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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission file number 0-20933
================================================================================
RASTER GRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3046090
(State of Incorporation) (I.R.S. Employer Identification Number)
3025 ORCHARD PARKWAY
SAN JOSE, CA 95134
(Address of principal executive office)
(408) 232-4000
(Registrant's telephone number)
================================================================================
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [_] No [X]*
*Registrant has not filed its Annual Report on Form 10-K for the year ended
December 31, 1997 nor its Quarterly Report on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 1998, but is filing it's Form 10-K current with the
filing of this report and the 1998 10-Qs shortly thereafter.
As of September 1, 1998, there were 9,599,525 shares of Common Stock
outstanding.
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AMENDED FILING OF FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997,
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
Subsequent to the filing with the Commission of its Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, the Company became aware of
errors and irregularities that ultimately affected the dollar amount and timing
of reported revenues in the nine months ended September 30, 1997, in particular
transactions involving undisclosed arrangements or agreements with customers.
As a result of its investigation into these errors and irregularities, in
February 1998, the Company announced that it would restate its financial
statements for the three and nine months ended September 30, 1997. The
financial review undertaken by the Company to determine the extent of the
restatement ultimately resulted in the restatement of the Company's financial
results for each quarter in the nine months ended September 30, 1997.
Financial statement and related disclosures contained in this amended
filing reflect, where appropriate, changes to conform to the restatement.
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited
and Restated) as of September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operation for the three
and nine month periods ended September 30, 1997 and
September 30, 1996 4
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1997 and September 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Items 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
(Restated)(1) (Restated)(2)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,576 $ 2,963
Short-term investments 4,681 13,100
Accounts receivable, net of allowance for 13,034 10,070
doubtful accounts of $1,215 in 1997 and $606 in 1996
Inventories 8,586 6,705
Prepaid expenses 687 506
------------ ------------
Total current assets 30,564 33,344
Property and equipment, net 4,148 2,547
Deposits and other assets 405 585
------------ ------------
Intangible assets 1,274 102
Total assets $ 36,391 $ 36,578
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,539 $ 4,953
Accrued payroll and related expenses 1,089 1,089
Accrued warranty 728 331
Other accrued liabilities 4,048 1,635
Deferred revenue 1,270 1,162
Borrowings under bank line of credit 2,000 --
Current portion of long-term debt 180 303
------------ ------------
Total current liabilities 15,854 9,473
Long-term debt, less current portion 38 178
Stockholders' equity:
Common stock 10 10
Additional paid in capital 43,181 42,746
Accumulated deficit (22,112) (15,417)
Deferred compensation (313) (392)
Notes receivable from stockholder -- (20)
Cumulative translation adjustment (267) --
------------ ------------
Total stockholders' equity 20,499 26,927
Total liabilities and stockholders' equity $ 36,391 $ 36,578
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
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RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
1997 1996 1997 1996
----------------- --------------- ---------------- ---------------
(Restated)(1) (Restated)(2) (Restated)(1) (Restated)(2)
<S> <C> <C> <C> <C>
Net revenues $12,790 $10,960 $35,507 $30,487
Cost of revenues 9,705 6,461 27,856 18,315
----------- ----------- ------------ -----------
Gross profit 3,085 4,499 7,651 12,172
----------- ----------- ------------ -----------
Operating expenses:
Research and development 1,524 1,082 4,269 3,326
Sales and marketing 2,543 1,868 7,157 5,092
General and administrative 1,175 598 3,012 1,516
Merger expenses -- -- 139 --
----------- ----------- ------------ -----------
Total operating expenses 5,242 3,548 14,577 9,934
----------- ----------- ------------ -----------
Operating (loss) income (2,157) 951 (6,926) 2,238
Other income, net 93 110 358 113
----------- ----------- ------------ -----------
(Loss) income before provision for income taxes (2,064) 1,061 (6,568) 2,351
Provision for income taxes 40 124 127 282
----------- ----------- ------------ -----------
(Loss) net income $ (2,104) $ 937 $ (6,695) $ 2,069
=========== =========== ============ ===========
Net(loss) income per share - basic $ (0.22) $ 0.12 $ (0.71) $ 0.29
=========== =========== ============ ===========
Shares used in computing net income
per share - basic 9,490 8,043 9,384 7,031
=========== =========== ============ ===========
Net income per share - diluted $ (0.22) $ 0.10 $ (0.71) $ 0.26
=========== =========== ============ ===========
Shares used in computing net income
per share - diluted 9,490 9,170 9,384 8,111
=========== =========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
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RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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Nine Months Ended
September 30,
------------------------------
1997 1996
------------- -------------
(Restated)(1) (Restated)(2)
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OPERATING ACTIVITIES
