<PAGE>
DEFINITIVE PROXY MATERIALS
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Confidential, for Use of the
[_] Preliminary Proxy Statement Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
RASTER GRAPHICS, INC.
(Name of Registrant as Specified In Its Charter)
RASTER GRAPHICS, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, Options (to purchase Common Stock)
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid with preliminary materials:
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
RASTER GRAPHICS, INC.
3025 Orchard Parkway
San Jose, California 95134
February 16, 1999
Dear Stockholder:
You are invited to attend an Annual Meeting of Stockholders of Raster
Graphics, Inc. (the "Company") to be held at Hyatt Rickeys, 4219 El Camino
Real, Palo Alto, CA 94306, on March 19, 1999 at 9:00 a.m. local time.
At the Annual Meeting you will be asked to consider and vote upon a proposal
to approve an Agreement and Plan of Merger (the "Merger Agreement") providing
for the merger (the "Merger") of the Company with a wholly owned Subsidiary of
Gretag Imaging Group, Inc. ("Gretag"), following which the Company will become
a wholly owned Subsidiary of Gretag. Upon the consummation of the Merger, each
share of common stock of the Company ("Common Stock") outstanding immediately
prior to the Merger (other than shares owned by the Company, Gretag and Gretag
Subsidiaries and shares as to which appraisal rights are properly perfected
and not withdrawn) will be converted into the right to receive $1.2968 in
cash. You will also be asked to elect two directors to the Raster Graphics
Board of Directors at the Annual Meeting. These directors will only serve
their terms of office if the Merger is not approved by the Raster Graphics
stockholders.
Hambrecht & Quist LLC, the investment banking firm retained by the Board of
Directors of the Company in connection with the Merger, has rendered its
opinion dated October 6, 1998 that, as of such date, the $1.2968 per share of
Common Stock in cash to be received by the holders of shares of Common Stock
pursuant to the Merger Agreement is fair to such holders from a financial
point of view. A copy of the opinion is attached to the enclosed Proxy
Statement as Annex E and should be read in its entirety.
Your Board of Directors has unanimously approved the Merger and the
transactions related thereto and has determined that they are advisable, fair
to and in the best interests of the Company and its stockholders. After
careful consideration, your Board of Directors recommends that stockholders
vote FOR the Merger Agreement and the Merger as described in the accompanying
Proxy Statement.
If the Merger is consummated, holders of Common Stock who do not vote in
favor of approval of the Merger Agreement and the Merger and who otherwise
comply with the requirements of Section 262 of the Delaware General
Corporation Law will be entitled to statutory appraisal rights. Failure to
obtain stockholder approval for the Merger would (among other things) entitle
Gretag to exercise an option to purchase certain of the Company's assets as
more fully described in the accompanying Proxy Statement.
In the materials accompanying this letter, you will find a Notice of Annual
Meeting of Stockholders, a Proxy Statement relating to the actions to be taken
by stockholders of the Company at the Annual Meeting and a proxy card. The
Proxy Statement more fully describes the proposed Merger and includes
information about the Company and Gretag. Please read the Proxy Statement and
Notice and consider the information included therein carefully.
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER
OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN, DATE AND
RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE ANNUAL MEETING,
YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE PREVIOUSLY RETURNED
YOUR PROXY. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE
ANNUAL MEETING.
Sincerely,
RAKESH KUMAR
Chairman and Chief Executive Officer
<PAGE>
RASTER GRAPHICS, INC.
3025 Orchard Parkway
San Jose, California 95134
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on March 19, 1999
----------------
Notice is hereby given that an Annual Meeting of Stockholders of Raster
Graphics, Inc., a Delaware corporation (the "Company"), will be held on March
19, 1999, at 9:00 am., local time, at Hyatt Rickeys, 4219 El Camino Real, Palo
Alto, CA 94306, for the following purposes:
(1) To consider and vote upon a proposal to approve the Agreement and
Plan of Merger, dated as of October 6, 1998 (the "Merger Agreement"),
between Gretag Imaging Group, Inc., a Delaware corporation ("Gretag"),
Gretag Acquisition Corp., a Delaware corporation and a wholly owned
Subsidiary of Gretag ("Merger Sub"), and the Company pursuant to which,
among other things, (a) Merger Sub will be merged with and into the Company
(the "Merger"), at which time the Company will become a wholly owned
Subsidiary of Gretag, and (b) each share of the Company's common stock, par
value $0.001 per share ("Common Stock"), outstanding immediately prior to
the Merger (other than shares owned by the Company, Gretag and Gretag
Subsidiaries and shares as to which appraisal rights are properly perfected
and not withdrawn) will be converted into the right to receive $1.2968 in
cash;
(2) To elect Class II directors of the Board of Directors to serve until
the earlier of the expiration of their term or consummation of the Merger;
and
(3) To transact such other business as may properly come before the
Annual Meeting or any postponements or adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this notice.
Only stockholders of record at the close of business on February 9, 1999,
the record date with respect to this solicitation, are entitled to notice of
and to vote at the Annual Meeting, or at any postponements or adjournments
thereof. The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Annual Meeting, in person or by
proxy, is required to approve the Merger Agreement and the Merger.
If the Merger is consummated, holders of Common Stock who do not vote in
favor of approval of the Merger Agreement and the Merger and who otherwise
comply with the requirements of Section 262 of the Delaware General
Corporation Law will be entitled to statutory appraisal rights.
BY ORDER OF THE BOARD OF DIRECTORS
RAKESH KUMAR,
San Jose, California President
February 12, 1999
IMPORTANT
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES THAT YOU OWN.
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN
THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN
THE UNITED STATES. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY THEN WITHDRAW
YOUR PROXY AND VOTE IN PERSON.
PLEASE DO NOT SEND YOUR COMMON STOCK CERTIFICATES AT THIS TIME.
<PAGE>
RASTER GRAPHICS, INC.
3025 Orchard Parkway
San Jose, California 95134
-----------------------------
PROXY STATEMENT
-----------------------------
ANNUAL MEETING OF STOCKHOLDERS
To Be Held on March 19, 1999
This Proxy Statement is being furnished to the holders of shares of Common
Stock, $0.001 par value ("Common Stock"), of Raster Graphics, Inc., a Delaware
corporation (the "Company" or "Raster Graphics"), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at
the Annual Meeting of Stockholders of the Company (the "Annual Meeting") to be
held on March 19, 1999 at 9:00 am., local time, at Hyatt Rickeys, 4219 El
Camino Real, Palo Alto, CA 94306, and at any postponements or adjournments
thereof.
At the Annual Meeting, the Company's stockholders will be asked to consider
and vote upon a proposal to approve an Agreement and Plan of Merger, dated as
of October 6, 1998 (the "Merger Agreement"), between Gretag Imaging Group,
Inc., a Delaware corporation ("Gretag"), Gretag Acquisition Corp., a Delaware
corporation and a wholly owned Subsidiary of Gretag ("Merger Sub"), and the
Company, and the transactions contemplated thereby. A copy of the Merger
Agreement is attached to this Proxy Statement as Annex A. The Merger Agreement
provides for the merger of Merger Sub with and into the Company (the
"Merger"). At the effective time of the Merger (the "Effective Time"), (i) the
Company will become a wholly owned Subsidiary of Gretag and (ii) each
outstanding share of Common Stock immediately prior to the Merger (other than
shares of Common Stock held by the Company or Gretag or any of Gretag's
Subsidiaries, or by stockholders who have perfected and not withdrawn their
right to seek appraisal of their shares under applicable Delaware law) will be
converted into the right to receive $1.2968 per share in cash. See "The
Merger--Conversion and Cancellation of Common Stock" and "--Appraisal Rights."
In addition, each holder of an employee stock option to acquire shares of
Common Stock will, immediately after the Effective Time, become entitled to
receive a cash payment equal to $1.2968 less the per share exercise price
under the option for each share of Common Stock covered by such option. See
"The Merger--Treatment of Stock Options." Gretag is not an affiliate of the
Company.
At the Annual Meeting, the Company's stockholders will also be asked to vote
for the election of the Class II directors of the Board of Directors to serve
until the earlier of the expiration of their term or consummation of the
Merger.
This solicitation of proxies is made by and on behalf of the Board of
Directors. In addition to mailing copies of this Proxy Statement and the
accompanying Notice of Annual Meeting of Stockholders and proxy to all
stockholders of record on February 9, 1999 (the "Record Date"), the Company
will request brokers, custodians, nominees and other fiduciaries to forward
copies of this material to persons for whom they hold Common Stock in order
that such shares may be voted. Solicitation may also be made by the Company's
officers and regular employees personally or by telephone. In addition, the
Company has retained Georgeson & Company, Inc. to assist in soliciting
proxies. The cost of the solicitation of proxies will be borne by the Company.
The information contained in this Proxy Statement materially complete and is
qualified by the Annexes hereto and the documents referred to and incorporated
by reference herein, each of which is important and should be carefully
reviewed in its entirety.
This Proxy Statement, the accompanying Notice of Annual Meeting of
Stockholders and the accompanying proxy are first being mailed to stockholders
of the Company on or about February 16, 1999.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO ATTEND THE ANNUAL MEETING. PLEASE COMPLETE, DATE, SIGN AND RETURN
THE PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
The date of this Proxy Statement is February 12, 1999.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and at Seven World Trade Center (13th Floor), New York,
New York 10019. Copies of such material may be obtained by mail from the
Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Please call the SEC at 1-
800-SEC-0330 for further information on the public reference rooms. SEC
filings of the Company are also available to the public from commercial
document retrieval services. The website maintained by the SEC is
"http://www.sec.gov." The Common Stock is quoted on the over-the-counter "Pink
Sheets" of the National Quotation Bureau and certain of the Company's reports,
proxy materials and other information can be inspected at the offices of
Nasdaq, 1735 K Street, N.W., Washington, D.C. 20006.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION...................................................... i
SUMMARY OF PROXY STATEMENT................................................. 1
ANNUAL MEETING OF STOCKHOLDERS............................................. 1
THE MERGER................................................................. 2
FORWARD-LOOKING STATEMENTS................................................. 12
RESTATEMENT OF FINANCIAL RESULTS........................................... 13
RISK FACTORS............................................................... 14
Risks Associated with the Merger and Related Agreements.................. 14
Risks Associated with Raster Graphics.................................... 15
THE ANNUAL MEETING......................................................... 21
VOTING AND PROXIES......................................................... 22
Date, Time and Place of Annual Meeting................................... 22
Record Date and Outstanding Shares....................................... 22
Voting Proxies........................................................... 22
Vote Required............................................................ 22
PROPOSAL NO. 1: THE MERGER................................................. 24
Parties to the Merger.................................................... 24
Raster Graphics, Inc. ................................................. 24
Gretag Imaging Group, Inc. ............................................ 24
Gretag Acquisition Corp. .............................................. 24
General.................................................................. 24
Background of the Merger................................................. 24
Reasons for the Merger................................................... 29
Projections Provided to the Company's Financial Advisor.................. 30
Opinion of Financial Advisor to the Company.............................. 31
Effective Time of the Merger............................................. 34
Conversion and Cancellation of Common Stock.............................. 34
Treatment of Stock Options............................................... 34
Exchange Procedures...................................................... 35
Conduct Pending the Merger............................................... 35
Other Offers............................................................. 37
Indemnification.......................................................... 38
Employee Benefits........................................................ 38
Representations and Warranties........................................... 39
Conditions to the Merger................................................. 39
Termination.............................................................. 40
Termination Fee.......................................................... 42
Amendment................................................................ 43
Extension; Waiver........................................................ 43
Interests of Certain Persons in the Merger............................... 43
Other Gretag Agreements.................................................. 44
Federal Income Tax Considerations........................................ 45
Regulatory Filings and Approvals......................................... 46
Appraisal Rights......................................................... 46
Recommendation of the Board of Directors................................. 48
PROPOSAL NO. 2: ELECTION OF DIRECTORS...................................... 49
Board of Directors....................................................... 49
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS--(Continued)
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Nominees............................................................... 50
Board Meetings and Committees.......................................... 50
Compensation of Directors.............................................. 51
Executive Compensation................................................. 51
Compensation Committee Report.......................................... 53
Stockholder Return..................................................... 55
Comparison of Cumulative Total Return.................................. 55
Recommendation of the Board of Directors............................... 55
RASTER GRAPHICS' BUSINESS................................................ 56
Overview............................................................... 56
INDUSTRY BACKGROUND...................................................... 56
Graphics Market Size and Trends........................................ 56
Traditional Printing Methods........................................... 57
Printing Methods' Capabilities......................................... 57
Digital Printing..................................................... 57
RASTER GRAPHICS' SYSTEM SOLUTION......................................... 58
Strategy............................................................... 58
Products............................................................... 59
Services............................................................. 62
Markets................................................................ 63
Customers, Sales and Marketing......................................... 63
Uncertainty Regarding Asian and Latin American Markets............... 64
Intellectual Property.................................................. 64
Manufacturing.......................................................... 65
Suppliers.............................................................. 65
Competition............................................................ 66
Employees.............................................................. 66
Executive Officers of the Company...................................... 67
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 68
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 70
PROPERTIES............................................................... 71
LEGAL PROCEEDINGS........................................................ 71
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.... 72
Market Information..................................................... 72
SELECTED FINANCIAL DATA.................................................. 73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 75
Overview............................................................... 75
Business Combinations.................................................. 77
Results of Operations.................................................. 77
Fiscal Year Ended December 31, 1997.................................... 78
Nine Months Ended September 30, 1998; and 1997......................... 81
Trends and Uncertainties............................................... 83
Liquidity and Capital Resources........................................ 89
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934..... 90
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
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INDEPENDENT PUBLIC ACCOUNTANTS............................................ 91
OTHER MATTERS............................................................. 92
ANNEXES
A--Agreement and Plan of Merger......................................... A-1
B--Asset Subsidiary and Stock Option Agreement.......................... B-1
C--Loan and Pledge Agreement............................................ C-1
D--Stockholders Agreement............................................... D-1
E--Opinion of Hambrecht & Quist LLC..................................... E-1
F--Section 262-of Delaware General Corporations Law..................... F-1
G--Report of Independent Auditors....................................... G-1
H--Financial Information for the Nine-Month Periods Ended September 30,
1998 and 1997.......................................................... H-1
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iv
<PAGE>
SUMMARY OF PROXY STATEMENT
This Proxy Statement relates to (i) the proposed merger (the "Merger") of
Gretag Acquisition Corp., a Delaware corporation ("Merger Sub") and a wholly
owned Subsidiary of Gretag Imaging Group, Inc., a Delaware corporation
("Gretag"), with and into Raster Graphics, Inc., a Delaware corporation (the
"Company" or "Raster Graphics") pursuant to which Raster Graphics will become
the wholly owned subsidiary of Gretag and (ii) election of the Class II
directors of the Board of Directors to serve until the earlier of the
expiration of their term or consummation of the Merger. The following is
intended as a summary of the information contained in this Proxy Statement, is
not intended to be a complete statement of all material features of the
proposals to be voted on and is qualified in its entirety by the more detailed
information appearing elsewhere in this Proxy Statement. Capitalized terms used
but not defined in this summary have the meanings given to them elsewhere in
this Proxy Statement.
ANNUAL MEETING OF STOCKHOLDERS
Date, Time and Place........ The Annual Meeting will be held on March 19,
1999, at 9:00 a.m., local time, at Hyatt Rickeys,
4219 El Camino Real, Palo Alto, CA 94306.
Record Date................. Only holders of record of shares of Common Stock
at the close of business on February 9, 1999 (the
"Record Date") are entitled to notice of and to
vote at the Annual Meeting and at any
postponements or adjournments thereof.
Purpose of the Meeting...... The purpose of the Annual Meeting is to consider
and vote upon a proposal to approve the Merger
Agreement and the transactions contemplated
thereby and to elect two directors to the Board
of Directors to serve until the earlier of the
expiration of their terms or the consummation of
the Merger. The Merger Agreement provides that,
at the Effective Time, the Company will become a
wholly owned subsidiary of Gretag and each
outstanding share of Common Stock (other than
shares owned by the Company, Gretag and Gretag's
Subsidiaries and shares as to which appraisal
rights are properly perfected and not withdrawn)
will be converted into the right to receive
$1.2968 in cash, without interest.
Outstanding Shares.......... At the close of business on the Record Date,
there were 9,599,525 shares of Common Stock
outstanding, and each such share is entitled to
one vote.
Vote Required............... Approval of the Merger Agreement and the
transactions contemplated thereby (including the
Merger) requires the affirmative vote of the
holders of a majority of the outstanding shares
of Common Stock entitled to vote at the Annual
Meeting. Election of the Class II directors
requires the affirmative vote of a majority of
shares constituting a quorum at the Annual
Meeting. Certain directors, executive officers
and principal stockholders of the Company,
holding in the aggregate 1,923,034 shares of
Common Stock (420,000 of which are issuable upon
exercise of outstanding options), or 19.2% of the
outstanding shares (4.38% of which are issuable
upon exercise of outstanding options) on the
Record Date, have entered into a Stockholders
Agreement with Gretag dated as of
1
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October 6, 1998 pursuant to which such
stockholders have agreed, among other things, to
vote such shares in favor of the Merger and to
vote against any competing transaction that might
be proposed by a third party prior to
consummation of the Merger. In addition, the
Company has granted Gretag an irrevocable option
to purchase shares of the Company's Common Stock
with a value (based upon the price per share to
be paid in the Merger) of up to the greater of
$5,000,000 and the amount of principal and
accrued interest pursuant to the Loan and Pledge
Agreement (the "Stock Option Consideration"). The
number of shares to be purchased shall equal the
Stock Option Consideration divided by
approximately $1.30. The exercise of this option
would increase the number of shares of Company
Common Stock outstanding and, if exercised prior
to the record date, would have enabled Gretag to
vote such shares in favor of the Merger. Gretag
may purchase up to 3,840,526 shares of the
Company's Common Stock (approximately 28.6% of
the outstanding shares after the exercise of such
option) pursuant to this option. As of the date
of this Proxy Statement, Gretag has not purchased
any shares of the Company's Common Stock. The
Company has been informed by Gretag that it has
no current intention to exercise its option to
purchase the Company's stock. See "The Merger--
Interests of Certain Persons in the Merger-
Stockholders Agreement" and "--Other Gretag
Agreements--Loan and Pledge Agreement."
THE MERGER
The Parties
Raster Graphics............. Raster Graphics develops, manufactures and
markets high-performance, large format digital
color printing systems, and sells related
consumables and software for the on-demand large
format digital printer ("LFDP") market. The
Company's Common Stock is listed on the over-the-
counter "Pink Sheets" under the symbol "RGFX."
The principal executive offices of the Company
are located at 3025 Orchard Parkway, San Jose,
California 95134, and the telephone number at
that address is (408) 232-4000.
Gretag...................... Gretag is a holding company, which through its
principal subsidiaries, Gretag Imaging, Inc. and
Gretag Imaging AG, performs research, development
and production of equipment (including splicers,
cutters, packaging machine and printers) for
central labs and equipment for point-of-service
labs, as well as software for lab control.
Gretag manufactures image processing equipment in
its two wholly owned operating subsidiaries--
Gretag Imaging AG, Regensdorf, Switzerland and
Gretag Imaging, Inc., Chicopee, Massachusetts,
United States--and in San Marco Imaging S.r.l.,
Fjume Veneto, Italy, in which Gretag and its
affiliates have a majority stake.
Merger Sub.................. Merger Sub is a wholly owned Subsidiary of
Gretag. Merger Sub was formed by Gretag for the
purpose of effecting the Merger and has not
conducted any prior business. The principal
executive offices of Gretag and Merger Sub are
located at 2070 Westover Road, Chicopee, MA
01022.
2
<PAGE>
General..................... Pursuant to the terms of the Merger Agreement, at
the Effective Time (i) Merger Sub will be merged
with and into the Company and will cease to exist
as a separate entity; (ii) the Company, as the
surviving corporation in the Merger (the
"Surviving Corporation") will become a wholly
owned Subsidiary of Gretag; and (iii) each
outstanding share of Common Stock (other than
shares owned by the Company, Gretag and Gretag's
Subsidiaries and shares as to which appraisal
rights are properly perfected and not withdrawn)
will be converted into the right to receive
$1.2968 in cash, without interest (the "Merger
Consideration").
Background of the Merger;
the Company's Reasons for
the Merger................. Following review of the Company's operating and
financial condition, industry trends, and the
Company's strategic position, the Company's Board
of Directors in April 1998 engaged Hambrecht &
Quist LLC ("Hambrecht & Quist") as its exclusive
financial advisor in connection with a possible
strategic transaction. During the next several
months, representatives of Hambrecht & Quist and
Company senior management contacted and held
meetings with a number of potential strategic
partners. Several of these parties conducted due
diligence reviews of the Company's finances,
operations, and business plans. After evaluating
various proposals and options over the course of
several months, the Company's Board of Directors
approved the Merger.
The Company's Board of Directors believes that
the terms of the Merger are fair, advisable and
in the best interest of the Company and its
stockholders. In reaching this conclusion, the
Board has considered a number of factors relating
to the business and prospects of the Company, the
industry it serves and its customers, the advice
of its advisors, and the terms of the Merger
Agreement. For a more detailed discussion of
these matters, see "The Merger--Background of the
Merger," and "--Reasons for the Merger."
Recommendation of the
Company's Board of
Directors.................. THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY
VOTE IN FAVOR OF THE APPROVAL OF THE MERGER
AGREEMENT AND THE MERGER.
Opinion of Financial Hambrecht & Quist has delivered its written
Advisor.................... opinion to the Board of Directors of the Company
that, as of October 6, 1998, the $1.2968 per
share of Common Stock in cash to be received by
the holders of shares of Common Stock pursuant to
the Merger Agreement is fair to such holders from
a financial point of view. The delivery of an
updated opinion by Hambrecht & Quist is not a
condition to the consummation of the Merger. See
"Risk Factors--Risks
Associated with the Merger and Related
Agreements--Opinion of Financial Advisor."
The full text of the written opinion of Hambrecht
& Quist, which sets forth assumptions made,
matters considered, the scope and
3
<PAGE>
limitations of the review undertaken and the
procedures followed by Hambrecht & Quist in
connection with the opinion is attached hereto as
Annex E and is incorporated herein by reference.
Holders of shares of Common Stock are urged to,
and should, read such opinion in its entirety.
Raster Graphics has agreed to pay Hambrecht &
Quist a fee of $350,000 in connection with the
delivery of a fairness opinion, which will be
credited against any future fees payable in
connection with the Merger, and an additional fee
payable upon closing of the Merger of $650,000.
See "The Merger--Opinion of Financial Advisor to
the Company."
Effective Time.............. The Effective Time will be the time and date when
a Certificate of Merger and certain other
documents are filed by the Company and Merger Sub
with the Secretary of State of the State of
Delaware and the Merger thereby becomes
effective. Subject to the terms and conditions of
the Merger Agreement, it is presently
contemplated that the Effective Time will occur
as soon as practicable after each of the
conditions to the Merger have been satisfied or
waived. See "The Merger--Effective Time of the
Merger," "--Conditions to the Merger" and "--
Regulatory Filings and Approvals."
Conditions to the Merger.... The respective obligations of the Company and
Gretag to consummate the Merger are subject to
certain conditions, including, among others, (i)
the approval of the Merger Agreement by the
affirmative vote of the holders of a majority of
the outstanding shares of Common Stock entitled
to vote at the Annual Meeting and (ii) the
receipt of all necessary regulatory approvals of
the Merger. The obligations of Gretag and Merger
Sub to consummate the merger are subject to
certain additional obligations, including, among
others, (i) approval of the settlement of certain
class action lawsuits, which have been pending
against the Company since March 1998 and which
allege that the Company and several of its
officers and directors violated federal
securities laws on terms substantially as
described in a memorandum of understanding
reached by the parties, according to which the
plaintiffs will receive $4.5 million, $850,000 of
which will be paid by the Company and the
remainder of which will be paid by the Company's
insurance carrier (such settlement was granted
preliminary approval by the United States
District Court in the Northern District of
California on December 11, 1998, and a hearing
for final approval is scheduled for February 19,
1999; the Company has already deposited the
$850,000 into an escrow account) and (ii) the
absence of any event, change, effect or
development that, individually or in the
aggregate would have a Material Adverse Effect on
the Company. Each of the conditions may be
waived; however, the Company is not aware of any
intention by Gretag to waive any condition. See
"The Merger--Conditions to the Merger," and
"Legal Proceedings."
Other Offers................ The Company and its Subsidiaries have also agreed
to, and have agreed to direct and use reasonable
efforts to cause their respective officers,
directors or employees, or any representative, to
cease as of the date of the Merger Agreement any
discussions or negotiations
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with any parties other than Gretag and Merger Sub
with respect to any proposals or offers relating
to an acquisition of 10% or more of the assets of
the Company or any of its Subsidiaries or any
shares of a class of equity securities of the
Company or any of its Subsidiaries (an
"Acquisition Proposal"). The Company and its
Subsidiaries have agreed that they shall not, and
shall not authorize or permit any of their
respective officers, directors or employees or
any representative retained by it to (i) solicit,
initiate or encourage (including by way of
furnishing non-public information), or take any
other action to facilitate an Acquisition
Proposal or (ii) participate in any discussions
or negotiations regarding an Acquisition
Proposal. However, if prior to the adoption of
the Merger Agreement by the Company's
stockholders, the Board of Directors of the
Company determines in good faith, based on the
advice of outside counsel, that failure to do so
would constitute a breach of its fiduciary duties
to the Company's stockholders under applicable
law, the Company, in response to an unsolicited
Acquisition Proposal by a third party to acquire
100% of the voting power of the Common Stock of
or substantially all the assets of the Company
and its Subsidiaries on terms which the Board of
Directors determines in good faith (based on the
written opinion of a financial advisor of
nationally recognized standing) to be more
favorable to the Company's stockholders than the
Merger and for which financing, to the extent
required by the terms of such proposal, is then
committed or is reasonably capable of being
obtained by such third party (a "Superior
Proposal"), may (x) furnish non-public
information with respect to the Company and its
Subsidiaries to the person who made such
Acquisition Proposal pursuant to a customary and
reasonable confidentiality agreement and (y)
participate in negotiations regarding such
Acquisition Proposal. See "The Merger--Other
Offers."
