<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED MARCH 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 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.
1
<PAGE>
AMENDED FILING OF FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 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 March 31, 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 statements and related disclosures contained in this amended
filing reflect, where appropriate, changes to conform to the restatement.
------------------------------------------------------
INDEX
-----
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
as of March 31, 1997 and December 31, 1996
(Unaudited and Restated) 3
Condensed Consolidated Statements of Operations
for the three month periods ended March 31,
1997 and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows
for the three month periods ended March 31,
1997 and March 31, 1996 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Items 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------ -------------------
(Restated)(1) (Restated)(2)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,471 $ 2,963
Short-term investments 9,899 13,100
Accounts receivable, net of allowance for
doubtful accounts of $881 in 1997 and $606 in 12,922 10,070
1996
Inventories 8,404 6,705
Prepaid expenses 665 506
------------------ -------------------
Total current assets 33,361 33,344
Property and equipment, net 3,107 2,547
Deposits and other assets 379 585
Intangible assets related to the acquisition of
Onyx Graphics, Inc. 90 102
------------------ -------------------
Total assets $36,937 $36,578
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,369 $4,953
Accrued payroll and related expenses 701 1,089
Accrued warranty 529 331
Other accrued liabilities 1,707 1,635
Deferred revenue 1,547 1,162
Current portion of long-term debt 301 303
------------------ -------------------
Total current liabilities 10,154 9,473
Long-term debt 64 178
Stockholders' equity:
Common Stock 10 10
Additional paid in capital 42,881 42,746
Accumulated deficit (15,806) (15,417)
Deferred compensation (366) (392)
Notes receivable from stockholders -- (20)
------------------ -------------------
Total stockholders' equity 26,719 26,927
------------------ -------------------
Total liabilities and stockholders' equity $36,937 $36,578
================== ===================
</TABLE>
See accompanying notes to unaudited condensed
consolidated financial statements.
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
3
<PAGE>
RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share date)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1997 1996
-------------- ---------------
(Restated)(1) (Restated)(2)
<S> <C> <C>
Net revenues $11,565 $9,322
Cost of revenues 7,441 5,814
-------------- ---------------
Gross profit 4,124 3,508
Operating expenses:
Research and development 1,564 934
Sales and marketing 2,019 1,582
General and administrative 942 445
Merger expenses 139 --
-------------- ---------------
Total operating expenses 4,664 2,961
-------------- ---------------
Operating (loss) income (540) 547
Interest income 188 16
Interest expense (31) (19)
-------------- ---------------
(Loss) income before provision for income taxes (383) 544
Provision for income taxes 6 92
-------------- ---------------
(Loss) net income ($389) $ 452
============== ===============
Net (loss) income per share - basic ($0.04) $0.07
============== ===============
Shares used in computing net (loss) income
per share - basic 9,282 6,493
Net (loss) income per share - diluted ($0.04) $0.06
============== ===============
Shares used in computing net (loss) income
per share - diluted 9,282 7,511
============== ===============
</TABLE>
See accompanying notes to unaudited
condensed consolidated financial statements
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
4
<PAGE>
RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------------
1997 1996
----------------- -----------------
(Restated)(1) (Restated)(2)
OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) income ($389) $ 452
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation and amortization 271 253
Amortization of deferred compensation 26 --
Changes in operating assets and liabilities:
Accounts receivable (2,852) (90)
Inventories (1,699) (339)
Prepaid expenses and other assets 47 (97)
Accounts payable 416 (19)
Accrued payroll and related expenses (388) 30
Deferred revenue 385 283
Warranty and other accrued liabilities 270 17
----------------- -----------------
Net cash (used in) provided by operating activities (3,913) 490
INVESTING ACTIVITIES
Capital expenditures (819) (384)
Net decrease in short-term investments 3,201 --
----------------- -----------------
Net cash provided by (used in) investing activities 2,382 (384)
FINANCING ACTIVITIES
Repayment of note (116) (102)
Repayment of note from shareholders 20 --
Proceeds from issuance of common stock 135 13
----------------- -----------------
Net cash provided by (used in) financing activities 39 (89)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents (1,492) 17
Cash and cash equivalents at beginning of period 2,963 1,550
----------------- -----------------
Cash and cash equivalents at end of period $ 1,471 $1,567
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $31 $19
Cash paid for taxes $56 $33
</TABLE>
See accompanying notes to unaudited
condensed consolidated financial statements.