Net (loss) income ($6,695) $ 2,069
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation and amortization 968 704
Amortization of deferred compensation 79 --
Changes in operating assets and liabilities:
Accounts receivable (2,447) (2,289)
Inventories (1,152) (2,081)
Prepaid expenses and other assets 96 (373)
Accounts payable 374 967
Accrued payroll and related expenses (87) 126
Deferred revenue 108 14
Accrued warranty 372 39
Other accrued liabilities 893 632
Net cash used in operating activities (7,491) (192)
------------- -------------
INVESTING ACTIVITIES
Capital expenditures (2,232) (1,160)
Net decrease in short-term investments 8,419 --
Datagraph acquisition, net of cash acquired (8) --
------------- -------------
Net cash provided by (used in) investing activities 6,179 (1,160)
------------- -------------
FINANCING ACTIVITIES
Proceeds from bank line of credit 2,000 --
Repayment of term loan (263) (263)
Repayment of note from shareholder 20 --
Proceeds from issuance of common stock 435 17,077
------------- -------------
Net cash provided by financing activities 2,192 16,814
------------- -------------
Effect of exchange rate changes on cash and
cash equivalents (267) --
------------- -------------
Net increase (decrease) in cash and cash equivalents 613 15,462
Cash and cash equivalents at beginning of period 2,963 1,550
------------- -------------
Cash and cash equivalents at end of period $ 3,576 $17,012
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 69 $ 58
Cash paid for taxes $ 84 $ 80
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
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RASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
RESTATEMENT OF FINANCIAL STATEMENT
Subsequent to the filing with the Commission of its Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, the Company became aware of
errors and irregularities that ultimately affected the dollar amount and timing
of reported revenues in the nine months ended September 30, 1997. The
irregularities took numerous forms and were primarily the result of lack of
compliance with the Company's procedures and controls.
The Company undertook and completed extended procedures related to revenue
recorded in each of the three month periods in the nine months ended September
30, 1997. As a result of these findings and other relevant information now
disclosed, the Company has determined that a significant number and dollar
amount of revenue transactions were improperly reported as earned revenue for
these interim periods, including the three and nine months ended September 30,
1997.
The Company has concluded that the earnings process for a significant
number of printer sales was not complete at the time of product shipment.
Further, the Company has determined that arrangements with a number of resellers
resulted in significant concessions or allowances that were not accounted for
when the revenue was originally reported as earned.
Because of the pervasiveness of these irregularities for the nine months
ended September 30, 1997, the Company has determinded that revenue from printer
sales should only be recognized in the quarter that shipment took place where
the Company received payment for the product by the end of the following
quarter, provided that the earnings process was complete. For transactions that
do not meet this criteria, revenue has been recognized on the receipt of payment
from the customer.
In addition, the Company has determined that its allowances for doubtful
accounts for each quarter in the nine months ended September 30, 1997 was
incorrectly estimated. The company has reviewed actual receipts since March 31,
1997 and has revised its estimated doubtful accounts.
The Company has also determined that its reserve for obsolete and excess
inventory for each quarter in the nine months ended September 30, 1997 was
incorrectly estimated. The Company has revised its estimate of expected printer
sales and accordingly has revised its estimate of excess and obsolete inventory.
The Company has also restated the net assets per share in the acquisition of
Datagraph. The original figures were based on an estimate and have since been
revised to reflect the actual values. In particular, an intangible asset of
$1,420,000 was initially recorded which has since been revised to $1,211,000
(see footnote 7).
As a result of this restatement, the financial statements shown under Item
1 in the Index of this Form 10-Q/A have been restated.
<TABLE>
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Three Months Ended
September 30 1997
------------------------------------
(In thousands except per share data)
------------------------------------
As reported Restated
---------------- --------------
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Net revenues $ 14,330 $ 12,790
Operating income (loss) 905 (2,157)
Income tax expense 109 40
Net income (loss) 889 (2,104)
</TABLE>
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Net income (loss) per share $ 0.09 ($0.22)
Retained earnings (deficit) (12,239) (22,112)
Accounts Receivable, net 18,709 13,034
Inventory, net 11,066 8,586
Accounts payable 5,579 6,539
Other accrued liabilities 3,464 4,048
Deferred revenue 1,330 1,270
</TABLE>
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Raster Graphics, Inc. (the "Company" or "Raster Graphics")
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the audited financial statements included in the Company's Annual Report
and Form 10-K for the fiscal year ended December 31, 1996. All intercompany
transactions have been eliminated.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited financial statements and include all recurring adjustments necessary for
a fair presentation of the interim periods presented. The operating results for
the nine months ended September 30, 1997 are not necessarily indicative of the
results for any other interim period or the full fiscal year ending December 31,
1997.