Termination................. The Merger Agreement may be terminated and the
Merger contemplated thereby may be abandoned at
any time prior to the Effective Time,
notwithstanding approval thereof by the
stockholders of the Company, if any, by mutual
written consent of the Company and Gretag. The
Merger Agreement may be terminated by either
Gretag or the Company if (i) the Effective Time
shall not have occurred on or before February 28,
1999 (which deadline has been extended by the
parties to March 22, 1999), (ii) there shall be
any statute, law, rule or regulation that makes
consummation of the Merger illegal, or (iii) the
Company Stockholder Approval shall not have been
obtained. The Merger Agreement may be terminated
by the Company if (i) any of the respective
representations or warranties made by Gretag or
Merger Sub in the Merger Agreement shall not have
been true and correct, or have ceased to be true
and correct or Gretag or Merger Sub shall have
breached or failed to comply in any material
respect with any of its obligations under the
Merger Agreement, or (ii) the Company takes any
of the actions relating to the consideration of a
Superior Proposal. The Merger Agreement may be
terminated by Gretag if, among other things, (i)
the
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Company fails to file its Annual Report on Form
10-K for the Company's 1997 fiscal year and the
Company's Quarterly Reports on form 10-Q for the
periods ended March 31, June 30 and September 30,
1997 and 1998 with the SEC by November 30, 1998,
which reports were filed prior to the November 30
deadline (ii) (x) any of the representations or
warranties made by the Company in the Merger
Agreement shall not have been true and correct in
all respects when made, or have ceased to be true
and correct in all respects as if made as of such
later date, or (y) the Company shall have
breached or failed to comply in any material
respect with any of its obligations under the
Merger Agreement, the Loan Agreement or the
Option Agreement, (iii) the Company shall not
have executed a certain OEM Sales Agreement
regarding the manufacture and supply of ink jet
printer heads with the Seiko Epson Corporation by
November 15, 1998, which agreement was executed
on January 22, 1999 (Gretag had extended the
deadline for this condition), (iv) any
corporation, entity, "group" or "person" other
than Gretag or Merger Sub, shall have acquired
beneficial ownership of more than 25% of the
outstanding shares of Common Stock, (v) since the
date of the Merger Agreement, there shall have
occurred any event, change, effect or development
that, individually or in the aggregate, would
have a Material Adverse Effect on the Company,
(vi) if the Company takes any of the actions
relating to a Superior Proposal. See "The
Merger--Other Offers," and "--Termination."
Termination Fee............. Except as provided below, whether or not the
Merger is consummated, all costs and expenses
incurred in connection with the transactions
contemplated by the Merger Agreement will be paid
by the party incurring such expenses. If the
Merger Agreement is terminated by the Company
because the Company Stockholder Approval has not
been obtained or because of a Superior Proposal
or by Gretag because the Company has breached a
representation, warranty or obligation, the
Settlement has been rejected by a court or
terminated, or the Company acts with respect to a
Superior Proposal, the Company will pay Gretag as
promptly as practicable in same-day funds an
aggregate amount equal to the documented
reasonable out-of-pocket expenses of Gretag,
Merger Sub and their respective affiliates
incurred in connection with or arising out of the
Merger, the Merger Agreement, the Option
Agreement, the Loan Agreement and the
transactions contemplated hereby and thereby;
provided, that in no event shall such expenses
exceed $1,000,000; and provided further, that if
(a) for any reason Gretag is unable to consummate
the purchase of the Inkjet business in accordance
with the Option Agreement at the date of the
closing of the Merger following any termination
of the Merger Agreement by the Company because
the Company Stockholder Approval has not been
obtained or because of a Superior Proposal or by
Gretag because the Company has breached a
representation, warranty or obligation or the
Company acts with respect to a Superior Proposal
or (b) at any time following the consummation of
the purchase of such Inkjet business
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<PAGE>
Gretag is required to rescind or unwind such
purchase or pay damages to the Company or any
other person as a result of or in connection with
such purchase, then the Company must promptly pay
to Gretag the sum of $500,000 in immediately
available funds in addition to the other
expenses. If the Merger Agreement is terminated
by the Company due to Gretag's breach of a
representation, warranty, or obligation, Gretag
must pay the Company as promptly as practicable
in same-day funds an aggregate amount equal to
the documented reasonable out-of-pocket expenses
of the Company and its affiliates incurred in
connection with or arising out of the Merger, the
Merger Agreement, the Option Agreement and the
transactions contemplated hereby and thereby;
provided that in no event shall such expenses
exceed $1,000,000; and provided further that such
expenses shall not include any fees and expenses
that would have been incurred by the Company or
its affiliates regardless of whether Gretag and
the Company had negotiated and executed the
Merger Agreement or the Option Agreement. If the
Company or Gretag fails to promptly pay any such
amounts owing when due, the Company or Gretag
must in addition thereto pay to Gretag or the
Company, as the case may be, all costs and
expenses incurred in collecting such amounts,
together with interest on such amounts from the
date such payment was required to be made until
the date such payment is received by Gretag or
the Company, as the case may be, at the prime
rate of Citibank, N.A. as in effect from time to
time during such period.
Additional Agreements
between the Company and
Gretag..................... Asset and Subsidiary Stock Option Agreement. As
an inducement to Gretag to enter into the Merger
Agreement and the Loan and Pledge Agreement,
concurrently with such agreements, the Company
entered into an Asset and Subsidiary Stock Option
Agreement with Gretag (the "Option Agreement"),
pursuant to which the Company granted to Gretag
the irrevocable right and option (the "Subsidiary
Stock Option") to purchase for $5,000,000 (less
the amount owed to Gretag pursuant to the Loan
and Pledge Agreement described below which amount
would be cancelled if such option is exercised)
all of the issued and outstanding shares of
common stock of Onyx Graphics Corporation and the
irrevocable right and option (the "Inkjet
Option") to purchase for $6,000,000 (less the
amount owed to Gretag pursuant to the Loan and
Pledge Agreement described below which amount
would be cancelled if such option is exercised)
(the "Inkjet Option Purchase Price") all of the
assets used or held for use in connection with
the design, manufacture, sales, service and
support of the Company's inkjet printer products
(other than certain after-market assets) and the
right and license to use certain related
intellectual property (upon the exercise of the
Inkjet Option Gretag would assume certain
liabilities incurred in the ordinary course of
the inkjet printer business). Gretag has the
right to exercise the Inkjet Option upon the
termination of the Merger Agreement pursuant to
(i) a failure to obtain the Company Stockholder
Approval of the
7
<PAGE>
merger, (ii) the Company taking action with
regard to a Superior Proposal or (iii) the
failure of a representation or warranty by the
Company under the Merger Agreement to be true and
correct where such failure has a material adverse
effect on the Company, or the Company's breach of
certain obligations of the Merger Agreement, the
Loan Agreement or the Option Agreement, provided,
in each case, that Gretag has not exercised the
Subsidiary Stock Option. Gretag has the right to
exercise the Subsidiary Stock Option upon the
termination of the Merger Agreement for any
reason, provided that Gretag has not exercised
the Inkjet Option. Exercise of either option
could have a materially adverse effect on the
business, operations and financial condition of
the Company. See "The Merger--Other Gretag
Agreements--Asset and Subsidiary Stock Option
Agreement."
Loan and Pledge Agreement. To obtain financing
necessary to enable the Company to meet short-
term working capital requirements, concurrently
with the Merger Agreement, the Company entered
into a Loan and Pledge Agreement with Gretag,
pursuant to which Gretag has agreed to lend the
Company through February 28, 1999, amounts that
together with accrued interest do not exceed
$5,000,000 so long as the sum of (i) all such
borrowed amounts and any outstanding accrued
interest and (ii) the aggregate principal amount
and accrued interest outstanding under the
Company's credit facility with Silicon Valley
Bank does not exceed $6,000,000. Loans made under
the Loan and Pledge Agreement are secured by the
Company's share of Onyx Graphic Corporation, a
wholly owned subsidiary of the Company (the
"Collateral"). Outstanding loans made to the
Company by Gretag and all accrued interest are
payable upon written demand, provided that, in
the absence of an event of default, Gretag cannot
make such demand unless the Merger Agreement
shall have been terminated or the Merger shall
have occurred. In addition, Gretag must seek
repayment by exercising the Inkjet Option or
Subsidiary Stock Option unless it is unable to
exercise the Subsidiary Stock Option or Inkjet
Option. As of December 31, 1998, the Company has
borrowed an aggregate amount of $3,350,000 under
the Loan and Pledge Agreement and owed $54,966.67
in accrued interest. Pursuant to the Loan and
Pledge Agreement, the Company has granted Gretag
an irrevocable option to purchase up to the
greater of $5,000,000 and the amount of
outstanding principal and accrued interest
pursuant to the Loan and Pledge Agreement worth
of shares of the Company's Common Stock. The
number of shares to be purchased shall be the
number of shares such that the ratio of (i) the
number of such shares to (ii) the sum of the
number of such shares plus 10,226,744 is equal to
the ratio of (i) the amount paid for such shares
to (ii) the sum of the amount paid for such
shares plus $13,314,248.50. Gretag may purchase
up to 3,840,526 shares of the Company's Common
Stock pursuant to this option. The exercise of
such option would increase the number of shares
of Company Common Stock issued and
8
<PAGE>
outstanding and, if exercised prior to the record
date, would enable Gretag to vote such shares in
favor of the Merger. As of the date of this Proxy
Statement, Gretag has not purchased any shares of
the Company's Common Stock. In the event the
stockholders of the Company fail to approve the
Merger, the Company would be obligated to repay
the outstanding indebtedness incurred by the
Company pursuant to the Loan Agreement. Failure
to repay the loan could have a materially adverse
effect on the business, operations and financial
condition of the Company. See "The Merger--Other
Gretag Agreements--Loan and Pledge Agreement."
Conduct Pending the Merger. The Company has
agreed, among other things, that the Company and
each of its Subsidiaries will (i) conduct its
operations according to its usual, regular and
ordinary course of business consistent with past
practice, (ii) use its reasonable best efforts to
preserve intact its business organizations and
goodwill, to maintain in effect all existing
qualifications, licenses, permits, approvals and
other authorizations, and (iii) promptly notify
Gretag upon becoming aware of any material breach
of any representation, warranty or covenant of
the Merger Agreement. See "The Merger--Conduct
Pending the Merger."
Interest of Certain Persons
in the Merger.............. In considering the recommendation of the Board of
Directors of the Company with respect to the
Merger, stockholders should be aware that certain
officers and directors of the Company have
interests in connection with the Merger.
Employment and Consulting Agreements. To retain
the services of Rakesh Kumar, the Company's Chief
Executive Officer, and Marc Willard, an officer
of the Company, the Company has entered into
certain agreements pursuant to which Mr. Kumar
and Mr. Willard will receive cash payments of
$300,000 and $200,000, respectively, upon
consummation of the Merger. To obtain the
services of the Company's acting Chief Financial
Officer, the Company entered into an agreement
dated as of May 14, 1998, as amended, with The
Brenner Group LLC, pursuant to which Ms. Kathy
Bagby has been Acting Chief Financial Officer of
the Company and pursuant to which the Company
will pay The Brenner Group LLC a bonus of
$175,000 upon consummation of the Merger. See
"The Merger--Interests of Certain Persons in the
Merger--Employment and Consulting Agreement."
Acceleration of Options. Under the terms of the
Company's stock option plans, the vesting of
options granted under such plans, including
unvested options to purchase 2,500 shares held by
Mr. Kumar with an exercise price of $0.50 per
share and unvested options to purchase 131,250
shares held by Mr. Williard with an exercise
price of $0.375 per share, will accelerate at the
time of the Merger. See "The Merger--Interests of
Certain Persons in the Merger--Acceleration of
Options."
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<PAGE>
Stockholder Agreement. Certain stockholders of
the Company, holding in the aggregate
approximately 19.2% of the outstanding shares on
the Record Date (including 4.38% of which are
issuable upon the exercisable of outstanding
options), have entered into an agreement dated as
of October 6, 1998, agreeing to vote such shares
in favor of the Merger. See "The Merger--
Interests of Certain Persons in the Merger--
Stockholders Agreement."
Indemnification............. For a period of four years after the Effective
Time, the Surviving Corporation will indemnify
and hold harmless all past and present officers
and directors of the Company and its Subsidiaries
to the full extent such persons may be
indemnified by the Company under applicable law
pursuant to the Company's Certificate of
Incorporation and Bylaws for acts and omissions
occurring at or prior to the Effective Time
resulting is losses in connection with related
litigation. In addition, Gretag has agreed to
cause to be maintained in effect for four years
from the Effective Time directors' and officers'
liability insurance covering those persons who
are currently covered by the Company's directors'
and officers' liability insurance policy on terms
substantially no less advantageous to such
existing coverage; provided, however, that Gretag
is not required to pay annual premiums in excess
of $225,000. See "The Merger--Indemnification."
Employee Benefits........... After the Effective Time, Gretag will cause the
Surviving Corporation and its Subsidiaries to
honor in accordance with their terms and the past
practice of the Company all existing employment
and severance agreements between the Company or
its Subsidiaries, and any officer, director, or
employee of the Company, or its Subsidiaries. In
addition, from and for two years after the
Effective Time, Gretag will, or will cause the
Surviving Corporation to, continue to provide
each employee of the Company and its Subsidiaries
with employee benefits and other terms and
conditions of employment that are, in the
aggregate, comparable to the benefits and terms
and conditions provided to each such employee by
the Company or its Subsidiaries. See "The
Merger--Employee Benefits."
Regulatory Filings and Under the Hart-Scott-Rodino Antitrust
Approvals.................. Improvements Act of 1976, as amended (the "HSR
Act"), and the rules promulgated thereunder by
the Federal Trade Commission (the "FTC"), certain
acquisition transactions, including the Merger,
may not be consummated until specified waiting
period requirements have been satisfied. On
December 1, 1998, the Company and Gretag filed
notification and report forms under the HSR Act
with the FTC and the Antitrust Division of the
U.S. Department of Justice. The Company and
Gretag received clearance for the Merger under
the HSR Act on December 14, 1998. See "The
Merger--Regulatory Filings and Approvals."
Federal Income Tax
Consequences............... In general, each stockholder, including
stockholders who exercise appraisal rights, will
recognize gain or loss per share equal to the
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<PAGE>
difference between the cash received for the
stockholder's shares and the stockholder's tax
basis per share in the Common Stock surrendered
by such stockholder. Such gain or loss generally
will be treated as capital gain or loss if a
stockholder's shares of Common Stock were held as
capital assets at the time of the Merger and will
be long-term capital gain or loss if the Common
Stock was held for more than one year prior to
the Effective Time. See "The Merger--Federal
Income Tax Considerations."
Appraisal Rights............ Stockholders who do not vote in favor of the
Merger and who have fully complied with the
applicable provisions of Section 262 of the
Delaware General Corporation Law ("DGCL") may
have the right to require the Surviving
Corporation to purchase the shares of Common
Stock held by them for cash at the fair value of
those shares as determined in accordance with the
DGCL. See "The Merger--Appraisal Rights."
Recent Market Price of
Company.................... Common Stock On October 5, 1998, the last full
trading day prior to public announcement of the
signing of the Merger Agreement, the high and low
bid prices per share reported on the "Pink
Sheets" of the National Quotation Bureau for the
Common Stock were $1.00 and $1.00, respectively.
The average daily closing bid price per share
reported on the "Pink Sheets" of the National
Quotation Bureau during the month of October was
0.9776.
11
<PAGE>
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Proxy Statement,
certain of the matters discussed herein are forward-looking statements that
are subject to certain risks and uncertainties. Actual results could differ
materially from those projected. Factors that could cause actual results to
differ materially include, but are not limited to, (i) fluctuations in
quarterly results, (ii) competitive products and technologies, (iii) ability
of the Company to upgrade its technologies and commercialize its products, and
(iv) other risks detailed below under the heading "Risk Factors" and included
from time to time in the Company's other SEC reports and press releases,
copies of which are available from the Company upon request.
12
<PAGE>
RESTATEMENT OF FINANCIAL RESULTS
On February 26, 1998 the Company announced its financial results for the
year ended December 31, 1997. The Company reported revenue of $54.7 million,
gross profit of $19.5 million, operating expenses of $20.6 million and a net
loss of $1.2 million for fiscal 1997. On April 1, 1998 the Company announced
that it would revise its 1997 financial results.
In March 1998, after consultation with its independent accountants, the
Board of Directors of the Company performed a review of the Company's
accounting and business practices. By mid-April the Board of Directors became
aware of pervasive errors and irregularities that ultimately affect the dollar
amount and timing of reported revenues in 1997. The Board of Directors
instructed that an analysis be conducted on these matters.
The irregularities took numerous forms and were primarily the result of a
lack of compliance with the Company's procedures and controls. The Company has
concluded that the earnings process for a significant number of printer sales
were not complete at the time of shipment. Further, the Company has determined
that arrangements with a number of resellers resulted in significant
concessions or allowances that were not accounted for when the revenue was
originally reported as earned.
In addition, the Company has determined that its allowances for doubtful
accounts receivable balances and excess and obsolete inventory, and the
realizable value of inventory and the goodwill recorded on the acquisition of
Datagraph have been incorrectly estimated.
As a result, for the year ended December 31, 1997 the Company reversed
recorded revenues of $5.8 million, recorded additional cost of revenue of $7.6
million, and additional operating expenses of $4.6 million. In addition, the
Company has restated its previously reported results for each interim period
in the nine months ended September 30, 1997.
The Company has also restated the net assets purchased on the acquisition of
Datagraph, a distributor of LFDP systems in France. The original figures were
based on an estimate, which has since been revised to reflect actual values.
In particular, an intangible asset of $1,420,000 was initially recorded and
was revised to $1,211,000. This purchase price was based on sales forecasts
produced by the Company at the time that assumed that Datagraph would be able
to transition its sales model from selling low-end printers manufactured by a
competitor to a network of dealers, to selling in addition the high-end Raster
Graphics printers directly to end users.
Following the acquisition, Datagraph's supplier of low-end printers
cancelled its contract, leaving Datagraph to distribute only the Company's
products. In addition, the Company was not able to effect such a transition
with the result that during the quarter ended December 31, 1997 Datagraph
experienced a shortfall in anticipated revenues causing management to revise
its sales forecasts and to write-off the goodwill associated with the
Datagraph acquisition. This situation continued in 1998 with further revenue
shortfalls being experience in the nine months ended September 30, 1998
resulting in a loss for that period. Further, it became evident to management
during the third quarter of 1998, that Datagraph required significant
additional support to effect the planned transition in its sales model. As a
result of the significant liquidity constraints at Raster Graphics it was
determined that such support could not be given and the decision was then
taken for Datagraph to commence bankruptcy proceedings.
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RISK FACTORS
Risks Associated with the Merger and Related Agreements
Risks Associated with Certain Options Granted in Connection with the
Merger. Concurrently with the Merger Agreement, the Company has entered into
an Asset and Subsidiary Stock Option Agreement between Gretag and the Company
(the "Option Agreement"), pursuant to which Gretag has an option (the
"Subsidiary Stock Option"), under certain circumstances, at terms specified
therein and described elsewhere in this Proxy Statement, to acquire all of the
issued and outstanding shares of Onyx Graphics Corporation or an option (the
"Inkjet Option") to purchase for $6,000,000 (less the amounts owed under the
Loan Agreement described below which amounts would be cancelled if such option
is exercised) (the "Inkjet Option Purchase Price") all of the assets used or
held for use in connection with the design, manufacture, sales, service and
support of the Company's inkjet printer products and the right and license to
use certain intellectual related property. See "The Merger--Additional Gretag
Agreements--Asset and Subsidiary Stock Option Agreement." Gretag required
these options as an inducement to enter into the Loan and Pledge Agreement and
the Merger Agreement, and the Company determined that such options were fair
in light of the total facts and circumstances facing the Company. See "The
Merger--Background of the Merger." The exercise of either option by Gretag
would, in essence, effect a sale of valuable assets for reasonable
consideration; however, the sale of such assets upon the exercise of either
option would change the Company's business and could significantly reduce the
likelihood that the Company will be able to enter into an alternative
transaction. There can be no assurance that the Company could find another
acquiror or strategic partner in the event that Gretag exercises either
option.
Risks Associated with the Loan and Pledge Agreement. Concurrently with the
Merger Agreement, the Company entered into a Loan and Pledge Agreement with
Gretag, pursuant to which Gretag will lend the Company through February 28,
1999, amounts that together with accrued interest do not exceed $5,000,000,
secured by the Company's shares in Onyx Graphics Corporation, a wholly owned
subsidiary of the Company. The terms of this agreement are described elsewhere
in this Proxy Statement. See "The Merger--Additional Gretag Agreements--Loan
and Pledge Agreement." The loss to the Company of the shares of Onyx Graphics
Corporation through an event of default could significantly reduce the
likelihood that the Company will be able to enter into an alternative
transaction and would be likely to have a material adverse effect on the
Company's business, financial condition and results of operations.
The Opinion of the Company's Financial Advisor Is Limited to Facts at
October 6, 1998; No Update Is Being Requested or Given. In connection with the
Merger, the Board of Directors of the Company received an opinion from
Hambrecht & Quist, its exclusive financial advisor, that, as of October 6,
1998, the $1.2968 per share of Common Stock in cash to be received by the
holders of shares of Common Stock pursuant to the Merger Agreement is fair to
such holders from a financial point of view. In connection with this opinion
Hambrecht & Quist was not requested to, and did not, express any opinion
relating to the financial terms of the Option Agreement or the Loan and Pledge
Agreement. In addition, the opinion of Hambrecht & Quist relates only to facts
and circumstances as of October 6, 1998. Changes in facts and circumstances
since such date may have occurred that would change the opinion of Hambrecht &
Quist, were such opinion to be given at a later date. An update to the opinion
of Hambrecht & Quist is not a condition to the Merger. Raster Graphics has
agreed to pay Hambrecht & Quist a fee of $350,000 in connection with the
delivery of a fairness opinion, which will be credited against any future fees
payable in connection with the Merger, and an additional fee payable upon
closing of the Merger of $650,000.
Loss of Opportunity for Raster Graphics as a Stand-Alone Entity. As a
consequence of the Merger, Raster Graphics stockholders will lose the chance
to invest in the development and exploitation of Raster Graphics's products on
a stand-alone basis. It is possible that Raster Graphics, if it were to remain
independent, could achieve economic performance superior to that which it
could achieve as a subsidiary of Gretag. Consequently, there can be no
assurance that stockholders of Raster Graphics would not achieve greater
returns on investment if Raster Graphics were to remain an independent
company.
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Risks Associated with Raster Graphics
Uncertain Impact of Restatement of Financial Statements; De-listing from
NASDAQ National Market. Subsequent to the filing with the Commission of its
Quarterly Reports on Forms 10-Q for the quarters ended March 31, 1997, June
30, 1997, and September 30, 1997, the Company became aware of errors and
irregularities that effected the timing and dollar amount of reported earned
revenue. These restatements had a material adverse effect on the Company's
financial condition, most notably evident by substantial reductions in
retained earnings and working capital.
The Company's public announcement on April 3, 1998 of the pending
restatements, delays in reporting operating results for 1997 while the
restatements were being compiled, de-listing of the Company's Common Stock
from the NASDAQ National Market as a result of the Company's failure to
satisfy its public reporting obligations, corporate actions to restructure
operations and reduce operating expenses, and customer uncertainty regarding
the Company's financial condition have adversely affected the Company's
ability to sell its product in fiscal year 1998 and consequently caused a
significant reduction in the Company's stock price. Adverse market conditions,
including significant competitive pressures in the Company's markets and
ongoing customer uncertainty about the Company's financial condition and
business prospects, and product operating issues, may continue to have an
adverse effect on the Company's ability to sell its products and results of
operations.
Limited History of Profitability and Uncertainty of Future Financial
Results. The Company had an accumulated deficit as of December 31, 1997 of
approximately $34.4 million. The Company has a limited history of
profitability and had a net loss of $19.0 million in 1997. There can be no
assurance that sales of the Company's products will generate significant
revenues or that the Company can return to profitability on a quarterly or
annual basis in the future.
Going Concern. The Company believes its existing capital resources will be
insufficient to satisfy its working capital requirements through the end of
1998. The Company will need to raise additional capital to fund operations
during 1998 and beyond. The Report of Independent Auditors on the Company's
financial statements for the year ended December 31, 1997, contains an
explanatory paragraph regarding the company's need for additional financing
and indicates substantial doubt about the Company's ability to continue as a
going concern. There can be no assurances that such capital will be available
on acceptable terms, if at all, and such terms may be dilutive to existing
stockholders. Although the Company has entered into a Loan and Pledge
Agreement with Gretag providing a loan facility secured by 100% of the issued
stock of Onyx Graphics Corporation (see "The Merger--Other Gretag Agreements
- -- Loan and Pledge Agreement"), the Company's inability to secure any
additional necessary funding would have a material adverse affect on the
Company's financial condition and results of operations. The Company's actual
working capital needs will depend upon numerous factors, including the extent
and timing of acceptance of the Company's products in the market, the
Company's operating results, the progress of the Company's research and
development activities, the cost of increasing the Company's sales and
marketing activities and the status of competitive products, none of which can
be predicted with certainty. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of assets and
liabilities that may result from the outcome of this uncertainty.
The Company's expenses for manufacturing and administrative capabilities,
technical and customer support, research and product development and other
activities are based in significant part on its expectations regarding future
revenues and are fixed to a large extent in the short term. The Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on a Single Product Line. Substantially all of the Company's
sales are derived from its printing systems, printers and related software and
consumables, such as specialized inks, varnish, vinyls and papers. The Company
anticipates that it will continue to derive substantially all of its revenues
in the next several years from sales of this product line. Dependence on a
single product line makes the Company particularly
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vulnerable to the successful introduction of competing products. The Company's
inability to generate sufficient sales of the product line and to achieve
profitability due to competitive factors, manufacturing difficulties, or other
reasons, would have a material adverse effect on its business, financial
condition and results of operations. Moreover, some of the Company's printing
system and printer customers have purchased and will continue to purchase
consumables such as ink and paper from suppliers other than the Company. If a
significant number of current or future purchasers of the Company's printing
systems were to purchase consumables from suppliers other than the Company,
the Company's business would be materially adversely affected.
Limited History of Product Manufacturing and Use; Product Defects. The
Company's printers are based on relatively new technology, are complex and
must be reliable and durable. Companies engaged in the development and
production of new, complex technologies and products often encounter
difficulties and delays. The Company began commercial production of the DCS
5400 in June 1994 and the DCS 5442 in January 1996. Since its introduction as
a second generation to the DCS 5400, the DCS 5442 has represented an
increasing percentage of the Company's shipments, and by September 1996,
substantially replaced the DCS 5400.
In December 1996, the Company introduced its first inkjet printer, the
PiezoPrint 1000, which is targeted at the lower priced entry level production
market. In March, 1997, the PiezoPrint 5000 joined the Raster Graphics product
line of printers as a mid-range of price/performance product which complements
the Company's affordable PiezoPrint 1000 inkjet printer and the high-volume
DCS 5442.
The Company is continuing to make upgrades and improvements in the features
of its PiezoPrint line of printers. Despite research and testing, the
Company's experience with volume production of its printers and with their
reliability and durability during customer use is limited. The Company and
users have encountered various operational problems with the PiezoPrint 5000
printers, including printhead quality issues, which the Company believes it is
successfully addressing. However, these operational problems have resulted in
delayed payments by customers, requests for return of printers, greater than
anticipated expense incurred servicing printers and actual returns of
printers, all of which had a material adverse effect on the Company's
business, financial condition and results of operations for 1997 and 1998.
There can be no assurance that the Company will successfully resolve any
future problem in the manufacture or operation of its printers or any new
product. Failure of the Company to resolve any future manufacturing or
operational problems with its printers or any new product in a timely manner
could result in similar material adverse effects on the Company's business,
financial condition and results of operations.
The Company's image processing software products are extremely complex as a
result of such factors as advanced functionality, the diverse operating
environments in which they may be deployed, the need for interoperability, the
multiple versions of such products that must be supported for diverse
operating platforms and languages and the underlying technological standards.
These products may contain undetected errors or failures when first introduced
or as new versions are released. There can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not
be found in new software products after commencement of commercial shipments,
resulting in loss of or delay in market acceptance. Such loss or delay would
likely have a material adverse effect on the Company's business, financial
condition and results of operations.