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
5
<PAGE>
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 March 31, 1997, the Company became aware of
errors and irregularities that ultimately affected the dollar amount and timing
of reported revenues in the nine months ended September 30, 1997. The
irregularities took numerous forms and were primarily the result of lack of
compliance with the Company's procedures and controls.
The Company undertook and completed extended procedures related to
revenue recorded in each of the three month periods in the nine months ended
September 30, 1997. As a result of these findings and other relevant information
now disclosed, the Company has determined that a significant number and dollar
amount of revenue transactions were improperly reported as earned revenue for
these interim periods, including the three months ended March 31, 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 now determined that arrangements with a number of
resellers resulted in significant concessions or allowances that were not
accounted for when the revenue was originally reported as earned.
Because of the pervasiveness of these irregularities, for the nine
months ended September 30, 1997, the Company has determined that revenue from
printer sales should only be recognized in the quarter that shipment took place
where the Company received payment for the product by the end of the following
quarter, provided that the earnings process was complete. For transactions that
do not meet this criteria, revenue has been recognized on the receipt of payment
from the customer.
In addition, the Company has determined that its allowances for doubtful
accounts for each quarter in the nine months ended September 30, 1997 was
incorrectly estimated. The company has reviewed actual receipts since March 31,
1997 and has revised its estimated doubtful accounts.
The Company has also determined that its reserve for obsolete and excess
inventory for each quarter in the nine months ended September 30, 1997 was
incorrectly estimated. The Company has revised its estimate of expected printer
sales and accordingly has revised its estimate of excess and obsolete inventory.
As a result of the restatement, the financial statements shown under
Item 1 in the Index of this Form 10-Q/A have been restated.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997
------------------------------------
(In thousands except per share data)
------------------------------------
As reported Restated
--------------- ----------------
<S> <C> <C>
Net revenues $12,587 $11,565
Operating income (loss) 932 (540)
Income tax expense 120 6
Net income (loss) 969 (389)
Net income (loss) per share $0.10 ($0.04)
Retained earnings (deficit) (14,448) (15,806)
Accounts receivable, net 14,116 12,922
Inventory, net 8,339 8,404
Accounts payable 5,140 5,369
Other accrued liabilities 1,692 1,707
Deferred revenue 1,562 1,547
</TABLE>
6
<PAGE>
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by Raster Graphics, Inc. (the "Company" or "Raster Graphics")
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the audited financial statements included in the Company's Annual Report
and Form 10-K for the fiscal year ended December 31, 1996.
In the opinion of management the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited financial statements and include all recurring adjustments necessary for
a fair presentation of the interim periods presented. The operating results for
the three months ended March 31, 1997 are not necessarily indicative of the
results for any other interim period or the full fiscal year ending December 31,
1997.
The unaudited condensed consolidated financial statements also include
adjustments that eliminated all significant intercompany transactions and
balances between the Company and ColourPass, which was merged into the Company's
wholly owned subsidiary, Raster Graphics Systems Limited effective March 18,
1997, for relevant periods prior to the merger (see Note 7). All periods
presented have been restated to reflect the merger which has been accounted for
as a pooling of interests.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For financial statement purposes, the Company considers all highly
liquid debt instruments with original maturities of ninety days or less and with
insignificant interest rate risk to be cash equivalents.