The unaudited condensed consolidated financial statements also include
adjustments that eliminated all significant intercompany transactions and
balances between the Company and ColourPass, which was merged into the Company;
wholly owned subsidiary, Raster Graphics Systems Limited, effective March 18,
1997 for relevant periods prior to the merger. All periods presented have been
restated to reflect the merger which has been accounted for as a pooling of
interests (see Note 7).
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For financial statement purposes, the Company considers all highly liquid
debt instruments with original maturities of ninety days or less and with
insignificant interest rate risk to be cash equivalents.
The Company classifies all of its short-term investments as "available-for-
sale" in accordance with the provisions of Financial Accounting Standards Board
Statement No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, the Company states its investments at estimated fair
value, with material unrealized gains and losses reported in stockholders'
equity. The cost of securities sold is based on the specific identification
method. Such securities are anticipated to be used for current operations and
are, therefore, classified as current assets, even though maturities may extend
beyond one year.
As of September 30, 1997, the Company had $4.7 million of investments in
state and municipal bonds. These state and municipal bonds bear interest at a
rate that automatically resets to the prevailing market interest rate at
approximately 35-day intervals. At September 30, 1997, substantially all
available-for-sale securities had
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principal maturity dates of over ten years. The gross unrealized gains and gross
unrealized losses at September 30, 1997 were immaterial to the Company and,
therefore, no amounts were recorded to stockholders' equity.
4. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or fair
market value and consist of the following (in thousands):
September 30, 1997 December 31, 1996
---------------------- ---------------------
Raw materials $4,045 $ 956
Work-in-progress 1,785 1,708
Finished goods 2,756 4,041
---------------------- ---------------------
$8,586 $6,705
====================== =====================
5. NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods presented have been
restated to conform to the Statement 128 requirements.
Pro forma net income (loss) per share for the three and nine months ended
September 30, 1996 and 1997 have been computed as described above and also gives
effect, even if antidilutive, to common equivalent shares from preferred stock
that automatically converted upon the closing of the Company's initial public
offering (using the as-if-converted method).
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
=======================================================
(in thousands, except for share data)
1997 (1) 1996 (2) 1997 (1) 1996 (2)
-------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share $ (2,104) $ 937 ($6,695) $ 2,069
=======================================================
Denominator for basic earnings per share:
Weighted average common stock 9,490 5,609 9,384 2,291
Convertible preferred stock (pro forma 1996) -- 2,434 4,740
-------------------------------------------------------
Shares used in computing basic earnings per share (pro forma 8,043
1996) 9,490 9,384 7,031
=======================================================
Basic earnings per share (pro forma 1996) ($0.22) $ 0.12 ($0.71) $ 0.29
Denominator for diluted earnings per share:
Weighted average common shares 9,490 5,609 9,384 2,291
Convertible preferred stock -- 2,434 4,740
Stock options and warrants 1,127 1,080
-------------------------------------------------------
Shares used in computing diluted earnings per share 9,490 9,170 9,384 8,111
=======================================================
Diluted earnings per share ($0.22) $ 0.10 ($0.71) $ 0.26
=======================================================
</TABLE>
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
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6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
Number 130, "Reporting of Comprehensive Income". This Statement requires that
all items that are to be required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
Statement is effective for fiscal years beginning after December 15, 1997, and
will be adopted by the Company for the year ended December 31, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
Number 131, "Disclosures About Segments of an Enterprise and Related
Information". This Statement replaces Statement Number 14 and changes the way
public companies report segment information. This Statement is effective for
fiscal years beginning after December 15, 1997 and will be adopted by the
Company for the year ended December 31, 1998.
In June 1988, the Financial Accounting Standards Board issued Statement
Number 133, "Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
inducing certain derivative instruments embedded in other contracts
(collectively referred to as derivative) and for hedging activities. This
statement is effective for fiscal years beginning after June 30, 1999 and will
be adopted by the Company for the year ended December 31, 2000.