Susceptibility of Certain Customers to Economic and Financing
Conditions. Many of the Company's end user customers are small businesses that
are more susceptible than large businesses to general downturns in the
economy. In some cases, these customers finance the purchase of the Company's
products through third-party financing arrangements. To the extent that such
customers are unable to obtain acceptable financing terms or to the extent
that a rise in interest rates makes financing arrangements generally
unattractive, these factors would impact adversely sales of the Company's
products. Consequently, the Company's access to a significant portion of its
present customer base would be limited. Moreover, competitors, such as Hewlett
Packard, that have significantly greater financial resources than the Company,
may be able to provide more attractive financing terms to potential customers
than those available through the Company or through third parties. There can
be no assurance that the Company's small business customers will, if
necessary, be able to obtain acceptable financing
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terms or that the Company will be able to offer financing terms that are
competitive with those offered by the Company's competitors. The Company has
extended payment terms to its customers as well as established a leasing
program for its customer's benefit through Integrated Lease Management. The
Company's inability to continue to generate sufficient levels of product
revenue from sales to such customers due to the unavailability of financing
arrangements or due to a general economic downturn would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Uncertainty Regarding Development of LFDP Market; Uncertainty Regarding
Market Acceptance of New Products. The LFDP market is relatively new and
evolving. The Company's future financial performance will depend in large part
on the continued growth of this market and the continuation of present large
format printing trends such as use and customization of large format
advertisements, use of color, transferring of color images onto a variety of
substrates, point-of-purchase printing, in-house graphics design and
production and the demand for limited printing runs of less than 200 copies.
The failure of the LFDP market to achieve anticipated growth levels or a
substantial change in large format printing customer preferences would have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, in a new market, customer preferences can
change rapidly and new technology can quickly render existing technology
obsolete. Failure by the Company to respond effectively to changes in the LFDP
market, to develop or acquire new technology or to successfully conform to
industry standards would have a material adverse effect on the business,
financial condition and results of operations of the Company.
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions
and rapid product obsolescence. The Company's success will be substantially
dependent upon its ability to continue to develop and introduce competitive
products and technologies on a timely basis with features and functionality
that meet changing customer requirements. The Company's business would be
adversely affected if the Company were to incur delays in developing new
products or enhancements, or if such products or enhancements did not gain
widespread market acceptance. In addition, there can be no assurance that
products or technologies developed by others will not render the Company's
products or technologies noncompetitive or obsolete. The Company must
continually assess emerging technologies and standards, and evolving market
needs, and must continually decide which technologies and product directions
to pursue. If the Company were to focus its efforts on technologies, standards
or products that do not meet emerging end user needs and do not achieve market
acceptance, the Company could miss one or more product cycles. In such an
event, the Company's business, financial conditions and results of operations
would be materially adversely affected.
The Company's products currently target the high-performance production
segment of the LFDP market. The future success of the Company will likely
depend on its ability to develop and market new products that provide superior
performance at acceptable prices within this segment and to introduce lower-
cost products aimed at a broader segment of the LFDP market. Also, as the
Company develops new printers, it may need to develop new consumables to be
used by its new printer products. During the development process of
consumables for the PiezoPrint 5000, the Company found that the oil based inks
used in this printer had certain limitations which did not allow the Company
to develop a photogloss media which was compatible with the printer. This lack
of a photogloss media limited the market acceptance of the printer. The
resulting reduction in anticipated revenue from the sale of PiezoPrint 5000
printers had a material adverse effect on the Company's business, financial
condition and results of operations for 1997 and 1998. Additionally, any
quality, durability or reliability problems with new products, regardless of
materiality, or any other actual or perceived problems with new Company
products, could have a material adverse effect on market acceptance of such
products. There can be no assurance that such problems or perceived problems
will not arise or that, even in the absence of such problems, new Company
products will receive market acceptance. A failure of future Company products
to receive market acceptance for any reason would have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, the announcement by the Company of new products and
technologies could cause customers to defer purchases of the Company's
existing products, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
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Dependence on Sole Source Subcontractors and Suppliers. The Company relies
on subcontractors and suppliers to manufacture, subassemble, and perform
first-stage testing of its printer components and may, in the future, rely on
third parties to develop or provide printer components, some of which are, or
may be, critical to the operation of the Company's products. The Company
relies on single suppliers for certain critical components, such as the
printhead for the PiezoPrint 5000, rubber drive rollers, electrostatic writing
head circuit boards, and application-specific integrated circuits. Also, the
Company's PiezoPrint 1000 inkjet printer is originally manufactured by a third
party. It is the Company's intent to discontinue actively marketing and
selling the PiezoPrint 1000 in 1998 when existing inventory has been
exhausted. The Company has no current plans to replace the PiezoPrint 1000
with another entry level printer. The Company also relies on limited source
suppliers for consumables, such as specialized inks, varnish, vinyls and
papers, that the Company sells under the Raster Graphics brand name. The ink
for the Company's newest printer is being sole-sourced. The Company's
agreements with its subcontractors and suppliers are not exclusive, and each
of the Company's subcontractors and suppliers can cease supplying printing
system components or consumables with limited notice and with little or no
penalty. In the event it becomes necessary for the Company to replace a key
subcontractor or supplier, the Company could incur significant manufacturing
set-up costs and delays while new sources are located and alternate components
and consumables are integrated into the Company's manufacturing process. There
can be no assurance that the Company will be able to maintain its present
subcontractor and supplier relationships or that the Company will be able to
find suitable replacement subcontractors and suppliers, if necessary. During
1997 the Company received from its sole-source supplier printheads for the
PiezoPrint 5000 which displayed quality problems after shipment of the printer
to customer sites. The supplier is reviewing its manufacturing process, and
intends to supply printheads in numbers that will not adversely affect the
Company's ability to produce printers. However, there can be no assurance that
the Company's present subcontractors and suppliers will continue to provide
sufficient quantities of suitable quality product components and consumables
at acceptable prices. The loss of subcontractors or suppliers or the failure
of subcontractors or suppliers to meet the Company's price, quality, quantity
and delivery requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Foreign Supplier. The PiezoPrint 1000 is the first product the
Company has purchased under license for marketing under its own label. The
supplier also distributes the product through its own worldwide distribution
network. The success of the Company in selling this product is dependent upon
many variables such as the established distribution network of the Company,
pricing, support, added value from integration of the Company's PosterShop
software and other factors. In addition this is the Company's first major
procurement of a finished product from a Japanese vendor who does not have
significant international trading experience. The inability to maintain a good
vendor relationship would adversely affect sales of the product. Furthermore
the purchase price of the product is denominated in Japanese yen; and the
fluctuation of this foreign currency will have an impact on the profitability
of the product. It is the Company's intent to discontinue actively marketing
and selling the PiezoPrint 1000 in 1998 when existing inventory has been
exhausted. The Company has no current plans to replace the PiezoPrint 1000
with another entry level printer. As a result, the Company does not expect any
material effect on its results of operations in connection with the PiezoPrint
1000 as a result of the recent financial uncertainties in Asia and other
foreign markets.
Risks Associated with Intellectual Property. As of December 31, 1997, the
Company had seven pending patent applications and has been awarded nine United
States patents covering technical features and fabrication methods used in
Raster Graphics' printers and color rendering techniques used by its image
processing software. Despite the Company's precautions, it may be possible for
a third party to copy or otherwise obtain and use the Company's technologies
without authorization or to develop competing technologies independently.
Furthermore, the laws of certain countries in which the Company does business,
including countries in which the Company does a significant amount of
business, such as Latin America, Korea, France, Germany and Japan, may not
protect the Company's software and intellectual property rights to the same
extent as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
If unauthorized copying or misuse of the Company's products were to occur to
any substantial degree, or if a competitor of the
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Company were to effectively duplicate the Company's proprietary technology,
the Company's business, financial condition and results of operations would be
materially adversely affected.
Although the Company has not received notices from third parties alleging
infringement claims that the Company believes would have a material adverse
effect on the Company's business, there can be no assurance that third parties
will not claim that the Company's current or future products or manufacturing
processes infringe the proprietary rights of others. Any such claim, with or
without merit, could result in costly litigation or might require the Company
to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all, which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
Pending Litigation. Following the Company's announcement that it would
restate its earnings for its third fiscal quarter in 1997, several putative
class action lawsuits were filed in the California Superior Court and in the
United States District Court in the Northern District of California against
the Company, its Chairman, Chief Executive Officer and President, and certain
of its officers and directors. Cases filed in California Superior Court are:
Ginter et al. v. Raster Graphics, Inc. et al. (CV772401), filed March 14,
1998, and Beshear v. Raster Graphics, Inc. et al. (CV773294), filed April 14,
1998. Cases filed in the United States District Court in the Northern District
of California are: Grimm v. Raster Graphics, Inc. et al (C-98-0807-FMS), filed
March 2, 1998, Dowgos v. Raster Graphics, Inc. et al. (C-98-0938-MJJ), filed
March 10, 1998, and Moore et al. v. Raster Graphics, Inc. (C-98-1489-SBA).
In substance, the complaints allege that the Company made false and
misleading statements regarding the introduction of its PiezoPrint 5000 and
the Company's financial results for its third fiscal quarter and its expected
results for its fourth fiscal quarter in 1997. The complaints further allege
that by making these purportedly false and misleading statements, the
defendants violated Section 10(b) and 20 of the Securities Exchange Act of
1934 and certain sections of the California Corporations Code. Plaintiffs 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. In October 1998, the Company entered into a Memorandum of
Understanding with the securities class action plaintiffs, which contains the
essential terms of settlement of the above-referenced class actions. In
consideration for a mutually agreed release, the plaintiffs will receive $4.5
million, $850,000 of which will be paid by the Company and the balance of
which will be paid by the Company's insurance carrier. Such sums have been
placed in escrow pending final approval of the settlement. The settlement is
conditional upon receiving final judicial approval. Although the United States
District Court for the Northern District of California on December 11, 1998
granted preliminary approval of the settlement, there can be no assurances
final judicial approval will be obtained. The Company has not admitted any
liability in connection with the settlement. The Company has incurred
litigation related costs and expenses of approximately $200,000 in connection
with these suits. If the settlement is not approved, the Company expects that
its litigation-related costs may exceed $1,000,000. Although the Company may
be reimbursed for these costs by its insurance carrier, there can be no
assurance that such reimbursement will be obtained. In addition, settlement of
these class-action suits is a condition to the consumation of the Merger.
The Company is a party to a number of legal claims arising in the ordinary
course of business. The Company believes the ultimate resolution of the claims
will not have a material adverse effect on its financial position, results of
operation, or cash flow.
Blank Check Preferred Stock; Anti-Takeover Provisions. The Company's Board
of Directors has the authority to issue up to 2,000,000 shares of Preferred
Stock and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the stockholders. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change of control of the Company without further
action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The Company has no present plans to
issue
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shares of Preferred Stock. The Company's Certificate of Incorporation and
Bylaws provide for, among other things, the prospective elimination of
cumulative voting with respect to the election of directors, the elimination
of actions to be taken by written consent of the Company's stockholders and
certain procedures such as advance notice procedures with regard to the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors. In addition, the Company's charter
documents provide that the Company's Board of Directors be divided into three
classes, each of which serves for a staggered three-year term. The foregoing
provisions could have the effect of making it more difficult for a third party
to effect a change in the control of the Board of Directors. The foregoing
provisions may also result in the Company's stockholders receiving less
consideration for their shares than might otherwise be available in the event
of a takeover attempt of the Company. On February 3, 1998, the Company's Board
of Directors adopted a stockholder rights plan. This plan provides
stockholders with special purchase rights under certain circumstances,
including if any new person or group acquires 15 percent or more of the
Company's common stock. This plan could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, or of making the Company less attractive to a potential
acquiror of, a majority of the outstanding voting stock of the Company, and
may complicate or discourage a takeover of the Company. The Company has
amended the stockholder rights plan in connection with the Merger so that the
rights plan is not triggered thereby.
Additional Risk Factors. Additional trends and uncertainties regarding
Raster Graphics are described elsewhere in this Proxy Statement. See
"Management's Discussion and Analysis -- Trends and Uncertainties."
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THE ANNUAL MEETING
This Proxy Statement is furnished in connection with the solicitation by the
Company of proxies to be voted at a Annual Meeting of Stockholders of the
Company to be held on March 19, 1999, at 9:00 a.m., local time at Hyatt
Rickeys, 4219 El Camino Real, Palo Alto, CA 94306 (the "Annual Meeting"). This
Proxy Statement is first being mailed to stockholders of the Company on or
about February 16, 1999.
The purpose of the Annual Meeting is to consider and vote upon a proposal to
approve the Agreement and Plan of Merger, dated as of October 6, 1998 (the
"Merger Agreement"), between Gretag Imaging Group, Inc., a Delaware
corporation ("Gretag"), Gretag Acquisition Corp., a Delaware corporation and a
wholly owned Subsidiary of Gretag ("Merger Sub"), and the Company, pursuant to
which, among other things, (a) Merger Sub will be merged with and into the
Company (the "Merger") and (b) each share of common stock of the Company
("Common Stock") outstanding immediately prior to the Merger (other than
shares owned by the Company, Gretag and Gretag Subsidiaries and shares as to
which appraisal rights are properly perfected and not withdrawn) will be
converted into the right to receive $1.2968 in cash. In addition, each holder
of an employee stock option to acquire shares of Common Stock will,
immediately after the Effective Time, become entitled to receive a cash
payment equal to $1.2968 less the per share exercise price under the option
for each share of Common Stock covered by such option. Upon the consummation
of the Merger, the separate existence of Merger Sub will cease, all of the
rights, privileges, powers, franchises, properties, assets, liabilities and
obligations of Merger Sub will be vested in the Company and the Company will
become a wholly owned Subsidiary of Gretag. See "Proposal No. 1: The Merger."
At the Annual Meeting you will also be asked to vote for the election of the
Class II directors of the Board of Directors to serve until the earlier of the
expiration of their term or consummation of the Merger. See "Proposal No. 2:
Election of Directors."
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY DETERMINED THAT THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR, ADVISABLE
AND IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS
THAT THE STOCKHOLDERS OF THE COMPANY APPROVE THE MERGER AGREEMENT AND THE
MERGER. THE BOARD OF DIRECTORS ALSO RECOMMENDS THAT THE STOCKHOLDERS OF THE
COMPANY APPROVE THE ELECTION OF THE CLASS II DIRECTORS.
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VOTING AND PROXIES
Date, Time and Place of Annual Meeting
The Annual Meeting is scheduled to be held at 9:00 a.m., local time, on
March 19, 1999, at Hyatt Rickeys, 4219 El Camino Real, Palo Alto, CA 94306.
Record Date and Outstanding Shares
Only holders of record of shares of Common Stock at the close of business on
February 9, 1999 (the "Record Date") may vote at the Annual Meeting or at any
adjournments or postponements thereof. As of the Record Date, there were
9,599,525 shares of Common Stock outstanding, the only class of securities of
the Company entitled to vote at the Annual Meeting, held by approximately
2,901 stockholders of record. Each stockholder is entitled to one vote for
each share registered in the stockholder's name on the Record Date.
Voting Proxies
Many of the Company's stockholders may be unable to attend the Annual
Meeting. Therefore, the Company's Board of Directors is soliciting proxies so
that each stockholder has the opportunity to vote on the proposals to be
considered at the Annual Meeting. When a proxy card is returned properly
signed and dated, the shares represented thereby will be voted in accordance
with the instructions on the proxy card. However, if a stockholder does not
return a signed proxy card, his or her shares will not be voted by the
proxies. Stockholders are urged to mark the boxes on the proxy card to
indicate how their shares are to be voted. If a stockholder returns a signed
proxy card and a choice is not specified, the shares represented by that proxy
card will be voted for the Merger and in favor of the Class II directors and
may also be voted in the proxy holder's discretion on such other business as
may properly come before the meeting or any adjournments or postponements
thereof, except that shares represented by proxies which have been voted
"against" the Class II directors or "against" the Merger Agreement and the
Merger will not be used to vote "for" postponement or adjournment of the
Annual Meeting for the purpose of allowing additional time for soliciting
additional votes "for" the Merger Agreement and the Merger. See "--Vote
Required" and "Other Matters."
Stockholders of the Company who execute proxies retain the right to revoke
them at any time before they are voted. Any proxy given by a stockholder may
be revoked (i) by duly executing and delivering a later proxy prior to the
exercise of such proxy, (ii) by giving notice of revocation in writing to the
Secretary of the Company prior to the meeting, at 3025 Orchard Parkway, San
Jose, California 95134, or (iii) by attending the Annual Meeting and voting in
person.
Vote Required
A quorum for the transaction of business at the meeting consists of holders
of the majority of the outstanding shares of the Company's Common Stock,
present in person or by proxy. In the event that less than a majority of the
outstanding shares are present at the Annual Meeting, either in person or by
proxy, a majority of the shares so represented may vote to adjourn the Annual
Meeting without further notice, other than announcement at the Annual Meeting,
until a quorum shall be present or represented.
The affirmative vote of holders of at least a majority of the outstanding
shares of Common Stock of the Company as of the Record Date is required to
approve and adopt the Merger Agreement and the transactions contemplated
thereby. The affirmative vote of a majority of shares represented and voting
at a duly authorized meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) is
required under Delaware law for the election of the Class II directors. Under
the DGCL, in determining whether the proposal regarding the adoption of the
Merger Agreement has received the requisite number of affirmative votes,
abstentions and broker non-votes will be counted and will have the same effect
as a vote against such proposal.
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Certain stockholders of the Company, holding in the aggregate 1,923,034
shares of the Common Stock (including 420,000 shares issuable upon the
exercise of outstanding options), or 19.2% of the outstanding shares
(including 4.38% issuable upon the exercise of outstanding options) on the
Record Date, have entered into a Stockholders Agreement with Gretag dated as
of October 6, 1998 pursuant to which such stockholders have agreed to vote
such shares in favor of the Merger and to vote against any competing
transaction that might be proposed by a third party prior to consummation of
the Merger. In addition, the Company has granted Gretag an irrevocable option
to purchase shares of the Company's Common Stock with a value (based upon the
price per share to be paid in the Merger) of up to the greater of $5,000,000
and the amount of principal and accrued interest pursuant to the Loan and
Pledge Agreement. Gretag may purchase up to 3,840,526 shares of the Company's
Common Stock pursuant to this option (approximately 28.6% of the outstanding
shares after the exercise of such option).
The cost of solicitation, including the cost of preparing and mailing the
Notice of the Annual Meeting of Stockholders and this Proxy Statement, will be
paid by the Company. Solicitation will be made primarily by mailing this Proxy
Statement to all stockholders entitled to vote at the Annual Meeting. Proxies
may be solicited by officers and regular employees, but at no compensation in
addition to their regular compensation as employees. The Company may reimburse
brokers, banks, and others holding shares in their names for third parties,
for the cost of forwarding Proxy Statements to and obtaining proxies from
third parties. In addition, the Company has retained Georgeson & Company to
assist in soliciting proxies.
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PROPOSAL NO. 1: THE MERGER
Parties to the Merger
Raster Graphics, Inc.
Raster Graphics develops, manufactures and markets high-performance, large
format, digital color printing systems, and sells related consumables and
software for the on-demand large format digital printer ("LFDP") market. The
Company's products are designed to meet the short-run, on-demand production
market requirements of quality, speed, flexibility, reliability and low per
copy cost.
The LFDP market consists of color print jobs with run lengths typically
ranging from one to 200 copies, and output sizes of 20-inches by 30-inches or
larger. Applications include Point of Purchase (POP) signs, trade show exhibit
graphics, displays, transit advertising, fleet graphics, banners, billboards,
courtroom graphics, backlit signage, posters and sports and corporate events.
The primary users of Raster Graphics' printing systems are color photo labs,
reprographic houses, graphic arts service bureaus, exhibit builders, digital
color printers, screen printers and in-house print shops.
Gretag Imaging Group, Inc.
Gretag Imaging Group, Inc. is a holding company, which through its principal
subsidiaries, Gretag Imaging, Inc. and Gretag Imaging AG, performs research,
development and production of equipment (including splicers, cutters,
packaging machine and printers) for central labs and equipment for point-of-
service labs, as well as software for lab control.
Gretag manufactures image processing equipment in its two wholly owned
operating subsidiaries--Gretag Imaging AG, Regensdorf, Switzerland and Gretag
Imaging, Inc., Chicopee, Massachusetts, United States--and in San Marco
Imaging S.r.l., Fjume Veneto, Italy, in which Gretag and its affiliates have a
majority stake.
Gretag Acquisition Corp.
Gretag Imaging Corp. ("Merger Sub") is a wholly owned Subsidiary of Gretag
and was formed by Gretag to effect the Merger and has had no prior business.
Upon consummation of the Merger, Merger Sub will be merged with and into the
Company, and Merger Sub's separate corporate existence will thereupon cease.
General
The discussion in this Proxy Statement of the Merger and the description of
the principal terms of the Merger Agreement are qualified by reference to the
Merger Agreement, the Asset and Subsidiary Stock Option Agreement, the Loan
and Pledge Agreement and the Stockholders Agreement, copies of which are
attached hereto as Annex A, Annex B, Annex C and Annex D, respectively, and
incorporated herein by reference, and to each of the other Annexes to this
Proxy Statement.
Background of the Merger
On March 26, 1998, the Raster Graphics Board of Directors held a meeting to
discuss the Company's operating and financial condition, industry trends, and
the Company's strategic position within the industry, as well as the
possibility of the sale of the Company or part of the Company to a strategic
buyer. The Board agreed that in light of the Company's declining financial
position caused by operating losses encountered in the Company's third and
fourth fiscal quarters in 1997 and difficulties encountered in the transitions
from a single product, single technology company to a multi-product, multi-
technology company, including difficulties associated with the introduction of
new products, management's projections of continuing operating losses and a
pending consolidation in the digital printing industry, that the Company
should consider strategic alternatives.
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The Board approved the retention of Hambrecht & Quist to identify, contact and
represent the Company in discussions with potential strategic acquirors.
On April 1, 1998, representatives of Hambrecht & Quist met with Rakesh
Kumar, President and Chief Executive Officer of the Company, and Remo Canessa,
then Chief Financial Officer of the Company, to discuss the strategic
combination process and review potential partners. Hambrecht & Quist provided
the Company with a list of approximately 20 potential strategic partners for
consideration. After some discussion, Messrs. Kumar and Canessa and Hambrecht
& Quist identified 15 parties which they believed could be suitable strategic
partners. Hambrecht & Quist was given permission to commence communications
with these approved parties.
On April 8, 1998, the Company executed an engagement letter with Hambrecht &
Quist concerning Hambrecht & Quist's role as the Company's exclusive financial
advisor in connection with a potential sale of the Company.
During the week of April 13, 1998, representatives of Hambrecht & Quist
began contacting the potential strategic buyers identified by Company
management and representatives of Hambrecht & Quist during the April 1
meeting. Over the next two weeks, representatives of Hambrecht & Quist
contacted all 15 such parties to ascertain potential levels of interest.
On April 17, the Company issued a press release stating, among other things,
that it had retained Hambrecht & Quist to assist it in the evaluation of
potential strategic partners.
By the end of April, representatives of Hambrecht & Quist had received
indications from four parties stating definitively that they would have no
interest in a combination with the Company. Hambrecht & Quist, via the
Company, was contacted by one additional party who expressed interest in the
Company.
Throughout April and May, 1998, representatives of Hambrecht & Quist
continued discussions with, executed non-disclosure agreements with and
forwarded information packages to those parties who expressed interest in a
strategic transaction with the Company.
In May 1998, Hambrecht & Quist distributed Information Packages to 10
prospective strategic partners. During this period, Hambrecht & Quist
conducted numerous telephone calls with senior management of these prospective
partners to determine their respective levels of interest, identify possible
areas of collaboration, facilitate answers to initial questions and schedule
meetings with Raster Graphics management over the months of May and June.
During the first week in May, 1998, one prospective acquirer ("Company A")
met with senior management of the Company at the Company's headquarters.
Company A conducted financial and operational due diligence at this time.
During the last week of May, two other prospective acquirers conducted
preliminary due diligence meetings with Company senior management. These
meetings each took place over one day. Each of these meetings involved
discussions about the Company's strategic position, technology, products,
operations and financial condition. These meetings also included facility
tours and product demonstrations.
In June 1998, the Company conducted preliminary due diligence meetings with
seven prospective acquirers. These meetings each took place over one or two
days at the Company's headquarters in San Jose. In each case, prospective
acquirers met with certain senior Management personnel to discuss the
Company's strategic position, technology, products, operations and financial
condition. These meetings also included facility tours and product
demonstrations. As one of the prospective acquirors, Gretag sent a team of
engineers in early June to conduct due diligence on the Company's technology
and products.
On June 8, 1998, the Company's Board of Directors held a meeting at which it
received an update from management and Hambrecht & Quist on discussions with
prospective strategic partners. The Board was apprised that the Company's lack
of completed financial statements for the 1997 fiscal year and the class
action securities litigation pending against the Company together posed
significant obstacles to completing a strategic transaction.
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By the end of June, 1998, eight prospective partners had informed Hambrecht
& Quist and/or the Company that they would not pursue a strategic combination
with the Company. Reasons cited included a perceived lack of compatibility
with there own strategies, discomfort with the Company's operating and
financial position, and discomfort with the class-action securities litigation
pending against the Company. One party submitted a proposal in writing to
acquire the Company's electrostatic product line for $3 to $3.5 million. In
addition, management of the Company determined that one other prospective
candidate who had met with Company management lacked sufficient financial or
managerial resources to undertake a combination transaction.
During this time period, representatives of another Nasdaq-listed company
("Company B") expressed interest to senior management of the Company regarding
a possible acquisition of Onyx Graphics Corporation, a wholly owned subsidiary
of the Company. The parties agreed to hold further discussions.
In the first week of July 1998, the Company held preliminary due diligence
meetings with an additional party. This meeting took place over one day at the
Company's headquarters in San Jose. The prospective acquiror met with certain
senior Management personnel to discuss the Company's strategic position,
technology, products, operations and financial condition. This meeting also
included facility tours and product demonstrations. This acquiror later
informed Hambrecht & Quist that it would not pursue a strategic combination
with the Company. Reasons cited included a perceived lack of compatibility
with its own strategy, and discomfort with the Company's operating and
financial position.
In early July, another party verbally proposed to senior management of the
Company an arrangement to pay the Company $2 million over an unspecified
period of time for exclusive distribution rights to the Company's inkjet
product lines.
During the month of July, Company A submitted a proposal to acquire the
Company for total consideration of either (a) 4.1 million shares of Company A
common stock (then valued at approximately $4.25 per share on the Nasdaq
National Market, bringing the total consideration to approximately $17.4
million); or (b) a convertible debenture with a face value of $25 million.
The management team of Company A presented these proposals to the Company's
Board of Directors on July 9, 1998. The presentation included an assessment of
the Company's strategic and financial position and its alternatives as Company
A perceived them. Prior to the July 9 Board meeting, the Company had also
received a one-page statement from Gretag indicating an interest in purchasing
the Company for between $18 and $20 million in cash, subject to the completion
of financial due diligence. Based on the proposals received and consideration
of conversations with other prospective buyers, the Board instructed Hambrecht
& Quist to continue to pursue discussions with Company A, Gretag and the other
interested parties. The Board also requested certain revisions to Company A's
proposals.