The Company classifies all of its investments as "available-for-sale" in
accordance with the provisions of Financial Accounting Standards Board Statement
No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, the Company states its investments at estimated fair value, with
material unrealized gains and losses reported in stockholders' equity. The cost
of securities sold is based on the specific identification method. Such
securities are anticipated to be used for current operations and are, therefore,
classified as current assets, even though maturities may extend beyond one year.
As of March 31, 1997, the Company has $9.9 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 March 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 March 31, 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):
7
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
1997 (1) 1996 (2)
-------------------- ------------------
<S> <C> <C>
Raw materials $ 4,900 $ 956
Work-in-progress 1,547 1,708
Finished goods 1,957 4,041
-------------------- ------------------
$ 8,404 $ 6,705
==================== ==================
</TABLE>
5. NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods presented
have been restated to conform to the Statement 128 requirements.
Pro forma net income (loss) per share for the three months ended March
31, 1996 has 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
March 31,
(in thousands except share data)
--------------------------------------
1997 (1) 1996 (2)
--------------------------------------
<S> <C> <C>
Numerator for basic and diluted earnings per share $ (389) $ 452
======================================
Denominator for basic earnings per share:
Weighted average common stock 9,282 600
Convertible preferred stock (pro forma 1996) -- 5,893
--------------------------------------
Shares used in computing basic earnings per share (pro forma
1996) 9,282 6,493
======================================
Basic earnings per share (pro forma 1996) $ (0.04) $ 0.07
Denominator for diluted earnings per share:
Weighted average common shares 9,282 600
Convertible preferred stock -- 5,893
Stock options and warrants 1,018
--------------------------------------
Shares used in computing diluted earnings per share 9,282 7,511
======================================
Diluted earnings per share $ (0.04) $ 0.06
======================================
</TABLE>
(1) see footnote 1
(2) restated for the pooling of interests with ColourPass (see footnote 7)
8
<PAGE>
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 into 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
months ended March 31, 1997, and March 31, 1996, the balance sheets as of March
31, 1997 and December 31, 1996 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 (in thousands) below sets forth the composition of combined
revenues and net income (loss) for the periods indicated. Merger related
expenses of $105,000 and $34,000 were included in the Raster Graphics, Inc. and
ColourPass net income, respectively.
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1997 (1) March 31, 1996
------------------------ -------------------------
<S> <C> <C>
Revenues
Raster Graphics, Inc $ 10,991 $ 8,591
ColourPass 574 731
------------------------ -------------------------
Combined $ 11,565 $ 9,322
======================== =========================
Net Income (loss)
Raster Graphics, Inc ($492) $489
ColourPass 103 (37)
------------------------ -------------------------
Combined ($389) $ 452
======================== =========================
</TABLE>
(1) see footnote 1
9
<PAGE>
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 for
each quarter in the nine months ended September 30, 1997 certain information
contained in this item has been changed from that which appeared in the
Company's originally filed form 10-Q for the quarterly period ended March 31,
1997.
OVERVIEW
Raster Graphics was established in 1987 initially to develop low-cost
electrostatic raster printers for the computer-aided design ("CAD") market.
Raster Graphics commenced shipments of its first printer, a 22-inch printer, in
1989, followed by a 24-inch printer in 1990 and a 36-inch printer in 1992.
In 1993, the Company identified the on-demand production large format
digital printing ("LFDP") market as a new opportunity to develop a product based
on its proprietary high-speed printhead technology. As a result, in 1993 the
Company shifted its product focus and began to develop the DCS 5400 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 represented an increasing
percentage of the Company's product shipments and, by September 1996,
substantially replaced the DCS 5400. In December 1996, the Company introduced
the PiezoPrint(TM) 1000, an inkjet printer manufactured by a third party, that
is targeted at the lower priced entry level production market. In March 1997,
the Company introduced the PiezoPrint(TM) 5000 as a mid-range, price/performance
product to complement the affordable PiezoPrint(TM) 1000 inkjet printer and the
high volume DCS 5442. Although the Company has no current plans to replace any
printer in
10
<PAGE>
its current line of products, 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.