7. BUSINESS COMBINATIONS
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 Systems Limited, a wholly owned subsidiary of the Company. The
combination was accounted for as a pooling of interests. Accordingly, the
condensed consolidated statements of operations for the three and nine months
ended September 30, 1997 and September 30, 1996, respectively, the balance
sheets as of September 30, 1997 and December 31, 1996, respectively, and all
related footnotes presented herein have been restated to include the accounts of
Raster Graphics, Inc. and ColourPass. Pursuant to the terms of the merger, the
Company filed a Form S-3 registration statement on November 3, 1997 to allow for
the resale of 73,475 shares of the Company's Common Stock.
The table below sets forth the composition of combined revenues and net
income (loss) for the periods indicated (in thousands). Merger related expenses
of $105,000 and $34,000 incurred in the first quarter of 1997 were included in
the Raster Graphics, Inc. and ColourPass net income, respectively.
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1997
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Revenues
Raster Graphics, Inc $12,165 $10,212 $33,481 $28,363
ColourPass 625 748 2,026 2,124
Combined $12,790 $10,960 $35,507 $30,487
================================ ==================================
Net Income (loss)
Raster Graphics, Inc $(2,208) $ 964 $(7,012) $ 2,165
ColourPass 104 (27) 317 (96)
--------------------------------- ----------------------------------
Combined $(2,104) $ 937 $(6,695) $ 2,069
================================== ==================================
</TABLE>
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 an intangible asset of $1,211,000, which
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following a revision of the Company's 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.
8. PENDING LITIGATION
Commencing in March 1998 several class action lawsuits were filed in both
state and federal courts purportedly on behalf of shareholders who purchased the
Company's stock during various periods in 1997 through early 1998. The
complaints name as defendants the Company and its Chairman, Chief Executive
Officer and President, and certain other officers and directors. The complaints
allege, among other things, violation of federal securities laws and that
defendants made false and misleading statements in press releases, SEC filings
and/or other public statements and seek unspecified damages. The litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is a party to a number of legal claims arising in the ordinary
course of business. The Company believes the ultimate resolution of the claims
will not have a material adverse effect on its financial position, results of
operation, or cash flow.
9. SUBSEQUENT EVENTS
The Company has entered into an Agreement and Plan of Merger with Gretag
Imaging Group, Inc. ("Gretag") for the acquisition of the Company for
approximately $1.30 per share (the "Merger"). The Company has also entered
into a Loan and Pledge Agreement and Asset and Subsidiary Stock Option
Agreement and certain of its stockholders have entered into a Stockholders
Agreement with Gretag. Pursuant to the Loan and Pledge Agreement, Gretag is
providing the Company a loan facility secured by 100% of the issued stock of
Onyx, a wholly owned subsidiary of the Company. The Company may draw down
amounts together with accrued interest of up to $5,000,000. The first
installment of $500,000 was received by the Company on September 23, 1998. In
addition, Gretag has the option to purchase up to $5,000,000 of the Company's
Common Stock in exchange for forgiving the loan and paying the balance in
cash. Pursuant to the Asset and Subsidiary Stock Option Agreement, (i) if the
Agreement and Plan of Merger is terminated, Gretag has the option to acquire
Onyx for $5,000,000 less the amount drawn down under the loan facility, or
(ii) if the Company's stockholders do not vote in favor of the Merger, if the
Company accepts a superior offer to sell the Company or upon certain other
events, Gretag has the option to acquire the Company's inkjet technology for
$6,000,000 less the amount drawn down under the loan facility. Pursuant to the
terms of the Stockholders Agreement, stockholders of the Company holding
approximately 20% of the Company's outstanding Common Stock have agreed to
vote in favor of the Merger and against any other proposal to acquire the
Company. The Merger and the Agreement and Plan of Merger requires stockholder
approval and consummation of the Merger is conditioned upon settlement of the
class action lawsuits against the Company.
In August 1998 the Company entered into a mutual release agreement with
Marc Willard, an officer of the Company. In consideration for Mr. Willard's
full release relating to the Company's acquisition of ColourPass (of which Mr.
Willard was an 80% partner), the parties agreed to a cash bonus of $70,000, a
cash payment of $200,000 upon the acquisition of the Company, and a stock option
grant of 175,000 shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in Part I -- Item 1
of this Quarterly Report and the audited financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report and Form 10-K for the fiscal
year ended December 31, 1996.
As a result of the restatement of the Company's financial statements
certain information contained in this item has been changed from that which
appeared in the Company's originally filed form 10-Q for the quarterly period
ended September 30, 1997.
OVERVIEW
Raster Graphics was established in 1987 initially to develop low-cost
electrostatic raster printers for the computer-aided design ("CAD") market.
Raster Graphics commenced shipments of its first printer, a 22-inch printer, in
1989, followed by a 24-inch printer in 1990 and a 36-inch printer in 1992.