During July, representatives of Hambrecht & Quist contacted the remaining
parties who had either expressed an interest in, or not formally ruled out, a
strategic transaction with the Company.
Representatives of Hambrecht & Quist held further discussions with the
investment bankers for Company A, informing them that Raster Graphics Board of
Directors requested certain revisions to Company A's initial proposal. On July
13, Company A submitted a revised proposal which included aggregate
consideration of either (a) 4.1 million shares of Company A common stock or
(b) 4.1 million shares of Company A convertible preferred stock. The Company's
Board requested that an offer from Company A be accompanied by a working
capital facility of up to $0.5 million. The Company A proposal also included a
management services agreement which would transfer managerial authority to
Company A immediately, while providing employment contracts with Messers.
Kumar and Willard.
Throughout July, representatives of Hambrecht & Quist conducted several
telephone conversations with the investment bankers and CEO for another
interested party ("Company C") to inform them of the outstanding proposals to
acquire the Company. Company C indicated that, based on their knowledge and
due diligence as of
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that time, they would be prepared to pursue an acquisition of the Company for
value of $10 to $12 million in either a cash or stock transaction.
On July 8, the Company received a proposal from an investment fund ("Company
E") to make a significant investment in the Company.
During the week of July 27, representatives of Hambrecht & Quist contacted
the investment bankers representing another interested party ("Company D") to
inform them of the outstanding offer for the Company as well as the Company's
desire to complete a transaction and obtain working capital funding. Through
further discussions with Company D's investment bankers, Hambrecht & Quist
learned that Company D would be unlikely to move forward without having access
to Raster Graphics' then uncompleted 1998 quarterly financial statements.
Further, Company D's level of interest continued to be tempered by the
presence of the stockholder litigation.
Hambrecht & Quist also resumed discussions with Gretag, requesting that
Gretag submit a formal term sheet including a commitment to provide working
capital to the Company. Gretag indicated that it wished to undertake further
financial and operating due diligence on the Company prior to submitting a
term sheet. Based on such due diligence, Gretag determined that the original
price range of $18 to $20 million would be revised to $13 to $15 million
subject to adjustments for the settlement of the class-action securities
litigation pending against the Company.
During the week of August 10, representatives of Hambrecht & Quist contacted
Company C's investment bankers to alert them that the Board had determined to
pursue discussions with Company A and Gretag (which was not identified).
Company D's investment bankers maintained that Company D remained very
interested in pursuing a transaction and queried Hambrecht & Quist as to
whether there would be an opportunity to allow Company D to conduct on-site
due diligence. Subsequent conversations with Company D and its investment
bankers confirmed that Company D had a renewed level of interest and wished to
move ahead with due diligence expeditiously.
On August 13, Company A submitted a revised proposal. The principal terms of
the proposal included total consideration of either 4.1 million shares of
Company A common or convertible preferred stock. The proposal also included
the following new terms: the preferred shares would be convertible at any time
at the option of the holder, a hold-back of shares in connection with
contingent expenses and a break-up fee of $3.5 million.
On August 17, the Board convened a meeting to discuss the revised offers
from Gretag and Company A, as well as renewed interest from Company D and the
investment proposal from Company E. Representatives of management and
Hambrecht & Quist presented a summary of the proposals to date. The Board
determined that several features of Company A's proposal were less desirable
to the Company's stockholders than the cash transaction proposed by Gretag,
primarily because the proposed consideration would be equity securities of
Company A, providing less liquidity to the Company's stockholders than the
cash consideration proposed by Gretag. In addition, Company A proposed to hold
back a percentage of the merger consideration until certain contingent
expenses were resolved and demanded a $3.5 million break-up fee. The Board
determined to request that Company A increase its purchase price to compensate
for the fact that the consideration to be paid was all stock rather than cash,
and increase available interim working capital financing to $1.5 million from
$500,000. In addition, the Board expressed concerns about the financial and
managerial resources of Company A, and discussed the likelihood of a decline
in Company A's share price following an announcement of its acquisition of the
Company. The Board agreed that Company D and Company E should have the
opportunity to conduct detailed due diligence at the Company's offices. The
Board instructed Hambrecht & Quist to attempt to negotiate improved terms with
Gretag and to convey its sentiments to relevant parties at Company A and
Company D.
On August 21, the Company received a revised proposal and term sheet from
Company A in response to the Board's requests. The proposal included total
consideration 4.1 million shares of Company A common or
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convertible preferred stock, an increase in the working capital facility to
$1.5 million, and did not include a management services agreement.
On August 25, the Board convened to review the status of discussions with
Company A, Company D and Gretag. Representatives of management and Hambrecht &
Quist reviewed each proposal and recommended continuing discussions with
Company D and Gretag. After a thorough discussion in which the views of
management and Hambrecht & Quist were elicited, the Board instructed Hambrecht
& Quist and Company management to continue discussions with Gretag and attempt
to expedite proceedings with Company D. The Board also agreed to inform
Company A that it would not proceed with its offer.
Also during the week of August 24, the Company provided additional due
diligence information, including revised financial projections, to Gretag. Due
to the Company's downward revision to revenue estimates for the third and
fourth quarter, of 1998, Gretag determined that the purchase price should be
revised. The Company and Gretag agreed to a cash purchase price of $14
million.
During the week of August 24, representatives of Company B met with certain
Company senior management at the Company's U.K. offices and made a proposal to
acquire the Company's Onyx subsidiary for $4 million.
On September 1, the Board convened to consider the Gretag offer of $14
million.
During the following week, representatives of Company E met with certain
senior Management personnel to discuss the Company's strategic position,
technology, products, operations and financial condition. This meeting also
included facility tours and product demonstrations.
By letter dated September 8, Company D indicated that, following completion
of due diligence, it had determined that it would only pursue an acquisition
of the Company through a purchase of assets. Company D did not make an offer
at the time, however, and indicated that it would do so only after the Company
had commenced bankruptcy proceedings.
On September 11, Hambrecht & Quist had discussions with the CEO of Company B
regarding its interest in an all stock merger with the Company which would
have resulted in a 50% pro forma ownership position for the Company's
stockholders.
On September 14, the Board received a revised offer from Company E to make a
significant investment in the Company based on terms that were more favorable
than Company E's original offer.
On September 14, the Board together with representatives from Hambrecht &
Quist convened to review the status of discussions with Company B, Company D,
Company E and Gretag. The Board briefly discussed the interest expressed by
Company B to acquire the Company in a stock-for-stock merger but rejected
Company B's proposal, because the Board determined that Company B, with a
market capitalization of only $12 million, had insufficient liquid resources
to support the succeeding company. Further, the board determined that the
stock consideration offered by Company B was inferior to the cash offer made
by Gretag because the value of the stock was uncertain and provided less
liquidity to the Company's stockholders. The Board then reviewed the letter
dated September 8 from Company D indicating that Company D would only pursue
an acquisition of the Company through a purchase of assets of the Company
following the Company's voluntary filing for bankruptcy protection under
Chapter 11. Hambrecht & Quist indicated that it understood from discussions
with Company D that Company D would not make a formal offer until after the
Company declared bankruptcy. The Board determined that a filing of bankruptcy
would be seriously detrimental to the Company's business, detrimentally affect
its relationship with its customers and suppliers and result in a material
reduction of the value of its business. The Board then discussed the revised
offer from Company E to invest $7.5 million in exchange for approximately 50%
of the capital stock of the Company. The Board concluded that while the offer
from Company E had improved, it would result in over 50% dilution to the
Company's stockholders, leave the
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Company as an independent enterprise and not provide any consideration for the
Company's stockholders. The Board reviewed Gretag's offer and concluded that
the cash offer from Gretag represented the best available offer to the
Company's stockholders. The Board then determined to pursue the Gretag offer
and authorized the Company to enter into the non-binding letter of intent with
Gretag. In addition, the Board further authorized the Company to execute a
promissory note with Gretag in the amount of $500,000 to meet certain short-
term working capital obligations and to enter into a no-shop agreement.
During the next several weeks, representatives and management of the Company
and Gretag continued due diligence procedures and analyses and negotiated the
terms of the Merger Agreement and the related agreements.
On September 17, Mr. Kumar received a call from Gretag senior management to
review the Company's latest financial forecast. On September 18, Mr. Kumar met
with Gretag management, at which time Gretag revised its offer to $10 million.
Following discussions between Mr. Kumar and members of the Company's Board of
Directors, and further discussions between Mr. Kumar and Gretag, Gretag
revised its offer to $13 million.
On September 30, the Board convened to consider the proposed transaction
with Gretag. At the meeting, representatives of Venture Law Group reviewed the
terms of the proposed merger as set forth in the Merger Agreement. Hambrecht &
Quist delivered an oral presentation of its financial analysis and opinion to
the Board which was subsequently confirmed in writing (on October 6) to the
effect that, as of that date and subject to certain limitations and
assumptions, the $1.2968 per share in cash to be received by holders of shares
of common stock pursuant to the Merger Agreement was fair from a financial
point of view to such holders. The Company's Board upon proper motion to
approve the Merger voted unanimously to do so.
On October 6, 1998, Gretag and the Company executed the Merger Agreement and
issued a joint press release announcing the transaction.
Reasons for the Merger
The Board of Directors has determined that the Merger Agreement and the
Merger are fair, advisable and in the best interests of Raster Graphics and
its stockholders and has unanimously approved the Merger Agreement and the
Merger. Accordingly, the Board of Directors unanimously recommends that the
stockholders of the Company vote for approval and adoption of the Merger
Agreement and the Merger.
In reaching its unanimous determination that the Merger Agreement and the
Merger are fair, advisable and in the best interests of Raster Graphics and
its stockholders, the Board considered a number of factors, including the
following:
(i) the relationship of the Merger Consideration to the historical stock
price for the Common Stock, including the fact that the Merger
Consideration of $1.2968 per share of Common Stock represents a substantial
premium over the trading range of the Common Stock of Raster Graphics over
the prior three-month period ($0.375 to $1.25 per share) on the over-the-
counter market;
(ii) information relating to the Company's poor financial condition and
results of operations, specifically the operating losses incurred by the
Company in 1997, the low cash balance of the Company, management's
expectations that the Company would continue to incur operating losses
through at least the first quarter of 1999, requiring the Company to raise
capital to meet its working capital requirements, all of which led the
Board to believe that the Company must seek a partner. The Board further
believes that absent a merger or major capital infusion the Company would
be forced to declare bankruptcy;
(iii) the fact that, as the shares of the Company's Common Stock have
been delisted from the Nasdaq National Market, there is not an active
trading market for Raster Graphics' Common Stock and, consequently, there
is generally a lack of liquidity for Raster Graphics' stockholders;
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(iv) the fact that the Company must raise additional capital to continue
as a going concern and that Gretag agreed to enter into working capital
facility with the Company only in connection with the Merger;
(v) the fact that the Company expects to incur further losses from future
operations through at least the quarter ending March 31, 1999;
(vi) the lack of any proposals from any other third party, including
third parties with whom Company management engaged in active negotiations
(as described elsewhere in this Proxy Statement, see "The Merger--
Background of the Merger"), at a price or terms superior to the Merger
Consideration to be received in the Merger, based on reports received from
management of Raster Graphics and Hambrecht & Quist;
(vii) the Board's belief that entering into the Asset and Subsidiary
Stock Option Agreement between Gretag and the Company dated as of October
6, 1998 (the "Option Agreement"), pursuant to which Raster Graphics grants
options to Gretag (i) to purchase all of the outstanding shares of common
stock of Onyx Graphics Corporation, a Subsidiary of Raster Graphics, and
(ii) to purchase all of the assets related to the design, manufacture,
sales, service and support of Raster Graphics' inkjet printer products,
which Gretag required in connection with the Merger Agreement, was
appropriate in light of the nature of the Company's deteriorating financial
conditions and results of operations (described in (ii) above) and the lack
of other competitive or superior offers to the Gretag offer;
(viii) the opinion of Hambrecht & Quist that, as of October 6, 1998, the
$1.2968 per share of Common Stock in cash to be received by the holders of
shares of Common Stock pursuant to the Merger Agreement is fair from a
financial point of view to such holders; and
(ix) the Board's view that the terms of the Merger Agreement and related
documents, as reviewed by the Board with its legal advisors and Hambrecht &
Quist, are fair, advisable and in the best interests of the Company and its
stockholders and provide the Company and its stockholders with the
flexibility to, under certain circumstances, accept a proposal by a third
party to acquire 100% of the voting power or all the assets of the Company
and its Subsidiaries on terms which the Company's Board of Directors
determines are more favorable to the Company's stockholders than the Merger
(a "Superior Proposal") and terminate the Merger Agreement.
The foregoing discussion of the information and factors discussed by the
Board of Directors is not meant to be exhaustive, but includes material
factors considered by the Board. The Board did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the Merger is in the best interests of the Raster Graphics
stockholders.
Projections Provided to the Company's Financial Advisor
In connection with the Merger, the Company provided Hambrecht & Quist LLC
("Hambrecht & Quist"), the Company's financial advisor, with certain
preliminary financial results for fiscal year 1997 and with financial
projections for fiscal year 1998. The Company's final report on Form 10-K for
the year ended December 31, 1997, showed that the Company's net loss was
approximately $2 million greater than in the draft provided to Hambrecht &
Quist. For the nine-month period ended September 30, 1998, the Company's
cumulative revenues reported on Form 10-Q were approximately $560,000 greater,
and the Company's cumulative net loss reported on Form 10-Q was approximately
$780,000 less, than in the projections provided to Hambrecht & Quist. The
projections provided to Hambrecht & Quist projected that the Company's total
revenues and net loss for fiscal 1998 will be approximately $43.9 million and
($11.0) million, respectively.
The foregoing projections were not prepared with a view to public disclosure
or compliance with published guidelines of the SEC or the guidelines
established by the American Institute of Certified Public Accountants
regarding projections, and are included in this Proxy Statement only because
they were provided to Hambrecht & Quist. The inclusion of these projections
should not be regarded as in indication that the Company, Hambrecht & Quist or
any other person who received such information considers it an accurate
prediction of future events,
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and none of them has relied on them as such. While presented with numerical
specificity, these projections are based upon a variety of assumptions
relating to the business of the Company which may not be realized and are
subject to significant uncertainties and contingencies, many of which are
beyond the control of the Company and many of which are described in more
detail under "Raster Graphics' Business" in this Proxy Statement. There can be
no assurance that the projections will be realized, and actual results may
vary materially from those shown. Neither the Company nor Hambrecht & Quist
intends to update, revise or correct such projections if they become
inaccurate (even in the short term).
Opinion of Financial Advisor to the Company
Raster Graphics engaged Hambrecht & Quist to act as its financial advisor in
connection with the Merger and to render an opinion as to the fairness from a
financial point of view to the holders of the outstanding shares of Common
Stock of Raster Graphics of the consideration to be received by such holders
in the Merger. Hambrecht & Quist was selected by the Raster Graphics Board of
Directors based on Hambrecht & Quist's qualifications, expertise and
reputation, as well as Hambrecht & Quist's historic investment banking
relationship and familiarity with Raster Graphics. Hambrecht & Quist rendered
its oral opinion on September 30, 1998 to the Board of Directors that, as of
such date, the consideration to be received by the holders of the Common Stock
in the Merger is fair to the holders of the Common Stock from a financial
point of view. A copy of Hambrecht & Quist's opinion dated October 6, 1998,
which sets forth the assumptions made, matters considered, the scope and
limitations of the review undertaken and the procedures followed by Hambrecht
& Quist is attached as Annex E to this Proxy Statement. Raster Graphics
stockholders are advised to read the opinion in its entirety. No limitations
were placed on Hambrecht & Quist by the Board of Directors of Raster Graphics
with respect to the investigation made or the procedures followed in preparing
and rendering its opinion.
In its review of the Merger, and in arriving at its opinion, Hambrecht &
Quist, among other things: (i) reviewed the publicly available consolidated
financial statements of Gretag for recent years and interim periods to date
and certain other relevant financial and operating data of Gretag made
available to Hambrecht & Quist from published sources; (ii) reviewed the
publicly available consolidated financial statements of Raster Graphics for
recent years and interim periods to date and certain other relevant financial
and operating data of Raster Graphics made available to Hambrecht & Quist from
published sources and from the internal records of Raster Graphics; (iii)
reviewed certain internal financial and operating information including
certain projections relating to Raster Graphics prepared by the management of
Raster Graphics; (iv) discussed the business, financial condition and
prospects of Raster Graphics, including the Company's liquidity needs, with
certain of its officers; (v) reviewed the recent reported prices and trading
activity for the common stock of Raster Graphics and compared such information
and certain financial information for Raster Graphics with similar information
for certain other companies engaged in businesses Hambrecht & Quist considered
comparable; (vi) reviewed the financial terms, to the extent publicly
available, of certain comparable merger and acquisition transactions;
(vii) reviewed the Merger Agreement, the Option Agreement, and the Loan
Agreement; and (viii) performed such other analyses and examinations and
considered such other information, financial studies, analyses and
investigations and financial, economic and market data as Hambrecht & Quist
deemed relevant.
Hambrecht & Quist did not, and did not assume any responsibility to,
independently verify any of the information concerning Raster Graphics or
Gretag considered in connection with their review of the Merger and, for
purposes of its opinion, Hambrecht & Quist assumed and relied upon the
accuracy and completeness of all such information. In connection with its
opinion, Hambrecht & Quist did not prepare or obtain any independent
evaluation or appraisal of any of the assets or liabilities of Raster Graphics
or Gretag, nor did they conduct a physical inspection of the properties and
facilities of Raster Graphics or Gretag. With respect to the financial
forecasts and projections made available to Hambrecht & Quist and used in
their analysis, Hambrecht & Quist assumed that they reflected the best
currently available estimates and judgments of the expected future financial
performance of Raster Graphics. For the purposes of their opinion, Hambrecht &
Quist also assumed that neither Raster Graphics nor Gretag was a party to any
pending transactions, including external financings,
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recapitalizations or material merger discussions, other than the Merger and
those in the ordinary course of conducting their respective businesses.
Hambrecht & Quist's opinion is necessarily based upon market, economic,
financial and other conditions as they existed and could be evaluated as of
the date of the opinion and any subsequent change in such conditions would
require a reevaluation of such opinion. Hambrecht & Quist was not requested
to, and did not express any opinion relating to the financial terms of the
Option Agreement or the Loan Agreement.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
summary of the Hambrecht & Quist analyses set forth below does not purport to
be a complete description of the presentation by Hambrecht & Quist to Raster
Graphics's Board of Directors. In arriving at its opinion, Hambrecht & Quist
generally did not attribute any particular weight to any analyses or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Hambrecht & Quist
believes that its analyses and the summary set forth below must be considered
as a whole and that selecting portions of its analyses, without considering
all analyses, or of the following summary, without considering all factors and
analyses, could create an incomplete view of the processes underlying the
analyses set forth in the Hambrecht & Quist presentation to the Raster
Graphics Board of Directors and its opinion. Hambrecht & Quist did note to the
Raster Graphics Board, however, that Hambrecht & Quist has attributed less
weight to the Analysis of Publicly Traded Comparable Companies because such
companies, although comparable in the business in which they engage, were not
comparable in terms of Raster Graphics' adverse financial and operating
characteristics. In performing its analyses, Hambrecht & Quist made numerous
assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
Raster Graphics and Gretag. The analyses performed by Hambrecht & Quist (and
summarized below) are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than
suggested by such analyses. Additionally, analyses relating to the values of
businesses do not purport to be appraisals or to reflect the prices at which
businesses actually may be acquired.
In performing its analyses, Hambrecht & Quist relied upon projections for
Raster Graphics for calendar year 1998 provided by the management team ("Base
Case").
The following is a brief summary of certain financial analyses performed by
Hambrecht & Quist in connection with providing its written opinion to Raster
Graphics's Board of Directors on October 6, 1998:
Premium Analysis: Hambrecht & Quist compared the price per share of the
offer as of September 28, 1998 to similar premiums for the selected merger and
acquisition transactions it deemed comparable (as described below). Hambrecht
& Quist observed that the average one and twenty trading-day premiums paid in
the Selected Merger and Acquisition Transactions were 3% and 9%, respectively.
This compared with the proposed Merger in which, as of September 28, 1998, the
one day and one month premiums offered over the closing price for Raster
Graphics Common Stock were 5% and 62%, respectively.
Discounted Cash Flow Analysis: Hambrecht & Quist considered analyzing the
value of Raster Graphics based on the potential unleveraged discounted cash
flows of the projected financial performance estimates of Raster Graphics.
However, because of the nature of Raster Graphics's business, the absence of
meaningful multi-year cash flow projections, and the overwhelming proportion
of total value that would be ascribed to Raster Graphics's highly speculative
terminal value after a five-year time period, Hambrecht & Quist determined
that this analysis did not provide a meaningful indication of value.
Analysis of Publicly Traded Comparable Companies: Hambrecht & Quist compared
selected historical and projected financial information of Raster Graphics to
publicly traded companies engaged in businesses Hambrecht & Quist considered
comparable. Such information included the ratio of market value to latest-
twelve-months ("LTM") net income, and market value to book value. Hambrecht &
Quist also examined the ratio of the enterprise value (market value plus debt
less cash) to LTM revenue, LTM earnings before interest, taxes, depreciation
and amortization ("EBITDA"), LTM earnings before interest and taxes ("EBIT"),
and projected
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calendar year 1998 revenue. Companies deemed comparable included the following
printing companies such as Calcomp Technology, Inc., Encad Inc., Indigo N.V.,
Nur Macroprinters Ltd., Scitex Corporation Ltd., VirtualFund.Com, Inc., and
Xeikon N.V. The foregoing multiples were applied to LTM financial results of
Raster Graphics for the period ended June 30, 1998 and projected Base Case
financial results of Raster Graphics for calendar year 1998. Hambrecht & Quist
determined average multiples for the Publicly Traded Comparables of 0.9 times
LTM revenue, 8.3 times LTM EBITDA, 23.9 times LTM EBIT, 28.5 times LTM net
income, 1.2 times projected calendar year 1998 revenue, and 3.0 times book
value.
As Raster Graphics incurred operating losses for the LTM period, Raster
Graphic's implied equity value based on the analysis of publicly traded
comparable companies was based on revenue and book value multiples. Raster
Graphic's implied equity value per share based on multiples to LTM results and
the Base Case ranged from $1.75 per share to approximately $5.43 per share.
This compared with an offer in the proposed Merger of approximately $1.2968
per share for Raster Graphics.
Analysis of Selected Merger and Acquisition Transactions: Hambrecht & Quist
compared the proposed Merger with selected merger transactions. This analysis
included 6 transactions involving companies Hambrecht & Quist deemed to be
comparable to Raster Graphics in operating and financial characteristics at
the time of their respective transactions. Transactions deemed comparable
included Oracle / Versatility, Boca Research / Global Village (modem
business), Tadiran Communication / Microwave Networks, Micron Electronics /
NetFrame Systems, Ultimate Electronics / Audio King, Vtel Corp. / Compression
Labs (the "Selected Merger and Acquisition Transactions"). In examining these
transactions, Hambrecht & Quist analyzed certain income statement and balance
sheet parameters of the acquired company relative to the consideration offered
in the Merger. The foregoing multiples were applied to historical financial
results of Raster Graphics for the twelve-month period ended June 30, 1998.
Multiples analyzed included consideration offered to LTM revenue and book
value. The consideration offered in the selected merger and acquisition
transactions was an average multiple of 0.4 times LTM revenue and 1.4 times
book value. Based on the analysis of the Selected Merger and Acquisition
Transactions, Raster Graphics's implied equity value per share applying
multiples to historical results ranged from approximately $0.79 per share and
approximately $1.95 per share. This result compared with an implied value in
the proposed Merger of approximately $1.2968 per share of Raster Graphics
Common Stock.
Hambrecht & Quist's Comparable Company Analysis and Comparable M&A
Transaction Analysis utilized (1) LTM information for the period ended June
30, 1998 based on historical financial information contained in drafts of the
Company's annual report on Form 10-K for the year ended December 31, 1997,
which were publicly filed on October 7, 1998 and on draft reports on Form 10-Q
for the quarters ended March 31, 1998 and June 30, 1998 and (2) projected
financial information of Raster Graphics for the quarters ended September 30
and December 31, 1998, prepared by the management of Raster Graphics.
Hambrecht & Quist did not review the Company's Form 10-Q for the period ended
September 30, 1998. The Raster Graphics Board of Directors does not believe
that this would have had a material effect on Hambrecht & Quist's opinion. No
company or transaction used in the above analyses is identical to Raster
Graphics or the Merger. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the Merger values of the
companies or company to which they are compared.
The foregoing description of Hambrecht & Quist's opinion is materially
complete and is qualified by reference to the full text of such opinion which
is attached as Annex E to this Proxy Statement.
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and Mergers, corporate restructurings, strategic alliances, negotiated
underwriting, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the
past, Hambrecht & Quist has provided investment banking and other financial
advisory services to Raster Graphics and has received fees for rendering these
services. In particular, Hambrecht & Quist acted as a lead-managing
underwriter in the Company's initial public offering in 1996. In the ordinary
course of business, Hambrecht & Quist may actively trade in the equity and
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derivative securities of Raster Graphics and of Gretag for its own account and
for the accounts of its customers and, accordingly, may at any time hold a
long or short position in such securities.
Pursuant to an engagement letter dated April 8, 1998, Raster Graphics has
agreed to pay Hambrecht & Quist a fee of $350,000 in connection with the
delivery of a fairness opinion that is credited against any future fees
payable in connection with the transaction. Raster Graphics has also agreed to
pay Hambrecht & Quist, in connection with its services as financial advisor to
Raster Graphics, an additional fee payable upon the closing of the Merger of
$650,000. Raster Graphics also has agreed to reimburse Hambrecht & Quist for
its reasonable out-of-pocket expenses and to indemnify Hambrecht & Quist
against certain liabilities, including liabilities under the federal
securities laws or relating to or arising out of Hambrecht & Quist's
engagement as financial advisor.
Effective Time of the Merger
The Merger Agreement provides that Merger Sub will be merged with and into
the Company and that following the Merger, the separate existence of Merger
Sub will cease and the Company will continue as the Surviving Corporation and
as a wholly owned Subsidiary of Gretag. The Merger will become effective upon
the filing of the Certificate of Merger contemplated by the Merger Agreement
with the Secretary of State of the State of Delaware (the "Effective Time") in
accordance with the Delaware General Corporation Law ("DGCL"). The effective
date (the "Effective Date") of the Merger will be as soon as practicable after
all conditions to the Merger have been fulfilled or waived, which is
anticipated to be on or about the date of the Annual Meeting. The Merger
Agreement also provides that (i) the Certificate of Incorporation of Merger
Sub shall be adopted as the Certificate of Incorporation of the Surviving
Corporation; (ii) the Bylaws of the Company in effect immediately prior to the
Effective Time shall be adopted as the Bylaws of the Surviving Corporation;
(iii) the directors of Merger Sub shall be the initial directors of the
Surviving Corporation; (iv) the officers of the Company immediately prior to
the Effective Time, together with such additions thereto as Merger Sub shall
designate, shall be the officers of the Surviving Corporation as of the
Effective Time; and (v) the Merger shall, from and after the Effective Time,
have all the effects provided by the DGCL. The Merger will be accounted for
under the "purchase" method of accounting treatment.