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 that it acquires from third party suppliers and resells under
the Raster Graphics name for use in the Company's digital printers. The sale of
consumables generates recurring revenues, which the Company believes will
continue to increase to the extent that the installed base of printing systems
expands. As the Company develops new printers, it may need to develop new
consumables to be used by its new printer products.
In the United States, Raster Graphics also derives revenues from
maintenance contracts of installed systems and printers, including the Company's
installed base of 22-inch, 24-inch and 36-inch printers. Revenue is also
generated from the sale of spare parts.
Raster Graphics' end user customers, OEMs, VARs, and international
distributors submit purchase orders that generally require product shipment
within two to eight weeks from receipt of order. Accordingly, the Company does
not use order backlog as a primary basis for management planning for longer
periods. Revenues are not recognized until products have been shipped and all
contingencies have been removed. As a result of the discovery of irregularities,
the Company has assumed that for the three months ended in March 31, 1997, such
contingencies exist on printer shipments unless payment was received by the end
of the following quarter, provided that the earning process was completed. For
transactions that do not meet this criteria, revenue has been recognized on the
receipt of payment (see footnote to the Condensed Consolidated Financial
Statements).
Cost of revenues includes materials, labor, overhead and software
royalties. Cost of revenues as a percentage of revenue varies depending upon
the revenue mix generated through end user, OEM, VAR and distributor sales, and
the revenue mix generated from Onyx software license fees, printing systems
sales, consumables sales and service fees.
Raster Graphics expenses research and development costs as incurred.
Research and development expenses have increased from year to year. Raster
Graphics believes that research and development expenses will continue to
increase in absolute dollar amounts and may increase as a percentage of
revenues.
Raster Graphics' sales and marketing expenses and general and
administrative expenses have also increased to support the revenue growth of the
Company. The Company's strategy is to distribute its products through a direct
sales force and independent representatives in selected markets, as well as
through OEMs, VARs and distributors. Raster Graphics also incurs sales and
marketing expenses in connection with product promotional activities. The
Company intends to continue to develop its domestic and international sales and
marketing organizations. As a result, the Company believes that sales and
marketing expenses will continue to increase in absolute dollar amounts and may
increase as a percentage of revenues.
The Company has 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 March 31, 1997, the Company had an accumulated deficit of $15.8
million. Although
11
<PAGE>
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 into Raster Graphics Systems Limited, a wholly owned
subsidiary of the Company, on March 18, 1997. The merger has been accounted for
as a pooling of interests, and accordingly, the financial results presented have
been restated to include ColourPass.
The following table sets forth certain restated consolidated statements
of operation data as a percentage of net sales for the periods indicated.
Three Months Ended
March 31,
---------------------------------
1997 1996
-------------- --------------
Net revenues 100.0% 100.0%
Cost of revenues 64.3 62.4
Gross profit 35.7 37.6
-------------- --------------
Operating expenses:
Research and development 13.5 10.0
Sales and marketing 17.5 17.0
General and administrative 8.1 4.8
Merger expenses 1.2 -
-------------- --------------
Total operating expenses 40.3 31.8
-------------- --------------
Operating (loss) income (4.6) 5.8
Other income, net 1.3 -
-------------- --------------
(Loss) income before provision for
income taxes (3.3) 5.8
Provision for income taxes 0.1 1.0
-------------- --------------
Net (loss) income (3.4) 4.8
============== ==============
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Net Revenues. Net revenues increased 24.7% to $11.6 million in the three
month period ended March 31, 1997, as compared to $9.3 million for the
comparable period of 1996. The increase was primarily due to the growth in sales
of printer systems following the introduction of the DCS 5442 printing system in
January 1996, the PiezoPrint(TM) 1000 in December 1996, and the PiezoPrint(TM)
5000 in March 1997; an increase in sales of consumables; increase in sales of
software; and sales by the Company's United Kingdom and German subsidiaries.