In 1993, the Company identified the on-demand production large-format
digital printing ("LFDP") market as a new opportunity to develop a product based
on its proprietary high-speed printhead technology. As a result, the
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Company shifted its product focus and began to develop the DCS 5400, an
electrostatic printer, specifically for the LFDP market. The Company began
shipping the DCS 5400 in July 1994. The Company began commercial production of
the DCS 5442 in January 1996 as a second generation to the DCS 5400. In December
1996, the Company introduced the PiezoPrint(TM) 1000, an inkjet printer
manufactured by a third party, that is targeted at the lower priced entry level
production market. In March 1997, the Company introduced the PiezoPrint(TM) 5000
as a mid-range, price/performance inkjet printer to complement the
PiezoPrint(TM) 1000 inkjet printer and the high production DCS 5442. Although
the Company has no current plans to replace any printer in its current line of
products, the future success of the Company will likely depend on its ability to
continue to develop market leading products for the production segment of the
LFDP market.
In order to provide a complete digital printing solution to its customers,
the Company began shipping image processing software, purchased from Onyx
Graphics, Inc. ("Onyx"), with its digital printers in July 1994. In August
1995, the Company acquired Onyx. As well as sales to Raster Graphics, Onyx
sells its software products to OEMs, VARs, systems integrators and other printer
manufacturers such as CalComp, Encad, Hewlett-Packard, ColorgrafX and Laser
Master. Onyx's current image processing software product, PosterShop(TM), was
introduced in April 1996 as a replacement for Onyx's Imagez image processing
software product. Although the Company has no current plans to replace its
PosterShop product, the Company will likely introduce new versions of its image
processing software in the future.
Raster Graphics also sells related consumables, including specialized inks
and papers that it acquires from third party suppliers and resells under the
Raster Graphics name for use in the Company's digital printers. The sale of
consumables generates recurring revenues, which the Company believes will
continue to increase to the extent that the installed base of printing systems
expands. As the Company develops new printers, it may need to develop new
consumables to be used by its new printer products.
Raster Graphics also derives revenues from maintenance contracts on
installed systems and printers, including the Company's installed base of 22-
inch, 24-inch and 36-inch printers. Revenue is also generated from the sale of
spare parts.
Raster Graphics' end user customers, OEMs, VARs, and international
distributors submit purchase orders that generally require product shipment
within two to eight weeks from receipt of order. Accordingly, the Company does
not use order backlog as a primary basis for management planning for longer
periods. Revenues are not recognized until products have been shipped and all
contingencies have been removed. As a result of the discovery of irregularities,
the Company has assumed that for the three months ended in March 31, 1997, such
contingencies exist on printer shipments unless payment was received by the end
of the following quarter, provided that the earning process was completed. For
transactions that do not meet this criteria, revenue has been recognized on the
receipt of payment (see footnote to the Condensed Consolidated Financial
Statements).
Cost of revenues includes materials, labor, overhead and software
royalties. Cost of revenues as a percentage of revenue varies depending upon
the revenue mix generated through end user, OEM, VAR and distributor sales, and
the revenue mix generated from Onyx software license fees, printing systems
sales, consumables sales and service fees.
Raster Graphics expenses research and development costs as incurred.
Research and development expenses have increased from year to year. Raster
Graphics believes that research and development expenses will continue to
increase in absolute dollar amounts and may increase as a percentage of
revenues.
Raster Graphics' sales and marketing expenses and general and
administrative expenses have also increased to support the revenue growth of the
Company. The Company's strategy is to distribute its products through a direct
sales force and independent representatives in selected markets, as well as
through OEMs, VARs and distributors. Raster Graphics also incurs sales and
marketing expenses in connection with product promotional activities. The
Company intends to continue to develop its domestic and international sales and
marketing organizations. As a
11
<PAGE>
result, the Company believes that sales and marketing expenses will continue to
increase in absolute dollar amounts and may increase as a percentage of
revenues.
The Company has established a customer finance program to provide customers
with financing options for Raster Graphics printing systems. Third party
financial partners will take title of the equipment and manage the financial
portfolio.
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets. To address these risks, the
Company must, among other things, respond to competitive developments, attract,
retain and motivate qualified persons, and continue to upgrade its technologies
and commercialize products and services incorporating such technologies. There
can be no assurance that the Company will be successful in addressing these
risks. As of September 30, 1997, the Company had an accumulated deficit of
$22.1 million. Although the Company was marginally profitable in 1995 and 1996,
there can be no assurance that the Company will be profitable in the future.