Conversion and Cancellation of Common Stock
Upon the consummation of the Merger, each then outstanding share of Common
Stock (other than shares owned by the Company, Gretag or Gretag's
Subsidiaries, and shares, if any, that are held by stockholders exercising
appraisal rights in accordance with the DGCL ("Dissenting Shares")), will be
converted into, and become exchangeable for, $1.2968 in cash without interest
(the "Merger Consideration"). At the Effective Time, all such shares of Common
Stock will no longer be outstanding and will be canceled and retired and will
cease to exist, and each certificate representing any shares of Common Stock
will thereafter represent only the right to receive the Merger Consideration,
or the right, if any, to receive payment from the Surviving Corporation of the
"fair value" of such shares as determined in accordance with Section 262 of
the DGCL. See "--Appraisal Rights."
Treatment of Stock Options
Under the terms of the Company's stock option plans, the vesting of options
granted under such plans will accelerate at the time of the Merger. At the
Effective Time, all options to purchase Common Stock under any Company stock
option plan or stock purchase plan, whether or not then exercisable, shall be
canceled. The Surviving Corporation will pay each option holder cash equal to
the difference between the option exercise price and the Merger Consideration
multiplied by the number of shares of Common Stock subject to options held by
such option holder at or as promptly as possible after the Effective Time,
without interest. Such payment shall be contingent upon the consummation of
the Merger and shall be subject to withholding of applicable income and other
taxes.
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Exchange Procedures
Promptly after the Effective Time, the paying agent that Gretag appoints
will mail to each holder of record of shares of Common Stock immediately prior
to the Effective Time (i) a letter of transmittal which shall specify that
delivery shall be effected, and risk of loss and title to the certificates
that represent outstanding shares of such Common Stock (a "Certificate" or
"Certificates") shall pass, only upon delivery of the Certificates to the
Paying Agent and which letter shall be in customary form and have such other
provisions as Gretag may reasonably specify and (ii) instructions for
effecting the surrender of such Certificates in exchange for the Merger
Consideration. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF COMMON
STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL.
Upon surrender of a Certificate to the paying agent together with such
letter of transmittal, duly executed and completed in accordance with the
instructions thereto, and such other documents as may reasonably be required
by the Paying Agent, the holder of such Certificate shall be entitled to
receive in exchange therefor the amount of cash into which shares of Common
Stock theretofore represented by such Certificate shall have been converted,
and the shares represented by the Certificate so surrendered shall forthwith
be canceled. See "--Conversion and Cancellation of Common Stock." No interest
will be paid or will accrue on the cash payable upon surrender of any
Certificate. In the event of a transfer of ownership of Common Stock which is
not registered in the transfer records of the Company, payment may be made
with respect to such Common Stock to such a transferee if the Certificate
representing such shares of Common Stock is presented to the Paying Agent,
accompanied by all documents required to evidence and effect such transfer and
to evidence that any applicable stock transfer taxes have been paid.
At and after the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
canceled and exchanged.
Conduct Pending the Merger
Under the terms of the Merger Agreement, from the date of the Merger
Agreement to the Effective Time, except as otherwise required pursuant to the
Merger Agreement, unless Gretag has consented in writing thereto, the Company
has agreed to, and will cause each of its Subsidiaries to, (i) conduct its
operations according to its usual, regular and ordinary course of business
consistent with past practice, (ii) use its reasonable best efforts to
preserve intact its business organizations and goodwill, to maintain in effect
all existing qualifications, licenses, permits, approvals and other
authorizations as required by the Merger Agreement, to keep available the
services of its officers and employees and to maintain, to the extent
reasonably possible given the Company's current cash position and loan from
Gretag, satisfactory relationships with customers, suppliers, distributors,
brokers, sales agents and all other persons having business relationships with
it, and (iii) promptly notify Gretag upon becoming aware of any material
breach of any representation, warranty or covenant of the Merger Agreement or
the occurrence of any event that would cause any representation, warranty or
covenant of the Merger Agreement no longer to be true and correct in all
material respects.
Under the terms of the Merger Agreement, from the date of the Merger
Agreement to the Effective Time, except as otherwise required pursuant to the
Merger Agreement, unless Gretag has consented in writing thereto, the Company
has agreed that it will not, and will not permit any of its Subsidiaries to,
(i) amend its Certificate of Incorporation or Bylaws or comparable governing
instruments, (ii) except with respect to the Option Agreement, the Loan
Agreement or the granting of options for the issuance in the aggregate of
20,000 shares of Common Stock in the ordinary course of business consistent
with the past practice of the Company, issue, sell, pledge or otherwise
dispose of any shares of its capital stock or other ownership interest in the
Company (other than issuances of Common Stock in respect of any exercise of
outstanding Options) or any of the Subsidiaries, or any securities convertible
into or exchangeable for any such shares or ownership interest, or any rights,
warrants or options to acquire or with respect to any such shares of capital
stock, ownership interest, or convertible or exchangeable securities; or
accelerate any right to convert or exchange or acquire any securities
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of the Company or any of its Subsidiaries for any such shares or ownership
interest, (iii) effect any stock split, reverse stock split, stock dividend,
subdivision, reclassification or similar transaction, or otherwise change its
capitalization as it exists on the date hereof, (iv) except with respect to
the Option Agreement and the Loan Agreement, grant, confer, award or amend any
option, warrant, convertible security or other right to acquire any shares of
its capital stock or take any action to cause to be exercisable any otherwise
unexercisable option under any stock option plan or restricted stock plan, (v)
declare, set aside or pay any dividend or make any other distribution or
payment with respect to any shares of Common Stock or other capital stock or
ownership interests (other than such payments by a wholly-owned Subsidiary to
the Company or another wholly-owned Subsidiary), (vi) directly or indirectly
redeem, purchase or otherwise acquire any shares of its capital stock or the
capital stock of any of its Subsidiaries, (vii) sell, lease, assign, transfer
or otherwise dispose of (by merger or otherwise) any of its property, business
or assets (including, without limitation, receivables, leasehold interests or
intellectual property and including any sale leaseback transaction) except (A)
for the sale of inventory in the ordinary course of business, (B) for sales of
other assets (other than assets subject to the Option Agreement) for fair
value in the ordinary course of business provided that the proceeds of such
other asset sales do not exceed $250,000 in any single transaction or $700,000
in the aggregate prior to the Effective Time, (C) with respect to the Option
Agreement and (D) the dissolution of the Company's French subsidiary, (viii)
settle or compromise any pending or threatened litigation without Gretag's
consent (which consent will not be unreasonably withheld or delayed), other
than (A) the settlement of the class actions (the "Settlement") described in
the Memorandum of Understanding attached as Exhibit I to the Merger Agreement
("Memorandum of Understanding") on terms substantially similar to those
described in the Memorandum of Understanding, and (B) settlements of
litigations which involve solely the payment of money (without admission of
liability) not to exceed $50,000 in any one case or $100,000 in the aggregate,
(ix) make any advance, loan, extension of credit or capital contribution to,
or purchase or acquire (by merger or otherwise) any stock, bonds, notes,
debentures or other securities of, or any assets constituting a business unit
of, or make any other investment in, any person, firm or entity, (x) make any
capital expenditures in the aggregate for the Company and its Subsidiaries in
excess of the amounts specified in the Company's budget for capital
expenditures, or otherwise acquire assets having a value, in the aggregate, in
excess of $50,000 not in the ordinary course of business, (xi) incur, assume
or create any indebtedness for borrowed money or the deferred purchase price
for property or services or pursuant to any capital lease or other financing
or amend in a manner materially adverse to the Company, any of the Company's
existing credit facilities, (xii) assume, guarantee or otherwise become liable
or responsible (whether directly, contingently or otherwise) for the
obligations of any other person except wholly-owned Subsidiaries of the
Company and except for obligations in the ordinary course of business
consistent with the past practice of the Company not exceeding $100,000
individually and $250,000 in the aggregate, (xiii) make any material tax
election (unless required by law or unless consistent with prior practice) or
settle or compromise any material income tax liability, (xiv) waive or amend
any term or condition of any confidentiality or "standstill" agreement to
which the Company is a party and which relates to a business combination with
the Company or the purchase of shares or assets of the Company, (xv) grant or
amend any stock-related or performance awards except for such awards in the
ordinary cause of business consistent with past practice of the Company not to
exceed $5,000 in the aggregate, (xvi) except with respect to agreements which
are terminable at will by the Company without any material penalty to the
Company, enter into or amend any legally binding employment, severance,
retention, change in control, consulting or salary continuation agreements
with any officers, directors, employees or former employees or grant any
increases in compensation or benefits to employees other than increases to
officers and employees in the ordinary course of business consistent with the
past practice of the Company, (xvii) adopt, amend or terminate any employee
benefit plan policy, understanding or arrangement, (xviii) except for purchase
orders for the sale of the Company's products in the ordinary course of
business consistent with past practice, enter into (A) any agreements with
distributors or sales agents other than agreements terminable without penalty
on less than 30 days' notice, (B) any agreements to distribute products for
others or which restrict the ability of the Company or its Subsidiaries or
affiliates to compete or (C) any other agreements, other than agreements
relating to product promotions or the agreement with Seiko Epson Corporation
(the "Seiko Epson Agreement") covering the same matters described in the
Letter of Intent, dated April 22, 1997, between the Company and Seiko Epson
Corporation, or amend any of the foregoing agreements as existed on the date
of the Merger Agreement, (xix) amend, change or waive (or exempt any person or
entity from the effect of) the Preferred Shares Rights
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Agreement, dated as of February 4, 1998, between the Company and U.S. Stock
Transfer Corporation (the "Rights Agreement"), except in connection with the
transactions contemplated by the Merger Agreement or the Option Agreement,
(xx) make any material changes in the type or amount of their insurance
coverages, (xxi) except as may be required by law or generally acceptable
accounting principles and with prior written notice to Gretag, change any
accounting principles or practices used by the Company or its Subsidiaries,
(xxii) effect any material change in the Company's advertising, product
promotion or brand support policies or programs or commit to any significant
new product promotion or advertising campaign except, in each case, for
matters in the ordinary course of business consistent with the past practice
of the Company, (xxiii) effect any material change in the Company's billing
practices or sales terms, or cause a material acceleration or delay in the
manufacture, shipment or sale of inventory, the collection of accounts or
notes receivable or, to the extent reasonably possible given the Company's
current cash position and loan from Gretag, the payment of accounts or notes
payable except, in each case, for matters in the ordinary course of business
consistent with the past practice of the Company, (xxiv) enter into any
contracts for derivatives, except for spot, option and forward contracts
entered into in the ordinary course of business consistent with the past
practice of the Company and with the Company's policies regarding derivatives
as previously disclosed to Gretag, (xxv) waive, relinquish, release or
terminate any right or claim, including any such right or claim under any
material contract or permit any rights of material value to use any
intellectual property to lapse or be forfeited, in each case, except in the
ordinary course of business consistent with the past practice of the Company,
(xxvi) apply for, consent to, or acquiesce in, the appointment of a trustee,
receiver, sequestrator or other custodian for any substantial part of the
property of the Company or any Subsidiary, or make a general assignment for
the benefit of creditors, or permit or suffer to exist the commencement of any
bankruptcy, reorganization, debt arrangement or other case or proceeding under
any bankruptcy or insolvency law, or any dissolution, winding up or
liquidation proceeding, in respect of the Company or any Subsidiary, or
(xxvii) agree in writing or otherwise to take any of the foregoing actions.
Other Offers
Under the Merger Agreement, the Company and its Subsidiaries have agreed to,
and have agreed to direct and use reasonable efforts to cause their respective
officers, directors or employees, or any investment banker, financial advisor,
attorney, accountant or other representative to, cease as of the date of the
Merger Agreement any discussions or negotiations with any parties other than
Gretag and Merger Sub with respect to any proposal or offer relating to an
acquisition of 10% or more of the assets of the Company or any of its
Subsidiaries or any shares of a class of equity securities of the Company or
any of its Subsidiaries, any tender offer or exchange offer that if
consummated would result in any person beneficially owning 10% or more of any
class of equity securities of the Company or any of its Subsidiaries or any
merger, consolidation, business combination, sale of substantially all the
assets, recapitalization, liquidation, dissolution or similar transaction
involving the Company or any of its Subsidiaries, other than the transactions
contemplated by the Merger Agreement (an "Acquisition Proposal"). The Company
and its Subsidiaries have agreed that they shall not, and shall not authorize
or permit any of their respective officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by it to, directly or indirectly, (i) solicit,
initiate or encourage (including by way of furnishing non-public information),
or take any other action to facilitate, any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, an
Acquisition Proposal or (ii) participate in any discussions or negotiations
regarding an Acquisition Proposal. However, if prior to the adoption of the
Merger Agreement by the holders of Common Stock, the Board of Directors of the
Company determines in good faith, based on the advice of outside counsel, that
failure to do so would constitute a breach of its fiduciary duties to the
Company's stockholders under applicable law, the Company, in response to an
Acquisition Proposal that (A) was unsolicited or that did not otherwise result
from a breach of the covenants described in this section, and subject to
compliance with certain notification requirements, and (B) constitutes a
proposal made by a third party to acquire 100% of the voting power of the
Common Stock of or substantially all the assets of the Company and its
Subsidiaries and otherwise on terms which the Board of Directors determines in
good faith (based on the written opinion of a financial advisor of nationally
recognized standing (which opinion is provided to Gretag)) to be more
favorable to the Company's stockholders than the Merger and for
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which financing, to the extent required by the terms of such proposal, is then
committed or is reasonably capable of being obtained by such third party (a
"Superior Proposal"), may (x) furnish non-public information with respect to
the Company and its Subsidiaries to the person who made such Acquisition
Proposal pursuant to a customary and reasonable confidentiality agreement and
(y) participate in negotiations regarding such Acquisition Proposal.
The Board of Directors and its committees have agreed that they shall not
(i) withdraw or modify, or propose to withdraw or modify, in a manner adverse
to Gretag, the approval or recommendation by such Board of Directors or such
committee of the Merger unless there is a Superior Proposal outstanding, (ii)
approve or recommend, or propose to approve or recommend, an Acquisition
Proposal unless such Acquisition Proposal is a Superior Proposal or (iii)
cause the Company to enter into any letter of intent, agreement in principle,
acquisition agreement or other agreement (an "Acquisition Agreement") with
respect to an Acquisition Proposal unless such Acquisition Proposal is a
Superior Proposal, and unless, in each case, the Board of Directors shall have
(x) determined in good faith, based on the advice of outside counsel, that
failure to do so would constitute a breach of its fiduciary duties to the
Company's stockholders under applicable law, and (y) terminated the Merger
Agreement.
The Company has agreed that it shall promptly (but in any event within one
day) advise Gretag orally and in writing of any Acquisition Proposal or any
inquiry regarding the making of an Acquisition Proposal including any request
for information, the material terms and conditions of such request,
Acquisition Proposal or inquiry and the identity of the person making such
request, Acquisition Proposal or inquiry. The Company has agreed that it will,
to the extent reasonably practicable, keep Gretag fully informed of the status
and details (including amendments or proposed amendments) of any such request,
Acquisition Proposal or inquiry.
Indemnification
The Merger Agreement states that, for a period of four years after the
Effective Time, Gretag shall cause to be maintained officers' and directors'
liability insurance covering the parties who are currently covered, in their
capacities as officers and directors, by the Company's existing officers' and
directors' liability insurance policies (the "Current Policies") on terms
substantially no less advantageous to such parties than such Current Policies.
However, Gretag is not required, in order to maintain or procure such
coverage, to pay annual premiums in excess of $225,000 (the "Cap"), and if
equivalent coverage cannot be obtained, or can be obtained only by paying an
amount in excess of the Cap, Gretag is only required to obtain such coverage
for such four-year period as can be obtained by paying annual premiums equal
to the Cap.
The Merger Agreement states that, for a period of four years after the
Effective Time, the Surviving Corporation shall indemnify and hold harmless,
to the fullest extent permitted under applicable law, each person who is, or
has been at any time prior to the date of the Merger Agreement or who becomes
prior to the Effective Time, an officer or director of the Company or any of
its Subsidiaries against all losses, claims, damages, liabilities, costs or
expenses (including attorneys' fees), judgments, fines, penalties and amounts
paid in settlement (collectively, "Losses") in connection with any Litigation
arising out of or pertaining to acts or omissions, or alleged acts or
omissions, by them in their capacities as such, which acts or omissions
occurred prior to the Effective Time. The Merger Agreement also states that
the Company and after the Effective Time the Surviving Corporation shall
periodically advance expenses as incurred with respect to the foregoing to the
fullest extent permitted under applicable law provided that the person to whom
the expenses are advanced provides an undertaking to repay such advance if it
is ultimately determined that such person is not entitled to indemnification.
Employee Benefits
Under the terms of the Merger Agreement, from and after the Effective Time,
Gretag shall cause the Surviving Corporation and any of its Subsidiaries to
honor in accordance with their terms and the past practice of the Company all
existing employment and severance agreements between the Company or any of its
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Subsidiaries, except as otherwise provided, and any officer, director, or
employee of the Company or any of its Subsidiaries so long as such agreements
were identified to Gretag in the schedules to the Merger Agreement (the
"Disclosure Schedules") and to the extent such terms were in effect on the
date of the Merger Agreement.
The Company agreed that it will use its reasonable best efforts consistent
with past practice and applicable law to enforce any non-compete and
confidentiality provisions existing at the time of the Merger Agreement and
contained in agreements with employees and former employees.
From and for two years after the Effective Time, Gretag has agreed to, and
agreed to cause Merger Sub to, continue to provide each employee of the
Company and its Subsidiaries with employee benefits and other terms and
conditions of employment that are, in the aggregate, comparable to the
benefits and terms and conditions provided to each such employee by the
Company or any of its Subsidiaries, as applicable, on the date of the closing
of the Merger (the "Closing Date").
The Company has agreed to use its reasonable best efforts to apply for and
receive from the Internal Revenue Service a favorable determination letter for
the Raster Graphics, Inc. Employees 401(k) Savings Plan & Trust.
Representations and Warranties
The Company, Gretag and Merger Sub have each made a number of
representations and warranties in the Merger Agreement, the truth and accuracy
of which are conditions to consummation of the Merger. The Company's
representations and warranties to Gretag and Merger Sub include, but are not
limited to, representations regarding the organization of the Company, the
power and authority of the Company to enter into the Merger Agreement, the
Option Agreement and the Loan Agreement, the third party and governmental
consents required for the consummation of the Merger, the Company's capital
structure, threatened and pending claims against the Company, the accuracy of
the Company's filings with the Securities and Exchange Commission, certain
changes in the Company's business since December 31, 1996, the Company's tax
position, the Company's employee benefit plans, certain labor and employment
matters, the Company's compliance with environmental laws and regulations, the
status of the Company's material agreements and relationships, the ownership
and sufficiency of the intellectual property used in Company's business, and
the various corporate approvals required for the consummation of the Merger.
Gretag's and Merger Sub's representations and warranties to the Company
include, but are not limited to, that each is a duly organized corporation
with the requisite power and authority to enter into the Merger Agreement and
that, at the Effective Time, there will be sufficient funds available to
consummate the Merger on the terms contemplated by the Merger Agreement.
None of the representations and warranties of the Company, Gretag or Merger
Sub will survive the Effective Time.
Conditions to the Merger
Each party's respective obligation to effect the Merger is subject to
satisfaction, or where permissible, waiver, prior to the Effective Time, of
the following conditions: (i) the waiting period applicable to the
consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act") shall have expired or been terminated, (ii) none
of the parties shall be subject to any order, judgment, injunction, decree or
ruling, or other action of a court or other governmental entity of competent
jurisdiction restraining, enjoining or otherwise prohibiting the Merger or the
transactions contemplated by the Merger Agreement, provided that Gretag,
Merger Sub, and the Company shall have used its reasonable best efforts to
appeal as promptly as practicable any such order, judgment, injunction,
decree, ruling or other action, (iii) the approval of the Merger by the
holders of a majority of the outstanding shares of Common Stock (the "Company
Stockholder Approval") in accordance with the DGCL and the Company's
Certificate of Incorporation and Bylaws, (iv) all regulatory filings and
consents which are necessary for the consummation of the Merger shall have
been made or obtained, or any waiting period (whether requisite or voluntary)
under any foreign antitrust laws shall have
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expired, in each case, to the extent that the failure to make or obtain such
regulatory filings or consents or of the waiting period to have expired, in
the aggregate, is reasonably likely, individually or in the aggregate, to have
a material delaying effect (all such consents, regulatory filings and the
lapse of all such waiting periods being referred to as the "Requisite
Regulatory Approvals"), and all such Requisite Regulatory Approvals shall be
in full force and effect. There shall not be any statute, law, rule or
regulation that makes consummation of the Merger illegal or prohibited.
The obligations of Gretag and Merger Sub to effect the Merger shall be
subject to the satisfaction or, where permissible, waiver, prior to the
Effective Time, of the following conditions: (i) the settlement of certain
class-action lawsuits pending against the Company shall have been approved by
all relevant parties and the appropriate court of competent jurisdiction in
substantially the form described in the Memorandum Of Understanding attached
as Annex I to the Merger Agreement, (ii) (A) the representations or warranties
made by the Company in the Merger Agreement shall be true and correct in all
respects as of the date of the Merger Agreement, and shall be true and correct
in all respects as of the Closing Date as if made as of the Closing Date
(other than representations and warranties made as of a specified date),
except where the failure to be so true and correct (without giving effect to
any materiality qualifications or thresholds contained in such representations
and warranties), individually and in the aggregate, would not have a material
adverse effect on the business, operations, results of operations, assets,
financial condition or prospects of the Company or its Subsidiaries taken as a
whole (a "Material Adverse Effect") or materially adversely affect the
business of Gretag in relation to its decision to consummate the transactions
contemplated by the Merger Agreement, and (B) the Company shall not have
breached or failed to comply in any material respect with any of its
obligations under the Merger Agreement, the Loan Agreement or the Option
Agreement, (iii) there shall not have been issued, delivered, sold or granted
any shares of Common Stock pursuant to the Rights Agreement, (iv) since the
date of the Merger Agreement, there shall not have occurred any event, change,
effect or development that, individually or in the aggregate, would have a
Material Adverse Effect, (v) the Seiko Epson Agreement, in form and substance
reasonably satisfactory to Gretag, shall have been executed and delivered by
all parties thereto, and (vi) each of the Company and its Subsidiaries shall
be validly existing and in good standing under the laws of its jurisdiction of
incorporation and is duly licensed or qualified to do business as a foreign
corporation and shall be in good standing under the laws of any other state of
the United States or any other jurisdiction in which the character of the
properties owned or leased by it or in which the transaction of its business
makes such licensure, qualification or good standing necessary.
The obligations of the Company to effect the Merger are subject to the
satisfaction or, where permissible, waiver, prior to the Effective Time, of
the following conditions: (i)(A) the representations or warranties made by
Gretag in the Merger Agreement shall be true and correct in all respects as of
the Closing Date as if made as of the Closing Date (other than representations
and warranties made as of a specified date), except where the failure to be so
true and correct (without giving effect to any materiality qualifications or
thresholds contained in such representations and warranties), individually and
in the aggregate, would not have a Material Adverse Effect, and (B) Gretag
shall not have breached or failed to comply in any material respect with any
of its obligations under the Merger Agreement, the Loan Agreement or the
Option Agreement, and (ii) Gretag or Merger Sub shall have deposited the
aggregate Merger Consideration with the Paying Agent.
Termination
The Merger Agreement may be terminated and the Merger contemplated thereby
may be abandoned at any time prior to the Effective Time, notwithstanding
approval thereof by the stockholders of the Company, if any, by mutual written
consent of the Company and Gretag.
The Merger Agreement may be terminated and the Merger contemplated thereby
may be abandoned at any time prior to the Effective Time, notwithstanding
approval thereof by the stockholders of the Company, if any, by Gretag or the
Company if (i) the Effective Time shall not have occurred on or before
February 28, 1999 (which deadline has been extended by the parties until March
22, 1999), provided that the right to terminate the Merger Agreement pursuant
to this clause (i) is not available to any party whose failure to fulfill any
obligation
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under the Merger Agreement caused or resulted in the failure of the occurrence
of the Effective Time on or before such date, (ii) there shall be any statute,
law, rule or regulation that makes consummation of the Merger illegal or
prohibited or if any court or other governmental entity of competent
jurisdiction shall have issued an order, judgment, decree or ruling, or taken
any other action restraining, enjoining or otherwise prohibiting the Merger
and such order, judgment, injunction, decree, ruling or other action shall
have become final and non-appealable, provided that the party terminating the
Merger Agreement has complied with the applicable provisions of the Merger
Agreement, or (iii) the Company Stockholder Approval shall not have been
obtained.
The Merger Agreement may be terminated and the Merger contemplated thereby
may be abandoned at any time prior to the Effective Time, notwithstanding
approval thereof by the stockholders of the Company, if any, by the Company if
(i)(x) any of the respective representations or warranties made by Gretag or
Merger Sub in the Merger Agreement shall not have been true and correct in all
respects when made, or shall thereafter have ceased to be true and correct in
all respects as if made as of such later date (other than representations and
warranties made as of a specified date), except where the failure to be so
true and correct (without giving effect to any materiality qualifications or
thresholds contained in such representations and warranties), individually or
in the aggregate, would not have a Material Adverse Effect, or (y) Gretag or
Merger Sub shall have breached or failed to comply in any material respect
with any of its obligations under the Merger Agreement, which untruth or
inaccuracy or breach, in the case of clauses (x) or (y), is not curable or, if
curable, is not cured within 10 business days after written notice thereof has
been given by the Company to Gretag, (ii) the Company takes any of the actions
relating to the consideration of a Superior Proposal (See "--Other Offers."),
provided that the Company has notified Gretag in writing of its intent to take
any such action five days prior to the termination of the Merger Agreement,
and the Acquisition Proposal at stake continues to be a Superior Proposal
notwithstanding any modification by Gretag of the terms of the Merger;
provided further that the Company has complied with the applicable provisions
of the Merger Agreement (See "--Other Offers."), and provided further that
such termination shall not be effective until (x) the Company has paid to
Gretag or deposited with a mutually acceptable escrow agent an amount equal to
$1,500,000 for possible payment to Gretag pursuant to the Merger Agreement;
and (y), the Company has deposited with a mutually acceptable escrow agent the
items set forth in Schedule D to the Option Agreement.