Compared to the fourth quarter of 1996, revenue decreased $577,000 or 4.8%.
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
handle growth, if any.
International sales, which include export sales and direct sales of the
Company's German and United Kingdom operations, were $7.0 million and $5.3
million for the three months ended March 31, 1997 and 1996, respectively. These
sales represented 60.9% and 57.2% of net revenues in the respective periods.
The increases in international sales were a result of the increased
international customer acceptance of the Company's printer systems, the
establishment of new distribution arrangements and increased sales made by the
Company's German and United Kingdom subsidiaries. Sales made by the Company's
German and United Kingdom subsidiaries are denominated in local currencies. The
Company is subject to transaction exposure that arises from foreign exchange
movements between the dates foreign currency sales are recorded and the dates
cash is received in the foreign currency. To date, the Company has not found it
appropriate to hedge the risks of foreign sales subject to fluctuations in
exchange rates.
Future international revenues will depend on the factors set forth
above, and will be subject to unexpected changes in regulatory requirements and
tariffs, longer customer payment cycles, fluctuation in currency exchange rates,
seasonal factors and risks associated with managing business operations in
geographically distant locations. No assurance can be given that international
revenues will continue to grow at current rates, or at all.
Gross Profit. Gross profit was $4.1 million, or 35.7% of net revenues,
for the three month period ended March 31, 1997, compared to gross profit of
$3.5 million, or 37.6% of net revenues, for the comparable period of 1996. The
decrease in gross profit percentage was primarily the result of increased
manufacturing costs.
The Company's future level of gross profit will depend on a number of
factors, including product mix, its ability to control variable expenses
relative to revenue levels, maintaining a revenue base over which to allocate
fixed costs and continue to develop, manufacture, market and sell innovative and
reliable new products.
Research and Development. Research and development expenses were $1.6
million, or 13.5% of net revenues for the first quarter of 1997 as compared to
$934,000, or 10.0% of net revenues for the comparable quarter in 1996. The
increase in research and development expenses was primarily due to increased
payroll and related expenses, increased engineering material, and in particular,
product development expenses associated with the launch of the new
PiezoPrint(TM) 5000 ink-jet printer. The Company intends to continue to dedicate
substantial resources to research and development activities to maintain its
leadership in the LFDP market. The Company intends to expand its product lines,
including printers, to achieve lower price points and higher image quality, and
to enhance its PosterShop image processing software. Accordingly, the Company
believes that research and development expenses will continue to increase in
dollar amounts, and may increase as a percentage of revenues, in the future.
Sales and Marketing. Sales and marketing expenses were $2.0 million and
$1.6 million for the first quarter of 1997 and 1996, respectively. As a
percentage of net revenues, sales and marketing expenses was 17.5% for the first
quarter of 1997 as compared to 17.0% for the first quarter of 1996. The
increase in expenses was due primarily to the increase in payroll and payroll
related expenses, and expenses associated with the launch of the new
PiezoPrint(TM) 5000 ink-jet printer. The Company believes that sales and
marketing expenses will continue to increase in dollar terms, and may increase
as a percentage of revenues, in the future.
General and Administrative. General and administrative expenses were
$942,000 or 8.1% of net revenues as compared to $445,000, or 4.8% of net
revenues for the comparable quarter in 1996. The increase in general and
administrative expenses reflected the increased cost of payroll and payroll
related expenses, increased cost of operating as a public company, and increased
reserves for bad debt.
Merger Expenses. On March 18, 1997, the Company completed a merger with
ColourPass, a business in the United Kingdom. Approximately $139,000 of
expenses was incurred in connection with this transaction.
Provision for Income Taxes. The Company's effective tax rate on the
consolidated pretax loss for the three month period ended March 31, 1997 is
(2%), compared to an effective tax rate of 17% on the consolidated pretax income
for the three month period ended March 31, 1996. The tax provision for the
three months ended March 31,
13
<PAGE>
1997 results from taxes on income in foreign jurisdictions despite an overall
loss. The effective tax rate for the three months ended March 31, 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 private sales of preferred stock and common stock, its initial public
offering of common stock, issuance of convertible debt, bank loans, and
equipment lease financing and private loans.