RESULTS OF OPERATIONS
ColourPass merged with the Company, on March 18, 1997. The merger has been
accounted for as a pooling of interest, and accordingly, the financial results
presented have been restated to include ColourPass.
The following table sets forth certain consolidated statements of
operations data as a percentage of net revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 75.9 59.0 78.5 60.1
Gross profit 24.1 41.0 21.5 39.9
----------- ----------- ----------- -----------
Operating expenses:
Research and development 11.9 9.9 12.0 10.9
Sales and marketing 19.9 17.0 20.2 16.7
General and administrative 9.2 5.5 8.5 5.0
Merger expenses - - 0.4 -
----------- ----------- ----------- -----------
Total operating expenses 41.0 32.4 41.1 32.6
----------- ----------- ----------- -----------
Operating (loss) income (16.9) 8.6 (19.6) 7.3
Other income, net 0.7 1.0 1.1 0.4
----------- ----------- ----------- -----------
(Loss) income before provision for income (16.2) 9.6 (18.5) 7.7
taxes
Provision for income taxes 0.3 1.1 0.4 0.9
----------- ----------- ----------- -----------
Net (loss) income (16.5) 8.5 (18.9) 6.8
=========== =========== =========== ===========
</TABLE>
Net Revenues. Net revenues for the three and nine months ended September
30, 1997 were $12.8 million and $35.5 million, respectively, an increase of
16.7% and 16.5%, respectively, over the comparable periods of fiscal 1996. The
increase is primarily attributable to growth in sales of consumables as the
Company continues to expand its family of inks and papers for the newer
PiezoPrint(TM) 5000 printer. Sales of printer systems, specifically the
PiezoPrint(TM) 1000 and PiezoPrint(TM) 5000 products, also contributed to the
increase in revenue.
12
<PAGE>
Future revenue growth will depend on a number of factors, including the
Company's ability to develop, manufacture, market and sell innovative and
reliable new products, customer satisfaction, market growth, competitive
developments, product mix, vendor performance and the Company's ability to
manage growth, if any.
International sales, which include export sales and direct sales of the
Company's German, United Kingdom and French operations, were $7.0 million and
$20.0 million for the three and nine months ended September 30, 1997,
respectively. These sales represented 55.1% and 56.3% of net revenue for the
three and nine months ended September 30, 1997. While international customer
acceptance of the Company's printer systems continues to grow, the Company's
German and United Kingdom subsidiaries experienced a reduction in sales of
software and printer systems during the quarter which contributed to the
decrease in international sales as a percentage of net revenues. The Company
believes that the quarter's percentage decline in international sales is
temporary and anticipates that international sales will return to historical
percentages. Sales made by the Company's German, United Kingdom and French
subsidiaries are denominated in local currencies. The Company is subject to
transaction exposure that arises from foreign exchange movements between the
dates foreign currency sales are recorded and the dates cash is received in the
foreign currency. To date, the Company has not found it appropriate to hedge
the risks of foreign sales subject to fluctuations in exchange rates. All
international sales made by the Company's domestic operations are denominated in
United States Dollars and are not subject to foreign exchange movements.
Future international revenues will depend on the factors set forth above,
and will be subject to unexpected changes in regulatory requirements and
tariffs, longer customer payment cycles, fluctuation in currency exchange rates,
seasonal factors and risks associated with managing business operations in
geographically distant locations. No assurance can be given that international
revenues will continue to grow at current rates, or at all.
Gross Profit. The Company's gross profit for the three and nine months
ended September 30, 1997 was $3.1 million and $7.7 million, respectively, a
decrease of 31.4% and 37.1%, respectively, over the comparable periods of fiscal
1996. The decrease in gross profit for the three and nine months ended
September 30, 1997 was primarily the result of increased excess and obsolete
inventory reserves following a revision on the Company's estimate of future
printer sales. Gross profit represented 24.1% and 41.0% of net revenues for the
three months ended September 30, 1997 and 1996, respectively. For the nine
months ended September 30, 1997 and 1996, respectively, gross profit represented
21.5% and 39.9% of net revenues.
The Company's future level of gross profit will depend on a number of
factors, including its ability to manage product mix, control variable expenses
relative to revenue levels, maintain a revenue base over which to allocate fixed
costs, and continue to develop, manufacture, market and sell innovative and
reliable new products.
