of
the transactions contemplated hereby.
12. Public Announcements. Each Stockholder will consult with
--------------------
Purchaser before issuing, and provide Purchaser with the opportunity to review
and comment upon, any press release or other public statements with respect to
the transactions contemplated by this Agreement and the Merger Agreement, and
shall not issue any such press release or make any such public statement prior
to such consultation, except as may be required by applicable law, court process
or by obligations pursuant to any listing agreement with any national securities
exchange (including, but not limited to, NASDAQ).
13. Legends. Each Stockholder will, promptly after executing and
-------
delivering this Agreement, deliver to the Company (or its transfer agent, if so
directed by the Company) the certificates representing the Subject Shares, which
certificates (or replacements thereof) shall be returned to such Stockholder in
accordance with Section 7.11 of the Merger Agreement with the following
restrictive legend placed thereon:
"THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS
AGREEMENT DATED AS OF OCTOBER 6, 1998, AND,
PURSUANT TO THE TERMS THEREOF, MAY NOT
BE SOLD, TRANSFERRED, GIVEN, PLEDGED,
ASSIGNED OR OTHERWISE DISPOSED OF, AND
ARE SUBJECT TO FURTHER RESTRICTIONS
REGARDING, AMONG OTHER THINGS, VOTING
8
<PAGE>
RIGHTS AND CERTAIN INDIRECT TRANSFERS AS
SET FORTH IN SUCH STOCKHOLDERS
AGREEMENT"
9
<PAGE>
IN WITNESS WHEREOF, Purchaser, the Merger Sub and the Stockholders
have caused this Agreement to be duly executed and delivered as of the date
first written above.
GRETAG IMAGING GROUP, INC.
By: /s/ Dr. Eduard Brunner
------------------------
Name: Dr. Eduard Brunner
Title: Treasurer
GRETAG ACQUISITION CORP.
By: /s/ Dr. Eduard Brunner
------------------------
Name: Dr. Eduard Brunner
Title: Treasurer
RAKESH KUMAR
/s/ Rakesh Kumar
---------------------------
MARC WILLARD
/s/ Marc Willard
---------------------------
NORWEST EQUITY PARTNERS IV
By: Promod Haque
------------------------
Name: Promod Haque
Title: Partner
MERRILL PICKARD ANDERSON
& EYRE IV, L.P.
By: /s/ Steven L. Merrill
-----------------------
Name: Steven L. Merrill
Title: General Partner
10
<PAGE>
SCHEDULE A
----------
Name and Address of Number of Shares of Company Number of
Stockholder Common Stock Stockholder
- ----------- Owned of Record Options
--------------- -------
Rakesh Kumar 19,646 245,000
c/o Raster Graphics, Inc.
3025 Orchard Parkway
San Jose, CA 95134
Marc Willard 167,523 175,000
c/o Raster Graphics, Inc.
3025 Orchard Parkway
San Jose, CA 95134
Norwest Equity Partners IV, 857,584 -0-
a Minnesota Limited
Partnership
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
Merril Pickard Anderson & 458,281 -0-
Eyre IV, L.P.
2480 Sand Hill Road
Suite 200
Menlo Park, CA 94025
11
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-13165) pertaining to the 1988 Stock Option Plan, 1996 Stock
Plan, 1996 Employee Purchase Plan and 1996 Directors' Stock Option Plan of
Raster Graphics, Inc. of our report dated September 25, 1998, with respect to
the consolidated financial statements of Raster Graphics, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1997.
Our audits also included the financial statement schedule of Raster
Graphics, Inc., listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
San Jose, California
October 2, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,727
<SECURITIES> 1,600
<RECEIVABLES> 12,718
<ALLOWANCES> 4,668
<INVENTORY> 6,640
<CURRENT-ASSETS> 20,540
<PP&E> 9,763
<DEPRECIATION> 5,320
<TOTAL-ASSETS> 25,558
<CURRENT-LIABILITIES> 17,089
<BONDS> 0
0
0
<COMMON> 43,289
<OTHER-SE> (34,984)
<TOTAL-LIABILITY-AND-EQUITY> 25,558
<SALES> 48,928
<TOTAL-REVENUES> 48,928
<CGS> 42,754
<TOTAL-COSTS> 42,754
<OTHER-EXPENSES> 25,232
<LOSS-PROVISION> 4,394
<INTEREST-EXPENSE> 403
<INCOME-PRETAX> (18,655)
<INCOME-TAX> 310
<INCOME-CONTINUING> (18,965)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,965)
<EPS-PRIMARY> (2.01)
<EPS-DILUTED> (2.01)
</TABLE>