For the three months ended March 31, 1997, $3.9 million of cash was used
in operations as compared to $490,000 of cash generated from operations for the
same period in 1996. A major factor in the change in cash position was the
initial cash flows and investments associated with two new product launches. In
December 1996, the Company introduced the PiezoPrint(TM) 1000 printing system.
Accordingly, during the first quarter of 1997, cash was used to purchase base
line levels of consumables inventory and finished goods units in anticipation of
sales. In March 1997, the Company launched the PiezoPrint(TM) 5000 printing
system. During the first quarter, cash was used to purchase raw materials and
components for the initial production units. Cash was also used to finance the
increase in accounts receivable. Accounts receivable increased because of
extended payment terms granted to selected customers as the Company entered or
expanded its presence in certain geographic markets. The extended payment terms
granted were consistent with prevailing credit terms in those markets.
The Company purchased $819,000 and $384,000 of capital equipment during
the three months ended March 31, 1997 and 1996, respectively.
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 repayment of notes payable in the amount of
$116,000 and $102,000 for the three months ended March 31, 1997 and 1996,
respectively, and cash received from the exercises of incentive stock options
and employee stock purchase plan.
At March 31, 1997, the Company had $11.4 million of cash, cash
equivalents and short-term investments. The Company also had available a $5.0
million bank line of credit that expired on December 14, 1997, which was secured
by the tangible assets of the Company. At March 31, 1997, there were no
borrowings 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.
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) unforeseen operational problems in the
PiezoPrint or DCS 5442 products, (iii) unforeseen reduced sales of the DCS 5442
products because of the introduction of the PiezoPrint(TM) 5000, (iv) dependence
on third party relationships, (v) risks associated with international
operations, (vi) competitive products and technologies, and (vii) other risk
factors described in the Company's Annual Report and Form 10-K as currently
filed with the Securities and Exchange Commission.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Commencing in March 1998 several class action lawsuits were filed in
both state and federal courts purportedly on behalf of shareholders who
purchased the Company's stock during various periods in 1997 through early 1998.
The complaints name as defendants the Company and its Chairman, Chief Executive
Officer and President, and certain other officers and directors. The complaints
allege, among other things, violation of federal securities laws and that
defendants made false and misleading statements in press releases, SEC filings
and/or other public statements and seek unspecified damages. The litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is a party to a number of legal claims arising in the
ordinary course of business. The Company believes the ultimate resolution of the
claims will not have a material adverse effect on its financial position,
results of operation, or cash flow.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER ITEMS
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See exhibit index on page 17
(b) Reports on Form 8-K: None
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RASTER GRAPHICS, INC.
By: /s/ Rak Kumar
---------------------------------
Rak Kumar
Chief Executive Officer
Date: October 2, 1998
16
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBITS PAGE NUMBER
- -------- ---------------------
<S> <C> <C>
27.1 Financial Data Statement Filed via Edgar
</TABLE>
17
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<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,471
<SECURITIES> 9,899
<RECEIVABLES> 13,803
<ALLOWANCES> 881
<INVENTORY> 8,404
<CURRENT-ASSETS> 33,361
<PP&E> 7,377
<DEPRECIATION> 4,270
<TOTAL-ASSETS> 36,937
<CURRENT-LIABILITIES> 10,154
<BONDS> 64
42,891
0
<COMMON> 0
<OTHER-SE> (16,172)
<TOTAL-LIABILITY-AND-EQUITY> 36,937
<SALES> 11,565
<TOTAL-REVENUES> 11,565
<CGS> 7,441
<TOTAL-COSTS> 7,441
<OTHER-EXPENSES> 4,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> (383)
<INCOME-TAX> 6
<INCOME-CONTINUING> (389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (389)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
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