Research and Development. Research and development expenses for the three
months ended September 30, 1997 were $1.5 million, an increase of 40.9% in
comparison to the three months ended September 30, 1996. Research and
development expenses for the nine months ended September 30, 1997 were $4.3
million, an increase of 28.4% in comparison to the nine months ended September
30, 1996. This increase is attributed to an increase in staffing and related
benefits, including recruiting and relocation expenses, and consultant fees
associated with development of new products. The Company intends to continue to
dedicate substantial resources to research and development activities to
maintain its leadership in the LFDP market. The Company intends to expand its
product lines, including printers, to achieve faster speed and higher image
quality, and to enhance its PosterShop image processing software.
Sales and Marketing. Sales and marketing expenses for the three months
ended September 30, 1997 were $2.5 million, an increase of 36.1% in comparison
to the three months ended September 30, 1996. Sales and marketing expenses for
the nine months ended September 30, 1997 were $7.2 million, an increase of 40.6%
in comparison to the nine months ended September 30, 1996. The increase in sales
and marketing expenses was primarily a result of increased staffing and related
benefits, tradeshow expenses associated with the promotion of the new PiezoPrint
products and increased selling costs related to higher revenues. The Company
expects to continue to increase its sales and marketing expenses in an effort to
expand domestic and international markets, introduce new products, and establish
and expand new distribution channels.
13
<PAGE>
General and Administrative. General and administrative expenses for the
three months ended September 30, 1997 were $1.2 million, an increase of 96.5% in
comparison to the three months ended September 30, 1996. General and
administrative expenses for the nine months ended September 30, 1997 were $3.0
million, an increase of 98.7% in comparison to the nine months ended September
30, 1996. The increase reflected the increased cost of operating as a public
company and an increase in staffing and related benefits. The Company believes
that its general and administrative expenses will increase as the Company
continues to build its infrastructure.
Merger Expenses. On March 18, 1997, the Company completed a merger with
ColourPass, a business in the United Kingdom. Approximately $139,000 of expense
was incurred in connection with this transaction.
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 an intangible asset of $1,211,000, which following a revision of the
Company's 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.
Provision for Income Taxes. The Company's effective tax rate on the
consolidated pretax loss for the three and nine month periods ended September
30, 1997 is (2%), compared to an effective rate of 12% on consolidated pretax
income for the three and nine month periods ended September 30, 1996,
respectively. The tax provision for the three and nine month ended September
30, 1997 results from taxes on foreign jurisdiction despite an overall loss.
The effective tax rates for the three and nine months ended September 1996
differs from the statutory rate primarily due to the tax benefit of utilizing
net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
its initial public offering of common stock, private sales of preferred stock
and common stock, issuance of convertible debt, bank loans, equipment lease
financing and private loans. At September 30, 1997, the Company had $8.2
million of cash, cash equivalents and short-term investments, a decrease of
$7.9 million from the December 31, 1996 balance of $16.1 million. The Company
also had available a $5.0 million bank line of credit that is secured by the
tangible assets of the Company. The credit facility expired on December 14,
1997, and management currently expects to renew the facility under similar terms
and conditions. At September 30, 1997, $2.0 million was outstanding under the
bank line of credit. 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.
Net cash used in operating activities during the first nine months of
fiscal 1997 was $7.5 million due primarily to increases in accounts receivable
of $2.4 million and inventory of $1.2 million. The increase in accounts
receivable reflects increased sales levels and payment terms granted under
distributor programs designed to stimulate sales of the recently introduced
PiezoPrint(TM) 5000. Inventory levels increased due to several reasons,
including an increase of demonstration equipment to support an increased number
of tradeshows, an increase in consumables related to the introduction of media
products for the PiezoPrint(TM) 5000, and an increase in finished goods due to
lower than anticipated printer system revenues.
During the nine month period ended September 30, 1997, the Company paid
approximately $2.2 million for capital expenditures compared to $1.2 million for
the same period of the prior year.
To finance the working capital needs and the purchase of capital equipment,
the Company reduced its short-term investments. Other financing activities
principally consisted of borrowing against the bank line of credit in the amount
of $2.0 million and cash received from the exercises of incentive stock options
and employee stock purchase plan in the amount of $435,000 for the nine months
ended September 30, 1997.
14
<PAGE>
The Company has implemented a program under which customers are introduced
to financing institutions through a third party broker by the Company. Through
this program, customers are able to obtain lease financing for their purchases
with the Company receiving the associated payment directly from the financial
institution.
On June 25, 1997, the Company loaned $90,000 to Dennis Mahoney, Vice
President and Chief Financial Officer of the Company. The loan is secured by
shares of the Company's stock and a second deed of trust. Principal and accrued
interest, at the rate of 6.8% per annum, is due and payable to the Company upon
the termination of Mr. Mahoney's consulting relationship with the Company.