The Merger Agreement may be terminated and the Merger contemplated thereby
may be abandoned at any time prior to the Effective Time, notwithstanding
approval thereof by the stockholders of the Company, if any, by Gretag if (i)
(A) the Company fails to file (x) the required reports for the periods ending
in 1997 by October 15, 1998 or (y) the required reports for the periods ending
in 1998 by November 30, 1998 (which reports were filed prior to November 30,
1998), (B) the Company, upon Gretag's request (based upon Gretag's reasonable
belief that events are likely to occur that would enable Gretag to exercise
the option to purchase the assets related to the Inkjet business (the "Inkjet
Option"), pursuant to the Option Agreement, has not placed in escrow the items
set forth in Schedule D to the Option Agreement, (C) if the Seiko Epson
Agreement, in form and substance reasonably satisfactory to Gretag, has not
been executed and delivered by all parties thereto by November 15, 1998 (which
agreement was executed on January 22, 1999 after Gretag extended the deadline
for this condition), (ii) (A) the Company has failed by October 15, 1998 to
have removed all liens, pledges, security interests, claims or other
encumbrances ("Encumbrances") from the assets subject to the Option Agreement
(other than the outstanding shares of common stock of Onyx Graphics
Corporation (the "O-Sub Shares")) or provided to Gretag evidence reasonably
satisfactory to Gretag that such Encumbrances will be removed prior to the
exercise of the Inkjet Option or (B) any Encumbrance (other than Encumbrances
existing as of the date hereof and Encumbrances created pursuant to the Loan
Agreement or the Option Agreement) has been placed on all or any portion of
the O-Sub Shares or the other assets subject to the Option Agreement, and all
such Encumbrances have not been removed within 10 calendar days after Gretag
has delivered written notice to the Company requesting that such Encumbrance
be removed, (iii)(x) any of the representations or warranties made by the
Company in the Merger Agreement shall not have been true and correct in all
respects when made, or shall thereafter have ceased to be true and correct in
all respects as if made as of such later date (other than representations and
warranties made as of a specified date), except where the failure to be so
true and correct (without giving effect to any materiality qualifications or
thresholds contained in such representations and
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warranties), individually and in the aggregate, would not have a Material
Adverse Effect or materially adversely affect the business of Gretag in
relation to its decision to consummate the transactions contemplated hereby,
or (y) the Company shall have breached or failed to comply in any material
respect with any of its obligations under the Merger Agreement, the Loan
Agreement or the Option Agreement, which untruth or inaccuracy or breach, in
the case of clauses (x) or (y), is not curable, or is not cured within 10
business days after written notice thereof has been given by Gretag to the
Company, (iv) any corporation, entity, "group" or "person" (as defined in the
Securities Exchange Act of 1934 (the "Exchange Act")), other than Gretag or
Merger Sub, shall have acquired beneficial ownership of more than 25% of the
outstanding shares of Common Stock, (v) since the date of the Merger
Agreement, there shall have occurred any event, change, effect or development
that, individually or in the aggregate, would have a Material Adverse Effect,
(vi) if the Settlement has been rejected by a court of competent jurisdiction
or otherwise terminated, and a substitute settlement that is reasonably
acceptable to Gretag has not been entered into and approved by such court
within 30 days of such rejection or termination, or (vii) if the Company takes
any of the actions relating to a Superior Proposal (See "--Other Offers.") or
if the Board of Directors shall have resolved to take any such action.
Termination Fee
Except as provided below, whether or not the Merger is consummated, all
costs and expenses incurred in connection with the transactions contemplated
by the Merger Agreement will be paid by the party incurring such expenses.
If the Merger Agreement is terminated by the Company because the Company
Stockholder Approval has not been obtained or because of the Company taking
action with respect to a Superior Proposal or by Gretag because the Company
has breached a representation, warranty or obligation, the Settlement has been
rejected by a court or terminated, or the Company acts with respect to a
Superior Proposal, the Company will pay Gretag as promptly as practicable in
same-day funds an aggregate amount equal to the Gretag Expenses. "Gretag
Expenses" means the documented reasonable out-of-pocket expenses of Gretag,
Merger Sub and their respective affiliates incurred in connection with or
arising out of the Merger, the Merger Agreement, the Option Agreement
(including the exercise thereof), the Loan Agreement (other than those
expenses explicitly covered therein) and the transactions contemplated hereby
and thereby (including, without limitation, amounts paid or payable to
investment bankers (if any), information agents, lending banks, fees and
expenses of counsel, accountants and consultants and printing and mailing
expenses, regardless of when such expenses are incurred); provided, that in no
event shall Gretag Expenses exceed $1,000,000 (the "Maximum Expense Amount");
and provided further, that if (a) for any reason Gretag is unable to
consummate the purchase of the Inkjet business in accordance with the Option
Agreement at the Combined Closing Date set forth in the Option Agreement
following any termination of the Merger Agreement by the Company because the
Company Stockholder Approval has not been obtained or because of the Company
taking action with respect to a Superior Proposal or by Gretag because the
Company has breached a representation, warranty or obligation or the Company
acts with respect to a Superior Proposal or (b) at any time following the
consummation of the purchase of such Inkjet business Gretag is required to
rescind or unwind such purchase or pay damages to the Company or any other
person (whether pursuant to a judgment or award or by reason of any settlement
of any judicial or arbitral proceeding) as a result of or in connection with
such purchase, then the Company must promptly pay to Gretag the sum of
$500,000 (the "Termination Amount") in immediately available funds in addition
to the Gretag Expenses.
If the Merger Agreement is terminated by the Company due to Gretag's breach
of a representation, warranty, or obligation, Gretag must pay the Company as
promptly as practicable in same-day funds an aggregate amount equal to the
Company Expenses. "Company Expenses" means the documented reasonable out-of-
pocket expenses of the Company and its affiliates incurred in connection with
or arising out of the Merger, the Merger Agreement, the Option Agreement and
the transactions contemplated hereby and thereby (including, without
limitation, amounts paid or payable to investment bankers, information agents,
lending banks, fees and expenses of counsel, accountants and consultants and
printing and mailing expenses, regardless of when such expenses are incurred);
provided that in no event shall Company Expenses exceed $1,000,000; and
provided further that
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Company Expenses shall not include any fees and expenses that would have been
incurred by the Company or its affiliates regardless of whether Gretag and the
Company had negotiated and executed the Merger Agreement or the Option
Agreement (including, without limitation, fees and expenses paid or payable to
accountants with respect to the preparation and filing of the Company's Annual
Report on Form 10-K for the Company's 1997 fiscal year, the Company's
Quarterly Reports on Form 10-Q for the quarterly periods ending March 31, 1998
and June 30, 1998, respectively and, any restatements of the Company's
Quarterly Reports for the quarterly periods ending March 31, 1997, June 30,
1997, and September 30, 1997, and amounts paid or payable to investment
bankers, counsel and consultants for advice given with respect to the general
solicitation of potential acquirors of the Company).
If the Company or Gretag fails to promptly pay any such amounts owing when
due, the Company or Gretag must in addition thereto pay to Gretag or the
Company, as the case may be, all costs and expenses (including, fees and
disbursements of counsel) incurred in collecting such amounts, together with
interest on such amounts (or any unpaid portion thereof) from the date such
payment was required to be made until the date such payment is received by
Gretag or the Company, as the case may be, at the prime rate of Citibank, N.A.
as in effect from time to time during such period.
Amendment
To the extent permitted by applicable law, the Merger Agreement may be
amended by action taken by or on behalf of the Board of Directors of the
Company and Gretag at any time before or after adoption of the Merger
Agreement by the stockholders of the Company but, after any such stockholder
approval, no amendment shall be made which decreases the Merger Consideration
or which adversely affects the rights of the Company's stockholders hereunder
without the approval of such stockholders. The Merger Agreement may not be
amended except by an instrument in writing signed on behalf of all of the
parties.
Extension; Waiver
At any time prior to the Effective Time, Gretag, Merger Sub or the Company,
by action taken by or on behalf of the Board of Directors and Gretag, may (i)
extend the time for the performance of any of the obligations or other acts of
the other parties, (ii) waive any inaccuracies in the representations and
warranties in the Merger Agreement by any other applicable party or in any
document, certificate or writing by any other applicable party or (iii) waive
compliance with any of the agreements or conditions contained in the Merger
Agreement. Any agreement on the part of any party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors of the Company
with respect to the Merger, stockholders should be aware that certain officers
and directors of the Company have interests in connection with the Merger.
Employment and Consulting Agreements. The Company entered into an employment
agreement with its Chief Executive Officer on July 3, 1991, which provides for
a six-month severance payment in the event of termination of employment. On
August 21, 1998, the Compensation Committee approved the grant of a $300,000
retention bonus payable to the Chief Executive Officer upon change of control
of the Company. On August 21, 1998 the Company entered into a mutual release
agreement with Marc Willard, an officer of the Company. In consideration for
Mr. Willard's full release relating to the Company's acquisition of ColourPass
(of which Mr. Willard was an 80% partner), the parties agreed to a cash bonus
of $70,000, a cash payment of $200,000 upon the acquisition of the Company,
and a stock option grant of 175,000 shares. In addition, the Company entered
into a consulting agreement on May 14, 1998 with The Brenner Group LLC
pursuant to which the Company has retained the services of its Acting Chief
Financial Officer. Under the terms of the consulting agreement, the Company is
obligated to pay The Brenner Group LLC a fee of $155.00 per hour and a bonus
and
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additional fees of $175,000 upon change of control or recapitalization which
occurs within six months of the expiration of the agreement or any extensions
thereto.
Acceleration of Options. The exercisability of all outstanding options to
acquire shares of Raster Graphics capital stock is subject to certain vesting
requirements. Under the terms of Raster Graphics' 1988 and 1996 Stock Option
Plans and the option agreements relating to the Options granted thereunder,
the vesting requirements for the Raster Graphics Options issued under such
plans will automatically accelerate at the time of the Merger.
Stockholder Agreement. Certain stockholders of the Company, holding in the
aggregate 1,923,034 shares of the Common Stock (including 420,000 shares
issuable upon the exercise of outstanding options), or 19.2% of the
outstanding shares (including 4.38% issuable upon the exercise of outstanding
options) on the Record Date, have entered into a Stockholders Agreement with
Gretag dated as of October 6, 1998 pursuant to which such stockholders have
agreed to vote such shares in favor of the Merger and to vote against any
competing transaction that might be proposed by a third party prior to
consummation of the Merger.
Indemnification of Directors and Management. Gretag has agreed that after
the Effective Time of the Merger it will cause to be maintained for four years
officers' and directors' liability insurance covering the parties who are
currently covered, in their capacities as officers and directors, by the
Company's existing officers' and directors' liability policies on terms
substantially no less advantageous to each parties than the Company's current
policies provided such annual insurance premiums do not exceed $225,000. The
Merger Agreement also provides that the Surviving Corporation shall indemnify
and hold harmless, to the fullest extent permitted by applicable law, each
person who is, or who has been or becomes an officer or director of the
Company. See "--Indemnification."
Other Gretag Agreements
Asset and Subsidiary Stock Option Agreement. Concurrently with the execution
of the Merger Agreement, the Company entered into an Asset and Subsidiary
Stock Option Agreement between Gretag and the Company (the "Option
Agreement"). The Company granted to Gretag the irrevocable right and option
(the "Subsidiary Stock Option") to purchase for $5,000,000 (less the amounts
owed under the Loan and Pledge Agreement described below) (the "Subsidiary
Purchase Price") all of the issued and outstanding shares of common stock, par
value $0.001 per share (the "O-Sub Shares"), of Onyx Graphics Corporation ("O-
Sub"); and the irrevocable right and option (the "Inkjet Option") to purchase
for $6,000,000 (less the amounts owed under the Loan and Pledge Agreement
described below) (the "Inkjet Option Purchase Price") (i) all of the assets
(not including the intellectual property used primarily for any business of
the Company other than the Inkjet business (the "Secondary Assets")) (the
"Business Assets") used or held for use in connection with, necessary for the
conduct of or otherwise material to the design, manufacture, sales, service
and support of the Company's inkjet printer products other than the Company's
after-market ink and paper business (the "Inkjet Business") and to assume
certain liabilities incurred in the ordinary course of the Inkjet Business and
(ii) the right and license to use the Secondary Assets, solely in connection
with the Inkjet Business as it is conducted at any time.
Gretag has the right to exercise the Inkjet Option upon the termination of
the Merger Agreement pursuant to (i) a failure to obtain the Company
Stockholder Approval of the Merger, (ii) the Company taking action with regard
to a Superior Proposal, (iii) the failure of a representation or warranty by
the Company under the Merger Agreement to be true and correct or the Company's
breach of certain obligations of the Merger Agreement, the Loan Agreement or
the Option Agreement if such failure or breach has a material adverse effect
on the Company, provided that Gretag has not exercised the Subsidiary Stock
Option.
Gretag has the right to exercise the Subsidiary Stock Option upon the
termination of the Merger Agreement for any reason, provided that Gretag has
not exercised the Inkjet Option.
Loan and Pledge Agreement. Concurrently with the execution of the Merger
Agreement, the Company entered into a Loan and Pledge Agreement between the
Company and Gretag (the "Loan and Pledge
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Agreement"). Pursuant to the Loan and Pledge Agreement, Gretag will lend to
the Company through February 28, 1999, amounts that together with accrued
interest do not exceed $5,000,000. The Company may specify dates at which time
the Company will borrow from Gretag an amount up to $500,000 so long as the
sum of all such borrowed amounts and any outstanding accrued interest does not
exceed $5,000,000 and the sum of such obligations and the aggregate principal
amount and accrued interest outstanding under the Company's credit facility
with Silicon Valley Bank does not exceed $6,000,000. As of December 31, 1998,
the Company has borrowed an aggregate amount of $3,350,000 under the Loan and
Pledge Agreement and owed $54,966.67 in accrued interest.
The outstanding loans made under the Loan Pledge Agreement and all accrued
interest are secured by the Company's shares in Onyx Graphics Corporation, a
wholly owned subsidiary of the Company (the "Collateral") and are payable
forthwith upon written demand from Gretag to the Company, provided that,
except upon the occurrence of an event of default such as non-payment, breach
of certain obligations, involuntary bankruptcy, or voluntary bankruptcy,
Gretag cannot make such demand unless and until either the Merger Agreement
shall have been terminated (for whatever reason) or the Merger shall have
occurred. In addition, Gretag must seek repayment by exercising the Subsidiary
Stock Option or Inkjet Option unless it is unable to exercise the Subsidiary
Stock Option or Inkjet Option.
The Company pays interest to Gretag on the unpaid principal amount at an
interest rate per annum equal to 8.5% per annum.
Pursuant to the Loan and Pledge Agreement, the Company has granted Gretag an
irrevocable option to purchase a number of shares of the Company's Common
Stock (the "Stock Option Shares") such that (a) the ratio of (i) the number of
Stock Option Shares to (ii) the sum of the number of Stock Option Shares and
10,226,744 is equal to (b) the ratio of (i) the Stock Option Consideration to
(ii) the sum of the Stock Option Consideration plus $13,314,248.50. The Stock
Option Consideration shall be an amount specified by Gretag and shall not
exceed the greater of $5,000,000 and any obligations of the Company to Gretag,
including principal and accrued interest outstanding under the Loan and Pledge
Agreement. The Stock Option Shares will not be registered under the Securities
Act.
Federal Income Tax Considerations
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are generally applicable to holders
of Common Stock. This discussion is based on currently existing provisions of
the Code, existing and proposed Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to
change. Any such change, which may or may not be retroactive, could alter the
tax consequences to the Company's stockholders as described herein. The
discussion is for general information purposes only and does not address all
federal income tax considerations that may be relevant to particular classes
of stockholders or in light of any special circumstances, such as stockholders
who are dealers in securities, are tax-exempt entities, are foreign persons,
or acquired their Common Stock upon exercise of stock options or in other
compensatory transactions. Furthermore, no state, local or foreign tax
considerations are addressed herein. The Company has not received or requested
any ruling from the Internal Revenue Service regarding any of the tax
consequences of the Merger. ACCORDINGLY, ALL COMMON STOCKHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
The receipt by the stockholders of cash, in the Merger or through the
exercise of appraisal rights, for shares of Common Stock will be a taxable
transaction for federal income tax purposes. Each stockholder's gain or loss
per share will be equal to the difference between $1.2968 and the
stockholder's tax basis per share in the Common Stock. If a stockholder holds
Common Stock as a capital asset, the gain or loss from the exchange will be a
capital gain or loss. This gain or loss will be long term capital gain or loss
if the stockholder's holding period is more than one year.
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A stockholder (other than certain exempt stockholders, including
corporations and certain foreign persons and entities) may be subject to
backup withholding at a 31% rate unless such stockholder provides a taxpayer
identification number ("TIN") and certifies that it is correct or certain
other requirements are met. A stockholder who fails to furnish a TIN may also
be subject to tax penalties. Backup withholding is not an additional tax.
Rather, the amount of the backup withholding can be credited against the
federal income tax liability of such stockholder, and a refund can be obtained
by the stockholder if backup withholding results in an overpayment of tax.
Stockholders who acquired their Common Stock upon exercise of incentive
stock options which either were granted within two years or exercised within
one year of the Effective Time will have a "disqualifying disposition" upon
the sale of such Common Stock in the Merger or pursuant to the exercise of
appraisal rights. As a result, any such stockholder will recognize ordinary
compensation income equal to the difference between the exercise price and the
lesser of (i) the fair market value of the stock subject to such incentive
stock option on the exercise date or (ii) the amount of cash received for such
stock in the Merger or pursuant to the exercise of appraisal rights. Any
additional gain recognized in the Merger will be short-term or long-term
capital gain depending on whether the exercise date was within one year of or
more than one year after the Effective Time. Holders of options who receive
cash in cancellation thereof will recognize ordinary compensation income equal
to the amount of such cash, which payments will be subject to applicable
income and employment tax withholding in the case of optionees who are
employees.
Regulatory Filings and Approvals
Under the HSR Act, and the rules promulgated thereunder by the FTC, certain
acquisition transactions, including the Merger, may not be consummated until
specified waiting period requirements have been satisfied. Raster Graphics and
Gretag each filed notification and report forms under the HSR Act with the FTC
and the Antitrust Division of the U.S. Department of Justice (the "Antitrust
Division") on December 1, 1998 and received clearance under the HSR Act on
December 14, 1998. Notwithstanding clearance under the HSR Act, at any time
before or after consummation of the Merger, the Antitrust Division or the FTC
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of substantial assets of Raster Graphics
or Gretag.
Raster Graphics and Gretag are not aware of any material governmental or
regulatory approvals required to be obtained in order to consummate the
Merger, other than compliance with the HSR Act and applicable federal and
state securities and corporate laws.
Appraisal Rights
If the Merger is consummated, dissenting holders of Common Stock will be
entitled to have the "fair value" (exclusive of any element of value arising
from the accomplishment or expectation of the Merger) of their shares
("Dissenting Shares") at the Effective Time of the Merger judicially
determined and paid to them by complying with the provisions of Section 262 of
the DGCL.
THE FOLLOWING IS A BRIEF SUMMARY OF SECTION 262, WHICH SETS FORTH THE
PROCEDURES FOR DISSENTING FROM THE MERGER AND DEMANDING STATUTORY APPRAISAL
RIGHTS UNDER THE DGCL. THIS SUMMARY IS A MATERIALLY COMPLETE STATEMENT OF THE
PROVISIONS OF THE DGCL RELATING TO THE RIGHTS OF THE COMPANY'S STOCKHOLDERS TO
AN APPRAISAL OF THE VALUE OF THEIR SHARES. HOWEVER, READERS ARE URGED TO
REVIEW TO THE FULL TEXT OF SECTION 262, A COPY OF WHICH IS ATTACHED TO THIS
PROXY STATEMENT AS APPENDIX D AND IS INCORPORATED HEREIN BY REFERENCE. FAILURE
TO FOLLOW SUCH PROCEDURES EXACTLY COULD RESULT IN THE LOSS OF APPRAISAL
RIGHTS.
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Stockholders of the Company who desire to exercise their appraisal rights
must satisfy all of the conditions of Section 262. This Proxy Statement
constitutes the notice contemplated by Section 262(d)(1). Stockholders of the
Company electing to exercise their appraisal rights under Section 262 must not
vote to approve the Merger. If any stockholder of the Company desires to
exercise his other appraisal rights, a written demand for appraisal of shares
must be filed with the Company on or prior to the taking of the vote to
approve the Merger at the Annual Meeting. This written demand for appraisal of
shares must be in addition to and separate from any vote by written consent
abstaining from or any vote against the Merger. Voting against, abstaining
from voting or failing to vote on the Merger proposal will not constitute a
demand for appraisal within the meaning of Section 262.
A demand for appraisal must be executed by or for the stockholder of record,
fully and correctly, as such stockholder's name appears on the stock
certificate. If the shares are owned of record in a fiduciary capacity, such
as by a trustee, guardian or custodian, such demand must be executed by or for
the fiduciary. If the shares are owned of record by or for more than one
person, as in a joint tenancy or tenancy in common, such demand must be
executed by or for all joint owners. An authorized agent, including an agent
for two or more joint owners, may execute the demand for appraisal for a
stockholder of record. However, the agent must identify the record owner and
expressly disclose the fact that, in exercising the demand, he is acting as
agent for the record owner.
A stockholder who elects to exercise appraisal rights must mail or deliver
his or her written demand to the Secretary of the Company at 3025 Orchard
Parkway, San Jose, California 95134. The written demand for appraisal should
specify the stockholder's name and mailing address, and that the stockholder
is thereby demanding appraisal of his or her shares.
A stockholder who elects to exercise appraisal rights must mail or deliver
his or her written demand to the Secretary of the Company at 3025 Orchard
Parkway, San Jose, California 95134. The written demand for appraisal should
specify the stockholder's name and mailing address, and that the stockholder
is thereby demanding appraisal of his or her shares.
Within 120 days after the Effective Time of the Merger, any stockholder who
has satisfied the requirements of Section 262 may deliver to the Company a
written demand for a statement listing the aggregate number of shares not
voted in favor of the Merger and with respect to which demands for appraisal
have been received and the aggregate number of shares of holders of such
shares.
Within 120 days after the Effective Time of the Merger, either the Company
or any stockholder who has complied with the required conditions of Section
262 may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of the Dissenting Shares. The Company does not
have any present intention to file such a petition if demand for appraisal is
made.
Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the Company which shall, within 20 days after such
service, file in the office of the Register in Chancery in which the petition
was filed, a duly verified list containing the names and addresses of all
stockholders of the Company who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the Company. If the petition shall be filed by the Company, the petition shall
be accompanied by such verified list. The Register in Chancery, if so ordered
by the court, shall give notice of the time and place fixed for the hearing of
such petition by registered or certified mail to the Company and to the
stockholders shown upon the list at the address therein stated, and notice
shall also be given by one or more publications at least one week before the
day of the hearing in a newspaper of general circulation published in the City
of Wilmington, Delaware, or such publication as the court deems advisable. The
forms of the notices by mail and by publication shall be approved by the court
and the cost thereof shall be borne by the Company.
If a petition for an appraisal is filed in a timely fashion, after a hearing
on such petition, the court will determine which stockholders of the Company
are entitled to appraisal rights and will appraise the shares owned by such
stockholders, determining the fair value of such shares, exclusive of any
element of value arising from the
47
<PAGE>
accomplishment or expectation of the Merger, together with a fair rate of
interest to be paid, if any, upon the amount determined to be the fair value.
In determining the fair value, the court is to take into account all relevant
factors, including the rate of interest which the Company would have had to
pay to borrow money during the pendency of the proceeding, and may rely upon
any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court. In making this
determination of fair value the court would consider market value, asset
value, dividends, earnings prospects, the nature of the enterprise and any
other relevant facts which could be ascertained as of the Effective Time of
the Merger. Any stockholder of the Company who is entitled to appraisal rights
will be permitted to participate fully in all such proceedings.
Stockholders of the Company considering seeking appraisal of their shares
should note that the fair value of their shares determined under Section 262
could be more, the same or less than the consideration they would receive
pursuant to the Merger Agreement if they did not seek appraisal of their
shares. The costs of the appraisal proceedings may be determined by the court
and taxed against the parties as the court deems equitable in the
circumstances. Upon application of a dissenting stockholder, the court may
order that all or a portion of the expenses incurred by any dissenting
stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts,
be charged pro rata against the value of all shares entitled to appraisal. In
the absence of such a determination or assessment, each party bears his or her
own expenses.
Any stockholder of the Company who has duly demanded appraisal in compliance
with Section 262 will not, after the Effective Time of the Merger, be entitled
to vote for any purpose the shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for
dividends or distributions payable to stockholders of record at a date prior
to the Effective Time of the Merger.
At any time within 60 days after the Effective Time of the Merger, any
stockholder of the Company shall have the right to withdraw his or her demand
for appraisal and to accept the terms offered in the Merger Agreement. After
this period the stockholder may withdraw his or her demand for appraisal and
receive payment for his or her shares as provided in the Merger Agreement only
with the consent of the Company. If no petition for appraisal is filed with
the court within 120 days after the Effective Time of the Merger,
stockholders' rights to appraisal will cease and stockholders will be entitled
to receive the Merger Consideration as provided in the Merger Agreement.
Inasmuch as the Company has no obligation to file such a petition, any
stockholder who desires such a petition to be filed is advised to file it on a
timely basis. No petition timely filed in the court demanding appraisal shall
be dismissed as to any stockholder without the approval of the court, and such
approval may be conditional upon such terms as the court deems just.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE
MERGER AND THE MERGER AGREEMENT.
48
<PAGE>
PROPOSAL NO. 2: ELECTION OF DIRECTORS
Board of Directors
At the Annual Meeting, two directors of the Raster Graphics Board of
Directors are to be elected, each to hold office until the earlier of the
expiration of their term or the consummation of the Merger. The Board of
Directors is divided into three classes with the directors of each class
serving staggered terms and until his respective successor is elected and
qualified. The Class I directors are Rakesh Kumar and Delbert W. Yocam, whose
current terms will end at the Annual Meeting of Stockholders to be held in
2000; the Class II directors are Promod Haque and Lucio L. Lanza, whose
current terms will end at this Annual Meeting; and the Class III director is
Charles Case, whose current term will end at the Annual Meeting of
Stockholders in 1999. The term of office for each person elected as a director
will expire at the third succeeding annual meeting of stockholders after their
election and until his or her respective successor is duly elected and
qualified.
The officers and directors of the Company and their ages as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Rakesh Kumar............. 53 President, Chief Executive Officer and Chairman
of the Board
Kathy J. Bagby........... 36 Acting Chief Financial Officer
Marc Willard............. 33 Executive Vice President
Charles Case............. 51 Director
Promod Haque(1)(2)....... 50 Director
Lucio L. Lanza(1)(2)..... 53 Director
Delbert W. Yocam(1)(2)... 54 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Kumar joined the Company in 1991 as President and Chief Executive
Officer. From 1988 to 1991, he was Group Marketing Manager, Engineering
Systems, for Digital Equipment Corporation, where he was responsible for
worldwide marketing to technical customers. From 1985 to 1987, he was Vice
President of Sales and Marketing for Precision Image Corporation, a
manufacturer of electrostatic printers. Prior to 1985, Mr. Kumar held a number
of management positions with Phoenix Data Systems, an electronic design
automation software company, Applican, Inc., a CAD systems company, and
Digital Equipment Corporation.
Ms. Bagby came to the Company in 1998 through The Brenner Group LLC, an
interim management and financial advisory services firm. From 1992 to 1997,
she held successive financial management positions at Red Brick Systems, most
recently as the Vice President of Finance and Accounting. Prior to Red Brick
Systems, Ms. Bagby held financial positions at Adia Services and Syntex Corp.
Mr. Willard joined the Company in 1997 through the acquisition of ColourPass
Ltd., where he served as President from 1989 to 1997. After acquisition of
ColourPass by Raster Graphics, Mr. Willard served as Managing Director of the
UK-based subsidiary prior to being named Vice President of Applications and
Market Development. In April 1998 Mr. Willard was appointed to Executive Vice
President of Sales and Marketing for the Company. Prior to 1989, he was a
service manager with Agfa's Digital Film Service Department.
Mr. Case has served as a director of the Company since November 1997. Since
1991, he has been Managing Partner of Roger's Hill Associates, a strategic
consulting firm to the digital printing industry. Prior to founding Roger's
Hill Associates, Mr. Case was Senior Vice President of CAP International Inc.,
which provides market information services for the electronic printing
industry.