Effective October 20, 1997, Mr. Mahoney left his position as Vice President and
Chief Financial Officer of the Company to pursue other interests. The loan was
repaid to the Company in February 1998.
Thereafter, the Company may require additional funds to support its working
capital requirements or for other purposes and may seek to raise such additional
funds through bank borrowings and public or private sales of its securities,
including equity and debt securities. The Company is also evaluating other
options including mergers and acquisitions. The Company's future capital
requirements, however, depend on numerous factors, including, without
limitation, the success of marketing, sales and distribution efforts; the
progress of its research and development programs; the costs involved in
preparing, filing, prosecuting, defending and enforcing intellectual property
rights; competition; competing technological and market developments; and the
effectiveness of product commercialization activities and arrangements. There
can be no assurance that additional funds, if required, will be available to the
Company on favorable terms or at all.
FORWARD LOOKING STATEMENTS
The Company notes that certain of the foregoing statements in this report
are forward-looking, the accuracy of which is necessarily subject to risks and
uncertainties. Actual results may differ materially from the statements made
due to a variety of factors including, but not limited to, (i) fluctuations in
quarterly results, (ii) risks related to international operations, (iii)
competitive products and technologies, (iv) ability of the Company to upgrade
its technologies and commercialize products, and (v) other risk factors
described in the Company's Annual Report and Form 10-K for the year ended
December 31, 1996, and such other documents that are filed from time to time
with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Commencing in March 1998 several class action lawsuits were filed in both
state and federal courts purportedly on behalf of shareholders who purchased the
Company's stock during various periods in 1997 through early 1998. The
complaints name as defendants the Company and its Chairman, Chief Executive
Officer and President, and certain other officers and directors. The complaints
allege, among other things, violation of federal securities laws and that
defendants made false and misleading statements in press releases, SEC filings
and/or other public statements and seek unspecified damages. The litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is a party to a number of legal claims arising in the ordinary
course of business. The Company believes the ultimate resolution of the claims
will not have a material adverse effect on its financial position, results of
operation, or cash flow.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with its initial public offering in 1996, the Company filed a
Registration Statement on Form S-1, SEC File No. 333-06617 (the "Registration
Statement"), which was declared effective by the Commission on August 8, 1996.
Pursuant to the Registration Statement, the Company registered 3,000,000 shares
of its Common
15
<PAGE>
Stock, $0.001 par value per share. The offering commenced on August 13, 1996 and
did not terminate until all of the registered shares had been sold. The
aggregate offering price of the registered shares was $24,000,000. The managing
underwriters of the offering were Hambrecht & Quist and Prudential Securities
Incorporated.
From August 8, 1996 to September 30, 1997, the Company incurred the
following expenses in connection with the offering:
Underwriting discounts and commissions $1,932,000
Other expenses 784,000
----------
Total Expenses $2,716,000
All such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total expenses
above were $16,900,000. From August 8, 1996, to September 30, 1997, the Company
used such net offering proceeds, in direct or indirect payments to others, as
follows:
Purchase and installment of machinery and equipment $ 2,956,000
Working capital 8,061,000
-----------
Total $11,017,000
Each of such amounts is a reasonable estimate of the application of the net
offering proceeds. This use of proceeds does not represent a material change in
the use of proceeds described in the prospectus of the Registration Statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER ITEMS
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See exhibit index on page 18
(b) Reports on Form 8-K: None
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RASTER GRAPHICS, INC.
By: /s/ Rak Kumar
-------------------------------
Rak Kumar
President and CEO
Date: October 2, 1998
17
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
-------
27.1 Financial Data Statement
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,576
<SECURITIES> 4,681
<RECEIVABLES> 14,249
<ALLOWANCES> 1,215
<INVENTORY> 8,586
<CURRENT-ASSETS> 30,564
<PP&E> 9,101
<DEPRECIATION> 4,941
<TOTAL-ASSETS> 36,391
<CURRENT-LIABILITIES> 15,854
<BONDS> 38
43,191
0
<COMMON> 0
<OTHER-SE> (22,692)
<TOTAL-LIABILITY-AND-EQUITY> 36,391
<SALES> 12,790
<TOTAL-REVENUES> 12,790
<CGS> 9,705
<TOTAL-COSTS> 9,705
<OTHER-EXPENSES> 5,242
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> (2,064)
<INCOME-TAX> 40
<INCOME-CONTINUING> (2,104)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,104)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