Mr. Haque has served as a director of the Company since May 1993. Since
1990, he has served as Vice President of Norwest Venture Capital Management
Inc., a venture capital firm. He also is a general partner of
49
<PAGE>
Itasca Partners, which is a general partner of Norwest Equity Partners IV, a
Minnesota limited partnership. He also serves as director of Prism Solutions,
Inc.; Transaction Systems Architect, Inc.; Connect, Inc.; and Information
Advantage, Inc.
Mr. Lanza has served as a director of the Company since May 1994. Since
1990, Mr. Lanza has been a partner of U.S. Venture Partners, a venture capital
firm, and an independent consultant to semiconductor and software companies.
In 1986, Mr. Lanza founded EDA Systems, and served as Chief Executive until
1989. Prior to 1986, he served in a number of marketing, engineering and
general management positions in the electronics industry, including
corporations such as Intel Corporation and Olivetti SpA. Mr. Lanza is also
Chairman of the Board of Artisan Components.
Mr. Yocam has served as a director of the Company since April 1995. Since
December 1996, Mr. Yocam has been Chairman of the Board of Directors and Chief
Executive Officer of Inprise Corporation (formerly Borland International).
From November 1994 to November 1996, he was an independent consultant. From
September 1992 to November 1994, Mr. Yocam was President, Chief Operating
Officer and a director of Tektronix, Inc. Mr. Yocam is also a director of
Adobe Systems, Inc., Hollywood Park, Inc., Xircom, Inc. and several privately
held technology companies.
Nominees
Two directors are to be elected at this Annual Meeting. The Board has
nominated the two current members of the Board constituting Class II to be re-
elected and to serve a three-year term expiring upon consummation of the
Merger or at the Annual Meeting of Stockholders to be held in 2001. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the Company's two nominees named below, regardless of whether any other
names are placed in nomination by anyone other than one of the proxy holders.
In the event that any such nominee is unable or declines to serve as a
director at the time of the Annual Meeting, the proxy holders will vote in
their discretion for a substitute nominee. It is not expected that any nominee
will be unavailable. The term of office of each person elected as a director
will continue until his term expires and until his successor has been elected
and qualified.
The name of the nominees, their ages as of December 31, 1998, and certain
other information about them are set forth below:
<TABLE>
<CAPTION>
Director
Name of Director Age Principal Occupation Since
---------------- --- -------------------- --------
<S> <C> <C> <C>
Promod Haque......... 50 Vice President of Norwest Venture Capital 1993
Lucio L. Lanza....... 53 Partner of U.S. Venture Partners 1993
</TABLE>
Except as set forth above, each of the nominees has been engaged in the
principal occupation set forth opposite his name during each of the past five
years. There are no family relationships among the directors or execution
officers of the Company.
Board Meetings and Committees
The Board of Directors held a total of 9 meetings during the fiscal year
ended December 31, 1997. The Board of Directors has an Audit Committee and a
Compensation Committee. It does not have a nominating committee or a committee
performing the functions of a nominating committee.
The Audit Committee reviews the Company's annual audit and meets with the
Company's independent auditors to review the Company's internal controls and
financial management practices. The Board's Audit Committee currently consists
of Messrs. Haque, Lanza and Yocam and held one meeting during fiscal year
1997. The Compensation Committee recommends compensation for certain of the
Company's personnel to the Board and, together with the Board of Directors,
administers the Company's stock and option plans. The Compensation
50
<PAGE>
Committee currently consist of Messrs. Haque, Lanza and Yocam and held ten
meetings during the last fiscal year.
Of the incumbent directors, no director attended fewer than 75 percent of
the aggregate number of meetings of the Board of Directors and of the
committees upon which such director served during fiscal 1997, other than Mr.
Yocam and Mr. Case, who attended 55.5 percent and 50.0 percent of the meetings
of the Board of Directors, respectively (during their respective periods of
service).
Compensation of Directors
Directors are reimbursed for certain reasonable expenses incurred in
attending Board meetings. In addition, Mr. Yocam receives $1,000 for each
Board of Directors meeting attended and receives an annual consulting fee of
$30,000, and Mr. Case receives $1,000 for each Board of Directors meeting
attended. In January 1997, Messrs. Haque, Lanza and Yocam were each granted an
option to purchase 5,000 shares of Common Stock at an exercise price of
$10.875 per share. In October 1997, Mr. Case was granted an option to purchase
10,000 shares of the Company's Common Stock of an exercise price of $5.4375
per share. Nonemployee directors of the Company are eligible to participate in
the Company's 1996 Director's Stock Option Plan.
Executive Compensation
The following table shows the compensation received by (a) the individual
who served as the Company's Chief Executive Officer during the fiscal year
ended December 31, 1997; (b) the other most highly compensated individuals who
were serving as executive officers of the Company for the fiscal year ended
December 31, 1997; and (c) the compensation received by each such individual
for the Company's two preceding fiscal years.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------ ------------
Securities
Bonus and Underlying
Name and Principal Position Year Salary Commission Options
--------------------------- ---- -------- ---------- ------------
<S> <C> <C> <C> <C>
Rakesh Kumar.............................. 1998 $180,000 $ -- --
President, Chief Executive.............. 1997 $180,692 $20,000 --
Officer and Chairman of the Board....... 1996 $168,923 $ 755 100,000
Remo Canessa(1)........................... 1998 $ 77,576 $ -- $ 70,000
Former Chief Financial Officer.......... 1997 $ -- $ -- $ --
1996 $ -- $ -- $ --
Sebastian J. Nardecchia(2)................ 1998 $ 87,952 $ -- $ --
Former Vice President, Operations....... 1997 $143,135 $15,000 10,000
1996 $123,538 $10,000 20,000
Marc Willard(3)........................... 1998 $171,000 $70,000 175,000
Executive Vice President................ 1997 $ -- $ -- 40,000
1996 $ -- $ -- $ --
Michael Willingham(4)..................... 1998 $ 77,074 $ -- $ --
Former Vice President,.................. 1997 $117,802 $10,000 10,000
Customer Service........................ 1996 $106,742 $ 5,000 10,000
</TABLE>
- --------
(1) Mr. Canessa joined the Company on February 17, 1998 at an annual base
salary level of $150,000 and resigned from the Company on May 19, 1998.
Mr. Canessa's 1998 salary included a severance package.
(2) Mr. Nardecchia's employment was terminated on March 31, 1998. Mr.
Nardecchia's 1998 salary included a severance package.
(3) Mr. Willard's joined the Company on January 1, 1998 at an annual base
salary level of $180,000.
(4) Mr. Willingham's employment was terminated on March 31, 1998. Mr.
Willingham's 1998 salary included a severance package.
51
<PAGE>
The following table sets forth information for the executive officers named
in the Summary Compensation Table with respect to grants of options to
purchase Common Stock of the Company made in 1998 and the value of all options
held by such executive officers on December 31, 1998.
Option Grants During Year Ended December 31, 1998
<TABLE>
<CAPTION>
Individual Grants(1)
--------------------------------------------------
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Number of Percentage of Price
Securities Total Options Exercise Appreciation for
Underlying Granted to or Base Option Term(2)
Options Granted Employees in Price Expiration -----------------
Name (Shares) Fiscal 1998 ($/Share) Date 5%($) 10%($)
---- --------------- ------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Marc Willard............ 175,000 37.40% $0.37 7/09/08 $ 41,271 $104,589
Remo Canessa(3)......... 70,000 14.96% $3.09 2/17/08 $136,206 $345,172
</TABLE>
- --------
(1) Consists of stock options granted pursuant to the Company's 1996 Stock
Plan. The Company's options generally become exercisable at a rate of
12.5% after six months following the date of grant and approximately 6%
per calendar quarter thereafter for as long as the optionee remains an
employee with, consultant to, or director of the Company. The maximum term
of each option granted is ten years from the date of grant. The exercise
price is equal to the fair market value of the stock on the grant date as
determined by the Board of Directors.
(2) The 5% and 10% assumed compounded annual rates of stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price appreciation over the ten-year
option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from the option grants
made to the persons named in the Summary Compensation Table.
(3) Mr. Canessa's employment was terminated on May 19, 1998.
Aggregated Option Exercises in the Year Ended December 31, 1998 and Year-End
Option Values
The following table sets forth information for the executive officers named
in the Summary Compensation Table with respect to exercises in fiscal year
1998 of options to purchase Common Stock of the Company.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Shares Underlying Unexercised the-Money Options at
Acquired Value Options at Fiscal Year End Fiscal Year End(1)
on Exercise Realized Exercisable/ Unexercisable Exercisable/Unexercisable
Name ----------- -------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Rakesh Kumar............ -- -- 305,833/39,167 $ 30,156/$ 468
Marc Willard............ -- -- 53,958/161,042 $9,114/$34,635
Sebastian J.
Nardecchia(2).......... -- -- 66,458/0 $ 6,796/$ 0
Michael Willingham(3)... -- -- 44,333/0 $ 4,031/$ 0
</TABLE>
- --------
(1) The value of unexercised in-the-money is based on the closing price of the
Company's Common Stock as reported on the "Pink Sheets" of the National
Quotation Bureau on December 31, 1998 of $0.625 per share.
(2) Mr Nardecchia's employment was terminated on March 31, 1998.
(3) Mr. Willingham's employment was terminated on March 31, 1998.
Employment Agreements; Change in Control
The Company entered into an employment agreement with its Chief Executive
Officer on July 3, 1991, which provides for a six-month severance payment in
the event of termination of employment. On August 21, 1998 the Compensation
Committee approved the grant of a $300,000 retention bonus payable to the
Chief Executive Officer upon change of control of the Company.
52
<PAGE>
Compensation Committee Report
The following is a report of the Compensation Committee of the Board of
Directors (the "Committee") describing the compensation policies applicable to
the Company's executive officers during the fiscal years ended December 31,
1998 and 1997. The Committee recommends salaries, incentives and other forms
of compensation for directors, officers and other employees of the Company,
administers the Company's various incentive compensation and benefit plans
(including stock plans) and recommends policies relating to such incentive
compensation and benefit plans. Executive officers who are also directors have
not participated in deliberations or decisions involving their own
compensation.
Compensation Policy
The Company's executive officer compensation philosophies are designed to
attract, motivate and retain senior management by providing an opportunity for
competitive, performance-based compensation. Executive officer compensation
consists of competitive base salaries and stock-based incentive opportunities
in the form of options to purchase the Company's Common Stock. The Company's
executive compensation program consists of three main components: (1) base
salary, (2) potential for bonus based on overall Company performance as well
as individual performance, (3) stock options/grants that provide the executive
officers with the opportunity to build a meaningful stake in the Company, with
the objective of aligning executive officers' long-range interests with those
of the stockholders and encouraging the achievement of superior results over
time. The second and third elements of the compensation program constitute the
"at risk" components. Bonuses are based on the Company's profitability during
the previous fiscal year, calculated according to a pre-set formula. The
Committee annually evaluates the Company's performance, actual compensation
and stock ownership of executive officers on a comparative basis with
companies in the same industry as well as other companies in the same
geographical area.
Base Salaries for 1998 and 1997
In establishing compensation guidelines with respect to base salary, the
Company utilized data from various surveys prepared by independent firms to
assist it in setting salary levels competitive with those of other similar
industry companies. Many of the companies contained in these surveys are also
included in the Hambrecht & Quist Technology Index. When using survey data,
the Committee seeks to compare compensation levels of the Company to those of
technology companies of similar size, adjusting for regional differences in
compensation levels. While it is the Committee's intent to continue to review
periodically base salary information to monitor competitive ranges within the
applicable market, including consideration of the Company's geographic
location and individual job responsibilities, it is further the intent of the
Committee to maintain a close relationship between the Company's performance
and the base salary component of its executive officers' compensation.
Stock Option Awards for 1998 and 1997
The Company's 1996 Stock Plan provides for the issuance of stock options to
officers and employees of the Company to purchase shares of the Company's
Common Stock at an exercise price equal to the fair market value of such stock
on the date of grant. The Company's stock options typically vest ratably over
a period of four years. Stock options are granted to the Company's executive
officers and other employees both as a reward for past individual and
corporate performance and as an incentive for future performance. The
Committee believes that stock-based performance compensation arrangements are
essential in aligning the interests of management and the stockholders in
enhancing the value of the Company's equity. In considering option awards, the
amount and term of options already held by recipients were considered.
Additional grants were based on the level of existing grants as well as
subjective evaluation of individual contributions to overall corporate
achievements.
Compensation of the Chief Executive Officer
The compensation for Rakesh Kumar, the Company's Chairman, President and
Chief Executive Officer ("CEO") is determined based on a number of factors,
including comparative salaries of CEO's of companies in
53
<PAGE>
the Company's peer group, the Company's profitability in the prior fiscal year
and the CEO's contribution to such profitability, the CEO's individual
performance and the Company's performance as measured against the stated
objectives. In January 1997, the Committee awarded the CEO a bonus of $20,000
based on his contribution to the Company's profitability in the 1996 fiscal
year. The CEO received no cash performance bonus during 1998. The CEO's total
compensation package includes stock option grants with the goal of motivating
leadership for long-term Company success and providing significant reward upon
achievement of Company objectives and enhancing stockholder value. As with
other executives, size of option grants is also based on a review of
competitive survey data.
Deductibility of Executive Compensation
The Committee has considered the impact of Section 162(m) of the Internal
Revenue Code adopted under the Omnibus Budget Reconciliation Act of 1993,
which section disallows a deduction for any publicly held corporation for
individual compensation exceeding $1 million in any taxable year for the CEO
and four other most highly compensated executive officers, unless such
compensation meets the requirements for the "performance-based" exception to
the general rule. Since the cash compensation paid by the Company to each of
its executive officers is expected to be well below $1 million and the Company
believes that options granted under the Company's 1996 Stock Option Plan will
meet the requirements for qualifying as performance-based, the Committee
believes that this section will not affect the tax deductions available to the
Company. It will be the Committee's policy to qualify, to the extent
reasonable, the executive officers' compensation for deductibility under
applicable tax law.
SUBMITTED BY THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS
Promod Haque
Lucio L. Lanza
Delbert W. Yocam
54
<PAGE>
Stockholder Return
The following table compares cumulative total stockholder return, assuming
reinvestment of all dividends, for the Company's Common Stock at December 31,
1998 since August 8, 1996 (the date on which the Company's stock was first
registered under Section 12 of the Securities Exchange Act of 1934, as
amended) to the cumulative return over such period of (i) the Hambrecht &
Quist Technology Index and (ii) the U.S. Index for the NASDAQ National Market.
The data assumes that $100 was invested on August 8, 1996 in the Common Stock
of the Company and each of the comparative indices. The data further assumes
that such amount was initially invested in the Common Stock of the Company at
a price per share of $8.00, the price at which such stock was first offered to
the public by the Company on that date. The stock price performance in the
following chart is not necessarily indicative of future stock price
performance.
Comparison of Cumulative Total Return
Cumulative Total Return of Raster Graphics, Inc.,
the Hambrecht & Quist Technology Index
and the Nasdaq Stock Market Index
<TABLE>
<CAPTION>
August 8, December 31, December 31, December 31,
1996 1996 1997 1998
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Raster Graphics, Inc.......... 100 148 58 8
H & Q Technology Index........ 100 127 149 231
NASDAQ Stock Market Index..... 100 113 139 195
</TABLE>
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF PROMOD HAQUE
AND LUCIO L. LANZA TO SERVE AS DIRECTOR UNTIL THE EARLIER OF EITHER (I) THE
ENSUING THREE YEAR TERM AND UNTIL HIS SUCCESSOR IS ELECTED AND QUALIFIED OR
(II) THE CONSUMMATION OF THE MERGER.
55
<PAGE>
RASTER GRAPHICS' BUSINESS
Overview
Raster Graphics develops, manufactures and markets high-performance, large
format, digital color printing systems, and sells related consumables and
software for the on-demand large format digital printer ("LFDP") market. The
Company's products are designed to meet the short-run, on-demand production
market requirements of quality, speed, flexibility, reliability and low per
copy cost.
The LFDP market consists of color print jobs with run lengths typically
ranging from one to 200 copies, and output sizes of 20-inches by 30-inches or
larger. Applications include Point of Purchase (POP) signs, trade show exhibit
graphics, displays, transit advertising, fleet graphics, banners, billboards,
courtroom graphics, backlit signage, posters and sports and corporate events.
The primary users of Raster Graphics' printing systems are color photo labs,
reprographic houses, graphic arts service bureaus, exhibit builders, digital
color printers, screen printers and in-house print shops.
INDUSTRY BACKGROUND
Graphics Market Size and Trends
The overall graphics market, consisting of offset, screen, photographic and
digital printing, is a large and mature market. According to U.S. Commerce
Daily, in 1995, the graphics market in the United States had sales of $160
billion with an estimated growth rate of 8% per year.
The anticipated growth of the LFDP market is being driven by a variety of
factors, including:
. Customization. The ability to vary content electronically on a print-by-
print basis enables companies to create highly-focused marketing
campaigns customized to market segment characteristics, such as nuances
in language, culture and geographic location.
. Demand for Color. The use of color in graphics design has become
pervasive as digital technology has made full color printing as
accessible as black and white printing. End users strongly prefer to use
full color in all forms of communications and advertising because of its
positive impact on awareness and retention.
. Available Technology. Advances in high speed, large format digital
printing technology enable cost effective, high quality, on-demand color
print jobs in run-lengths from one to 200 copies.
. Desktop Publishing. Innovations in desktop publishing have provided
graphics design capabilities to thousands of users through the use of
widely available software packages such as Adobe Illustrator, Aldus
PageMaker and QuarkXPress which have revolutionized desktop graphics
design. This digital desktop publishing technology enables users to
create new designs easily and quickly and print them directly using LFDP
systems.
. Market Expansion. The installed base of thousands of low-cost, color
inkjet printers is helping to fuel the growth of many new applications
such as corporate presentations, Point of Purchase ("POP") displays and
exhibit graphics. As end users become accustomed to color graphics and
demand higher performance capabilities including speed, graphics size
and outdoor applications, the demand for LFDP should expand.
. Efficiency of Large Format Print Advertising. The Traffic Audit Bureau
for Media Measurement, Inc., estimates in its Planning for Out of Home
Media Report that large format print advertising is six-to-nine times
more cost effective than newspaper and television advertising. As a
result, Outdoor Services, Inc., a marketing research company, estimates
that large format print advertising is one of the fastest growing
advertising media, rising from sales of $260 million in 1970 to $3.5
billion in 1995.
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<PAGE>
LFDP technology enables adoption of this cost-effective medium by a new
class of regional users desiring a smaller number of prints.
Traditional Printing Methods
Prior to the availability of LFDP technology, graphic printing methods were
limited to the following three categories:
. Photographic Enlargement. The photographic enlargement process involves
imaging a digital file on a film recorder and using an enlarger to
expose large photographic paper or backlit film. While this method
provides a cost-effective solution for a small number of prints, it
requires extensive chemical-based processing, which requires special
handling. Furthermore, the image quality for line art, such as text, can
lose its sharpness as the image is enlarged. Also, the photographic
process is primarily suited for indoor applications.
. Screen Printing. In the screen print process, an image is first created
on four sets of film-one for each of the four process colors,
representing Cyan, Magenta, Yellow and Key (black) ("CMYK"). These films
are then exposed onto four screens to produce masks for each color. Ink
pigments are applied through these masks by a squeegee to produce the
final graphics. While screen print quality is acceptable for most
distance-viewed applications, this multi-step process is expensive and
time-consuming, making it uneconomical for runs shorter than 50 to 100
copies.
. Offset Printing. Offset printing requires the creation of four films
which are then used to make printing plates. The plates are physically
mounted on a press, ink is applied to the plates, and the image is then
transferred by an intermediary blanket onto the final paper. In addition
to film and plate-making, offset printing also requires extensive press
setup. Offset printing is an expensive, time-consuming process and is
uneconomical for runs shorter than 1,000 copies. However, offset
printing offers the highest quality graphics and lowest cost per copy
for runs over 1,000 copies.
Because of the multi-step process and high set-up costs, each of these
traditional printing technologies is only cost-effective within certain ranges
of run lengths.
Printing Methods' Capabilities
Digital Printing
Digital printing fulfills the unmet demand of short-run users, as it does
not require expensive chemicals, films, screens, masks or set-up processes.
Furthermore, this technology allows graphics to be printed directly from a
variety of desktop publishing programs.
Currently, there are two primary methods of digital printing, electrostatic
and inkjet. Electrostatic printheads form images by depositing small dots of
electrical charge across the full width of the paper. The image is developed
by the attraction of the ink to the charged dots. Inkjet printers form images
by spraying very small dots of inks as the printhead moves horizontally in a
scanning-type process.
<TABLE>
<CAPTION>
High Image On- Short Outdoor
Method Quality* Demand Runs Applications
------ ---------- ------ ----- ------------
<S> <C> <C> <C> <C>
LFDP.................................... X X X X
Photograph.............................. X X X
Screen.................................. X X
Offset.................................. X X
</TABLE>
- --------
* Determination of image quality is subjective, involving individual taste
and perception. The above chart indicates the Company's estimates of
generally-accepted industry perceptions of image quality.
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RASTER GRAPHICS' SYSTEM SOLUTION
Raster Graphics offers complete printing system solutions to meet the
demands of the on-demand production LFDP market. RGI's printing systems allow
users to print short runs of high quality color graphics on-demand at
substantial time and cost savings relative to traditional printing methods.
Raster Graphics' product offerings consist of its electrostatic Digital
ColorStation ("DCS") printers and its PiezoPrint inkjet printers, integrated
image processing software and related consumables and services. Key benefits
of RGI's printing systems include:
High Performance. With a production printing speed of 600 to 1,000 square
feet per hour, the DCS printing systems can produce 50 to 60 full-color, 36-
by 48-inch posters in one hour, which the Company believes is significantly
faster than printers in a comparable price class. Runs of up to 200 prints can
be easily produced in a single shift. The PiezoPrint 5000, one of the fastest
large-format continuous-feed inkjet printer available, can print 340 square
feet per hour in draft mode, 180 square feet per hour in standard mode and 90
square feet per hour in enhanced mode. Its printing technology employs three
printheads per color for a total of 384 nozzles per color, which gives it the
ability to print at production speeds. In standard mode, using the PiezoPrint
5000, a user can print 120 (3-foot by 4-foot) posters in one 8-hour shift. The
PiezoPrint 1000 prints at up to 17 square feet per hour.
Low Cost for Short Runs. Primary job costs of RGI's printing systems are
variable and are principally composed of relatively low cost consumables. In
contrast, conventional printing methods involve relatively high fixed
overhead, set-up and labor costs for each printing job. Furthermore, the on-
demand capability of digital printing reduces the waste of surplus or outdated
copies. As a result, the Company believes that its printing systems provide a
cost-effective solution for color printing runs of up to 200 copies.
Targeting and Customizing or "Narrowcasting." RGI's printing systems allow
content to be varied on a print-by-print basis. Fixed and variable data are
printed in one process at the same quality level. This permits narrowcasting
marketing campaigns that are customized to a specific market segment.
High Print Quality and Flexibility. RGI's printing systems offer adjustable
printing modes allowing utilization of the same system for different levels of
image quality to meet the needs of both close-up graphics and distance-viewed
graphics.
Raster Graphics has received eight highly acclaimed industry awards for its
contribution to digital printing technology. Most recently, the Company's
PiezoPrint 5000 received the Digital Printing and Imaging Association's "1997
Product of the Year" award, a Seybold Seminars 1997 "Hot Pick" award, and
Digital Graphics Magazine 1997 "Trailblazer" award. In addition, the Company's
DCS 5400 product received the Digital Printing and Imaging Association's 1994
Product of the Year award; was named among the Top 10 New Repro Products for
1994 by Modern Reprographics; was designated a Hot Product for 1994 by
Electronic Publishing; received a 1994 Editor's Choice Award from Computer
Graphics World; and was honored with the 1994 Industry Excellence Award by
IEEE Computer Graphics and Applications.
Strategy
Raster Graphics' objective is to become a market leader in providing digital
printing systems and related consumables and services for the on-demand
production LFDP market. The Company's strategy for growth includes the
following:
Provide System Solutions. In 1995, the Company acquired Onyx, a leader in
image processing software, enabling the Company to develop highly integrated
systems solutions for its customers. Raster Graphics plans to continue
developing additional products and services to provide complete integrated
solutions to its customers. The Company believes that customers prefer an
integrated solution since most customers lack the expertise or time to source
and integrate individual and potentially incompatible components from multiple
suppliers.
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Focus on Large Format Digital Segment. Raster Graphics plans to continue to
focus its efforts on producing LFDP systems with capabilities that target and
address specific needs of the production customer, such as paper graphics,
backlit graphics, vinyl graphics and textile graphics. The Company believes
that the rapid growth in small format on-demand color printing will also
stimulate demand for comparable large format solutions by raising the level of
awareness of the benefits of short-run printing.
Increase Recurring Revenues Base. Raster Graphics plans to continue
expanding its services and specialized consumables businesses which provide
recurring revenues to the Company. The Company currently sells various inks,
varnish, specially-coated papers, vinyls and maintenance and training
services.
Core Technologies. Raster Graphics plans to utilize its technological
expertise to expand its product offerings. The Company has expertise in a
number of core technologies, including knowledge of complex printhead design
and manufacturing; high speed paper transport; high speed data transfer; and
image processing software.
Pursue Acquisitions, Joint Ventures and Alliances. Raster Graphics will seek
to acquire strategic businesses and technologies and establish joint ventures
with companies offering complementary products or synergistic distribution.
For example, by utilizing Onyx's leadership position in image processing
software, Raster Graphics plans to build alliances with manufacturers and
distributors of entry level low-speed graphics printers. The Company believes
that this large base of low-speed graphics printing systems will become
upgrade prospects for the Company's high performance production systems.
Products
Raster Graphics DCS Printer. RGI's DCS 5442 utilizes electrostatic
technology to print on roll stock and is capable of producing 54-inch wide
graphics, in lengths of up to 100 feet. A paper transport system advances the
paper through the printer and the Silicon Imaging Bar printhead deposits small
dots of electrical charge on the paper. The inking system then applies the
inks to develop the image. This process is repeated for each color. Throughout
the entire process, the printer control system is responsible for all
operations of the printer.
Raster Graphics, in its DCS 5442 printer, offers the following innovative
features to satisfy the requirements of the LFDP market:
. High Performance Using Non-Multiplexed Writing. Raster Graphics'
patented, non-multiplexed printhead, the Silicon Imaging Bar,
simultaneously images across the full 54-inch width of paper allowing
DCS printers to operate at much higher speeds than traditional
multiplexed printers. In multiplexed electrostatic printing, a segmented
printhead images across the width of the paper one segment at a time.
. Five Color Capability. The DCS 5442 printer utilizes a unique five color
process that allows printing spot colors or applying varnish. Spot
colors enable the printing of precise corporate identity colors (e.g.
Coca-Cola red or Kodak yellow), accent metallic colors or neon colors.
Varnish enables the application of a protective finish coat. Traditional
four-color printing processes using only CMYK cannot offer these
capabilities.
. Dual Resolution Printing Mode. The DCS 5442 is capable of printing
images in 200 x 200 dpi mode or 200 x 400 dpi mode without any special
printer setup. Images are processed faster in 200 x 200 dpi mode, while
200 x 400 dpi mode provides better image definition. A user can select
the appropriate mode to match the application needs. Currently,
comparable electrostatic printers do not offer this dual resolution
printing mode.
. Seamless Integration with System Software. The DCS 5442 permits real
time interaction between the printers and the image processing server to
manage job attributes (e.g. type of media on which to print, type of
ink, rush vs. normal priority, number of inking passes per color, etc.),
and keep the operator informed of the job and print engine status.
Traditionally, printers and image processing software have
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been developed independently with limited communication capabilities. As
a result, operators have been forced to manually track job attributes,
requiring additional time and causing workflow inefficiencies.
It is the Company's intent to continue actively marketing and selling the
DCS 5442 printer.
Raster Graphics PiezoPrint Product Family. Raster Graphics markets a line of
digital color inkjet printers, supplies and accessories which are targeted at
the production-oriented digital printing environment. Both the PiezoPrint 1000
and PiezoPrint 5000 printers offer several significant features:
. Piezo Printhead Technology. The Piezo printhead technology differs from
conventional thermal inkjet technology in that heat is not used to
produce the bubble which propels the drop of ink needed for printing.
PiezoPrint printheads utilize piezoelectric crystal technology which
produces ink droplets by force. The piezoelectric crystal changes shape
when electrically stimulated, squeezing a droplet out of the nozzle to
form a pixel.
. UV-Stable Pigmented Ink. The Piezo family of printers can utilize UV-
stable pigmented ink to produce prints which are sufficiently durable
and light resistant to be used outdoors.
. PosterShop Color Production Software. PosterShop color production
software is integrated in all PiezoPrint printers and provides users a
flexible and easy-to-use interface.
Raster Graphics PiezoPrint 1000 Inkjet Printing System. In December 1996,
the Company introduced the PiezoPrint 1000, a more affordable inkjet printer
targeted at the entry level market. In addition to its lower price point, the
PiezoPrint 1000 also offers significant performance features:
. Easy Setup and Initial Operation. The PiezoPrint 1000 and the
accompanying PosterShop Pro software are designed so that a typical user
can install the complete system and begin production printing in less
than one hour.
. Media Versatility. Users can select from a variety of media including
bond paper, photo-gloss, opaque and backlit film, banner tyvik, canvas
and adhesive-backed vinyl, for both indoor and outdoor applications.
Such media can be up to 52 inches in width, thereby providing a full 50
inches of printable area. When using the optional take-up feeder, the
available print length of the PiezoPrint 1000 is limited only by the
length of the media.
. High Resolution. The PiezoPrint 1000 is capable of printing at
resolutions of up to 720 dpi.
It is the Company's intent to discontinue actively marketing and selling the
PiezoPrint 1000 in 1998 when existing inventory has been exhausted. The
Company has no current plans to replace the PiezoPrint 1000 with another entry
level printer. The Company intends to provide service and consumables to
existing PiezoPrint 1000 customers through a third party service provider.
Raster Graphics PiezoPrint 5000 Inkjet Printing System. In March, 1997, the
PiezoPrint 5000 joined the Raster Graphics family of production-oriented
large-format digital printing systems. Fitting comfortably in the mid-range of
price/performance between the affordable PiezoPrint 1000 inkjet printer and
the high-volume Digital ColorStation 5442 electrostatic digital press, the
PiezoPrint 5000 is a complete production system for the professional print
provider. The PiezoPrint 5000 offers the following features:
. Inking System. Ink reservoirs hold 32 ounces of UV-resistant pigment-
based colors.
. Diagnostics. Productive workflow is ensured by the printer's built-in
PiezoRx technology, which, after a misfiring nozzle is identified by the
operator, automatically allows the user to compensate for it by
directing other nozzles to fire.
. Media. Several media are available for the PiezoPrint 5000, including
high-quality bond paper for indoor applications, moisture-resistant bond
for outdoor applications, adhesive and banner vinyls, and backlit film.
Additional media will be added as they are qualified.
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. Color Consistency. Piezo printing technology generally provides greater
reliability of color consistency because it is not susceptible to the
heat buildup common in thermal inkjet technology which can cause
perceptible color shifts. In addition, Piezo printheads are designed to
last longer than thermal heads and to provide increased printer
reliability, which translates into greater uptime.
. Six Color Capability. In addition to the standard four-color cyan,
magenta, yellow and black (CMYK), the PiezoPrint 5000 is capable of an
expanded color gamut by using fifth and sixth ink stations.
The Company and its customers have experienced operational issues with the
PiezoPrint 5000. The Company received printheads from its sole-source supplier
which displayed quality problems after shipment of the printer to customer
sites. During 1997, it was necessary for the Company to correct the problems
by replacement of faulty printheads as a field upgrade as well as returning
printers to Raster Graphics for a factory upgrade. The Company believes that
the upgrade of faulty printheads will continue into 1999. The Company has
recorded warranty reserves to cover these anticipated costs, which the Company
does not otherwise expect to be material.
In addition, during the development of consumables for the PiezoPrint 5000,
the Company found that oil-based inks used in this printer had certain
limitations which did not allow the Company to develop a photogloss media
which was compatible with the printer. This lack of a photogloss media limited
the market acceptance of the printer.
Print System Software. The Company's PosterShop printer system software,
based on client/server architecture, is designed to facilitate the workflow in
a graphics production shop. A typical environment consists of multiple
PosterShop clients connected to a PC server. The PosterShop software allows
clients to prepare printing jobs and send them to the server. The server
manages the job queues, performs the raster image processing ("RIP") function
and communicates with the printer(s) and clients. Clients can also remotely
access job and printer status from the server. In addition, the DCS system
software can concurrently process and print, thereby maximizing throughput.
PosterShop software, developed by the Company's wholly-owned subsidiary
Onyx, provides a complete set of tools for producing large-format color
graphics in a wide variety of printers. PosterShop, which is Onyx's second
generation image processing software, includes the following tools:
. Preview and Size. Preview and sizing module displays the image on the
screen, rendered with the same software that is used to create the final
print. This "What You See is What You Get" ("WYSIWYG") display also
provides an easy drag-and-drop cropping box to select the size and area
to be printed. The image can be enlarged to any size up to 50 feet by 50
feet.
. Tiling. Tiling enables PosterShop to automatically create panels or
tiles when an image will not fit on a single page. These tiles are
displayed on the screen with easy drag-and-drop lines so the user can
easily edit them. The user can also specify an overlap so that the image
is duplicated along the adjoining edges.
. Color Correction. Using several sliders, the color correction tool is
used to control the image appearance. These sliders are highlights,
midtones, shadows, contrast, brightness and saturation. These
adjustments are displayed both on screen and on the printout. This color
tool also has more advanced features for sophisticated users, such as
set white, set black, histograms, CMYK curves, sample point and others.
Up to four views of the image can be displayed at the same time.
. Color Calibration. Color calibration is used to provide device-
independent color when changing media, ink or dot pattern. Calibration
reads a color swatch using a densitometer to create color tables
associated with each media resolution and dot pattern.
. PostScript RIP and Font Manager. PosterShop features a full PostScript
level 2 RIP. This RIP converts the PostScript graphics files to binary
data formats specific to each printer. The RIP function utilizes a
number of specialized dot patterns including Fixed Dot Random Placement
(FDRP), a patented Onyx dot pattern. A font manager is included to add
special fonts to the RIP.
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Inkjet Image Processing Software. In addition to the PosterShop software
sold with RGI's printing systems, the Company offers specialized versions of
PosterShop to other inkjet printer manufacturers and distributors under the
Onyx brand name.
Consumables
Color printing requires the consumption of significant quantities of inks
and papers. Raster Graphics' product offerings include a range of consumables,
such as specialized process color inks, spot color inks and varnish, vinyls,
films, indoor and outdoor papers and laminates.
The specialized toners and inks, concentrates and varnish are created
specifically for the DCS and PiezoPrint products to optimize image quality and
printer performance. The Company currently offers over 200 different
configurations of toner and ink, concentrate and varnish products. Toner, ink
and concentrate consumption varies depending upon both the content and number
of rolls printed. A graphic with a primarily white background will require
much less ink than a graphic with high image content.
Raster Graphics markets 30 different types of specially coated medias for
use in its electrostatic and inkjet printer products, some of which are
offered in various widths to meet market applications requirements. The
Company also continues to supply paper and ink products for its discontinued
printer products.
In addition, during the development of consumables for the PiezoPrint 5000,
the Company found that oil-based inks used in this printer had certain
limitations which did not allow the Company to develop a photogloss media
which was compatible with the printer. This lack of a photogloss media limited
the market acceptance of the printer.
Services
The Company devotes significant resources in striving for excellence in
customer service. Service response and repair data is recorded and tracked via
an on-line customer dispatch system Raster Graphics has also developed a
state-of-the-art maintenance manual for its printers that resides on a laptop
computer and is interactive with the printer. Using the laptop computer, the
field engineer or trained distributor can diagnose and test the various
components of the printer.
In the United States, Raster Graphics provides installation and 90-day on-
site warranty support for the DCS 5442 and PiezoPrint 5000, and a one year
parts warranty for the PiezoPrint 1000. After the initial warranty period, the
Company offers service maintenance contracts to its installed base of
customers. The Company's service organization consists of technical support
personnel, technical trainers, field service technicians, a customer call
dispatch center and inventory and logistics support. The field service
technicians are located in 13 key locations across the United States.
Internationally, Raster Graphics provides 90-day (12 months for printhead)
return-to-factory parts warranty. Maintenance service is provided by
authorized dealers and distributors.
Raster Graphics provides classroom and on-site training for all products
sold domestically. All of the Company's training programs are listed in the
Company product/price book. The Company also trains its international dealers
and distributors at the Raster Graphics training center in San Jose,
California.
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Markets
The Company's current printing systems are targeted for the high performance
production electrostatic and inkjet segment of the on-demand large format
digital printing market. According to IT Strategies, in June, 1998, the
potential professional channels which produce and supply wide format digital
printing to business customers on a print-for-pay basis are:
<TABLE>
<CAPTION>
Estimated
Number of
Market Segment Sites
-------------- -------------
<S> <C>
Quick Printers................................................ 3,000-7,000
Sign Shops.................................................... 2,000-4,000
Screen Printers............................................... 6,640-10,240
Color Photo Labs.............................................. 975-1,040
Exhibit Builders.............................................. 1,600
Digital Color Print Shops..................................... 2,500
Graphic Arts Service Bureaus.................................. 2,160-2,880
-------------
Total....................................................... 14,775-29,260
</TABLE>
IT Strategies estimates the worldwide annual sales of professional large
format color printers (professional inkjet and electrostatic) were 21,140
units or $308 million in 1997 and are projected to grow to 48,079 units or
$290 million in 2002. In addition, sales of consumables (inks, varnish,
papers, vinyls, and other substrates) were $287 million in 1997 and are
projected to grow to $5.3 billion in 2002. IT Strategies estimates the retail
valuation of print output in 1997 was $11.4 billion, and is projected to grow
to $18.5 billion in 2002.
The major markets and applications for LFDP are as follows:
<TABLE>
<S> <C>
.POP Displays .Museums/Galleries
.Vinyl and Cloth Banners .Presentations/Seminars
.Corporate Identity Graphics .Backlit and Reflective Posters
.Mall Graphics .Courtroom Graphics
.Exhibit/Trade Show Graphics .Seasonal/Travel Promotions
.Billboards .Advertising/Merchandising Tie-ins
.Sports/Concert/Event Graphics .Custom Commercial Wallpaper
</TABLE>
Customers, Sales and Marketing
Raster Graphics sells complete printing systems, printers and PosterShop
image processing software to customers both internationally and domestically.
To address these customers, the Company has adopted a dual distribution
strategy that encompasses both a direct sales organization and third-party
distributors, including original equipment manufacturers ("OEMs") and value
added resellers ("VARs").
In the United States, Raster Graphics has traditionally employed a direct
sales force. These individuals sold DCS and PiezoPrint printing systems to end
user customers such as commercial photo labs, reprographics service bureaus,
exhibit builders, screen printers, digital printing centers, pre-press trade
shops and in-plant printers. This sales force also assisted OEMs and VARs,
such as Cactus, a division of 3M, in reselling printers when the image
processing software system is supplied by such OEMs or VARs. 3M markets the
Company's printers under the 3M ScotchPrint system brand name and
differentiates its offerings by providing specialized, premium-priced long-
durability consumables.
More recently, the Company has changed its sales strategy to increased focus
on the indirect sales channel and has begun to recruit a select number of
dealers and distributors to market its inkjet products in the United States.
Internationally, the Company sells and supports its products through the
direct sales efforts of its European subsidiaries and through non-exclusive
agreements with a number of distributors. In 1995, the Company formed
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a wholly-owned subsidiary in Germany to support the existing German
distributors. As of August 1996, this subsidiary began to directly sell DCS
printing systems, DCS printers and consumables to the Company's German
customers. In March 1997, the Company merged with ColourPass Technologies, a
leading distributor of printing systems for the LFDP market in the United
Kingdom. In September 1997, the Company acquired Datagraph, a distributor in
France of LFDP systems. In addition, based on recent developments, Datagraph
has commenced bankruptcy proceedings and is in the process of liquidation.
In addition to marketing its products in the United States and Europe,
Raster Graphics also sells its products in a number of other countries through
distributors and VARs. Raster Graphics also sells stand-alone printer products
to international OEMs and systems integrators/VARs. These customers integrate
these printers with an image processing system.
In addition, the Company distributes specialized versions of the PosterShop
image processing software to inkjet printer manufacturers and distributors
under the Onyx brand name. Some of the key distributors of these versions of
PosterShop include Ahearn & Soper and Casey Johnson. The Company employs a
dedicated sales force located in Salt Lake City, Utah to work with these
inkjet customers.
The Company promotes its products through public relations, direct mail,
advertising, trade shows and on-going customer communication programs. The
Company utilizes telemarketing programs to market consumables to its installed
customer base. Additionally, the PosterShop product is also promoted through
the inkjet printer dealer channel by offering free, time-limited copies of
PosterShop image processing software with the printer sales.
Uncertainty Regarding Asian and Latin American Markets
A significant number of the Company's customers and suppliers are based in
Asia and Latin America. The financial instability in these regions has and may
have an adverse impact on the financial position of customers and suppliers in
the region, which could impact the Company's future revenues and operations,
including the ability of customers to pay the Company. As a result of
experiencing collection problems from its Asian and Latin American customers
in 1997 as the Company did not require letters of credit, the Company is
planning to require sales to these regions to be secured by letters of credit
or transacted on a prepaid wire transfer basis. Should the current volatility
in Asia and Latin America continue, either the Company or the Company's
customers may be unable to sell its products in the region. The inability to
generate revenue in this region, or the inability to collect amounts due,
could have a material adverse impact on the Company's business, financial
condition and results of operations.
Intellectual Property
As of December 31, 1997, the Company has seven pending patent applications
and has been awarded nine United States patents covering technical features
and fabrication methods used in Raster Graphics' printers and color rendering
techniques used by its image processing software. The expiration dates of
these patents range from 2006 to 2010. Topics covered in these patents include
methods for fabricating electrostatic writing heads, paper positioning and
stabilizing systems, and devices for applying digital ink on paper. The
Company currently holds no foreign patents. The Company expects to continue to
seek patents on innovations related to its products under development. There
can be no assurance that the Company will be successful in obtaining necessary
patents, that the Company's patent applications will result in the issuance of
patents, that the Company will develop additional proprietary technology that
is patentable, that any issued patents will provide the Company with any
competitive advantages or will withstand challenges by third parties or that
patents of others will not have an adverse effect on the Company. In addition
to patents, the Company believes its competitive position is dependent on its
unpatented industrial know-how, its copyrighted software, and the timing of
the introduction of product innovations in advance of potential future
competitors.
There can be no assurance that others will not independently develop similar
products, duplicate the Company's products or design products that circumvent
any patents used by the Company. No assurance can be
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given that the Company's processes or products will not infringe patents or
proprietary rights of others or that any licenses required under any such
patents or proprietary rights would be made available on terms acceptable to
the Company, if at all. If the Company does not obtain such licenses, it could
encounter delays in product introductions while it attempts to change the
design of the product, or it could find that the development, manufacture or
sale of products requiring such licenses could be enjoined. In addition, the
Company could incur substantial costs in defending itself in suits brought
against the Company on such patents or in bringing suits to protect the
Company's patents against infringement. The Company's business could be
adversely affected by these actions.
Manufacturing
Raster Graphics' in-house manufacturing is performed in San Jose,
California. This operation consists primarily of writing head manufacturing,
electro-mechanical assembly and printer and system testing. The Company's
printhead assembly process for the PiezoPrint 5000 inkjet printer and the
patented electrostatic writing head manufacturing process are extremely
complex. All other electronic components and assemblies are subcontracted to
qualified suppliers. All products are tested prior to shipment to customers.
The PosterShop image processing software manufacturing is performed by Onyx in
Salt Lake City, Utah. Raster Graphics also contracts with a warehouse and
distribution center in Rotterdam, Netherlands to store and distribute
consumables for the European markets. Consumables for the United States and
the rest of the world are supplied from the Company's San Jose headquarters, a
warehouse and distribution facility in Newark, California and a contracted
warehouse distribution center in New Jersey.
Raster Graphics' inventory delivery and control systems include MRP, Just-
In-Time and KANBAN systems. The Company focuses on continuous critical process
improvement. These programs include early supplier involvement on new
products, product qualification testing on new products, a qualified supplier
base, in-line statistical defect tracking systems and an outgoing and incoming
inspection capability.
Raster Graphics obtains safety certification for its products with the
assistance of Underwriters Laboratories ("UL") and TUV Product Services. This
allows Raster Graphics to affix UL and CE mark labels to its equipment. A
self-certification process is employed to confirm that Raster Graphics
printers conform to the required standards for electromagnetic emissions.
Testing is typically carried out under the supervision of CKC Laboratories,
who document the results. Raster Graphics then affixes the appropriate FCC,
CSA and CE mark labels to the products. The Company also maintains a complete
CE mark technical file for each product as required by the European Economic
Community.
Suppliers
The Company maintains strong business relationships with its key suppliers,
several of whom have been with the Company since its inception. With the
exception of the PiezoPrint 1000, the printhead for the PiezoPrint 5000 and
three key components of the Company's line of printers, as well as paper
transport belts for its discontinued CAD products, all components have
multiple sources. To date, the Company has experienced only minor material
problems or delays in dealing with its sole source suppliers, with the
exception of the supplier of the printhead for the PiezoPrint 5000. During
1997, the Company received PiezoPrint 5000 printheads from its supplier which
displayed quality problems after shipment of the printer to customer sites.
The supplier is reviewing its manufacturing process and intends to supply
printheads in numbers that will not adversely affect the Company's ability to
produce printers. However, in case of loss of any of the suppliers of sole
sourced parts, or if additional quality problems are encountered with sole-
sourced parts, the Company's ability to deliver its products on a timely basis
would be materially adversely affected, and would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The inks, concentrates and varnish currently used in RGI's electrostatic
printers are specially developed by two suppliers. There is no assurance that
these two suppliers will continue to sell to the Company. Also, there is no
assurance that a new supplier will not enter the market and provide
consumables that compete with the Company's offerings. Papers used in RGI's
electrostatic products are developed by additional suppliers. A
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number of other companies also acquire papers from these suppliers and compete
with the Company in the sale of paper to end users.
The inks used by the Company's PiezoPrint 1000 and PiezoPrint 5000 products
are currently sole sourced. The printing media for the PiezoPrint 1000 and the
PiezoPrint 5000 are supplied by three suppliers. The Company will continue to
develop additional sources for these products. There is no assurance that the
suppliers will continue to sell to the Company, nor is there any assurance
that a new supplier will not enter the market to provide consumables to
compete with the Company's offering.
Competition
The market for LFDP equipment in general is extremely competitive. The
Company believes that the key competitive factors in the LFDP market are
speed, print quality, price and the ability to provide complete system
solutions, including service. Many of the Company's competitors, including
Xerox ColorgrafX Systems, a subsidiary of Xerox Corporation, ("ColorgrafX"),
Encad, Inc. ("Encad"), ColorSpan Corporation, the primary operating subsidiary
of VirtualFund.com ("ColorSpan") and CalComp Technology, Inc. ("CalComp") are
well established, have substantially greater resources than Raster Graphics
and offer similar, and in some instances superior, products and services.
ColorgrafX, for example, markets several color electrostatic printers priced
below the Company's DCS 5442. In addition, ColorSpan offers attractively
priced lower performance inkjet printing systems. Encad markets inkjet
printers for the LFDP market which offer high image quality at a relatively
low price. Calcomp recently introduced their CrystalJet printer, which
utilizes piezoelectric-based inkjet technology similar to that of the
PiezoPrint 5000. At the high end of the market, 3M Commercial Graphics, a
division of Minnesota Mining and Manufacturing Company ("3M"), markets the
ScotchPrint 2000 which offers high performance at a premium price. Raster
Graphics believes, however, that its complete solutions and services compare
favorably against these and other competitors in terms of price and
performance.
In the image processing software market, there are a large number of
companies that compete with the Company's PosterShop product, such as Cactus,
a division of 3M, Star Technology and VisualEdge. However, with the exception
of ColorSpan, Raster Graphics is the only other manufacturer of both the
printer and the software. This allows the Company to offer a highly integrated
printer and software solution resulting in increased productivity.
Many of the companies that currently compete with the Company or that may
compete with the Company in the future have longer operating histories and
significantly greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base,
than the Company. As a result, these competitors may be able to respond more
quickly and/or effectively to new or emerging technologies and changes in
customer requirements or to devote greater resources to the development,
promotion, sale and support of their products than the Company. These
companies may have the ability to offer superior payment terms. Consequently,
the Company expects to continue to experience increased competition, which
could result in significant price reductions, loss of market share and lack of
acceptance of new products, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete against
current or future competitors successfully or that competitive pressures faced
by the Company will not have a material adverse effect upon its business,
financial condition and results of operations.
In the consumables market, Oce supplies consumables, including inks and
papers, to its customers using the Company's printers. In addition, 3M markets
a set of special premium-priced, long-durability inks. A number of other
companies compete with the Company for the paper business.
Employees
As of December 31, 1997, Raster Graphics had 218 regular employees in the
following areas: 52 in manufacturing; 53 in customer support; 30 in research
and development; 45 in sales and marketing; and 38 in
66
<PAGE>
general and administrative functions. The Company's employees are not
represented by any collective bargaining organization, and the Company has
never experienced a work stoppage. The Company believes that its relations
with employees are good.
During the first quarter of 1998, the Company implemented a plan of internal
restructuring of its operations. The plan was initiated to reduce operating
expenses and improve the Company's financial condition. The plan resulted in a
reduction in headcount of approximately 28 and included several officers of
the Company. The costs associated with this restructuring totaled
approximately $300,000.
Executive Officers of the Company
The executive officers of the Company, and their ages as of December 31,
1998, are set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Rakesh Kumar............ 53 President, Chief Executive Officer and Chairman of the Board
Kathy J. Bagby.......... 36 Acting Chief Financial Officer
Marc Willard............ 33 Executive Vice President, Sales and Marketing
</TABLE>
Mr. Kumar joined the Company in 1991 as President and Chief Executive
Officer. From 1988 to 1991, he was Group Marketing Manager, Engineering
Systems, for Digital Equipment Corporation, where he was responsible for
worldwide marketing to technical customers. From 1985 to 1987, he was Vice
President of Sales and Marketing for Precision Image Corporation, a
manufacturer of electrostatic printers. Prior to 1985, Mr. Kumar held a number
of management positions with Phoenix Data Systems, an electronic design
automation software company, Applicon, Inc., a CAD systems company, and
Digital Equipment Corporation.
Ms. Bagby came to the Company in 1998 through The Brenner Group LLC, an
interim management and financial advisory services firm. From 1992 to 1997,
she held successive financial management positions at Red Brick Systems, most
recently as the Vice President of Finance and Accounting. Prior to Red Brick
Systems, Ms. Bagby held financial positions at Adia Services and Syntex Corp.
Mr. Willard joined the Company in 1997 through the acquisition of
ColourPass. In April, 1998 Mr. Willard was appointed to Executive Vice
President, Sales and Marketing. In January, 1998, Mr. Willard was appointed to
the position of Vice President, Applications and Market Development for the
Company. From 1989 to 1997, Mr. Willard served as President of ColourPass.
Prior to that time, Mr. Willard was a Service Manager with Agfa's Digital Film
Service Department.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of December 31, 1998 as to (i) each person who is known by the
Company to beneficially own more than five percent of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each of the executive
officers, and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares
Beneficially
Owned(1)
5% Stockholders, Directors Named Executive Officers, -----------------
and Directors and Executive Officers as a Group Number Percent
---------------------------------------------------- --------- -------
<S> <C> <C>
Gretag Imaging Group, Inc.(2)............................... 3,840,526 28.6%
2070 Westover Road
Chicopee, MA 01022
State of Wisconsin Investment Board......................... 865,000 9.01%
P.O. Box 7842
Madison, WI 53707
Norwest Equity Partners IV,................................. 857,584 8.93%
a Minnesota Limited Partnership
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
Sihl........................................................ 618,500 6.44%
Allmendstrasse 125
CH-8021 Zurich, Switzerland
FMR Corp.................................................... 550,000 5.73%
82 Devonshire Street
Boston, MA 02109
Promod Haque(3)............................................. 874,251 10.98%
Rakesh Kumar(4)............................................. 332,145 2.98%
Marc Willard(5)............................................. 236,082 *
Sebastian J. Nardecchia(6).................................. 68,285 *
Delbert W. Yocam(7)......................................... 56,667 *
Michael Willingham(8)....................................... 44,333 *
Lucio L. Lanza(9)........................................... 19,167 *
Charles Case(10)............................................ 3,334 *
All executive officers and directors as a group (8
persons)(11)............................................... 1,634,264 16.06%
</TABLE>
- --------
* Less than 1.00%.
(1) Information with respect to beneficial ownership is based upon information
furnished by each director and officer or contained in filings made with
the Securities and Exchange Commission. Except as indicated in the
footnotes to this table, the stockholders named in this table have sole
voting and investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to community property laws
where applicable.
(2) Includes 3,855,645 shares issuable upon the exercise of options
exercisable within 60 days of December 31, 1998.
(3) Includes 857,584 shares held by Norwest Equity Partners IV. Because Mr.
Haque is a general partner of Norwest Equity Partners, the general partner
of Norwest Equity Partners IV, he may be deemed to be a beneficial owner
of such shares. Mr. Haque disclaims beneficial ownership of such shares
except to the extent of his interest in such shares arising from his
interest in Norwest Equity Partners. Includes 16,667 shares issuable upon
the exercise of outstanding options exercisable within 60 days of
December 31, 1998.
(4) Includes 312,499 shares issuable upon the exercise of outstanding options
exercisable within 60 days of December 31, 1998.
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<PAGE>
(5) Includes 68,541 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1998.
(6) Includes 66,485 shares issuable upon the exercise of outstanding options
exercisable within 60 days of December 31, 1998. Mr. Nardecchia's
employment was terminated on March 31, 1998.
(7) Includes 56,667 shares issuable upon the exercise of outstanding options
exercisable within 60 days of December 31, 1998.
(8) Includes 44,333 shares issuable upon the exercise of outstanding options
exercisable within 60 days of December 31, 1998. Mr. Willingham's
employment was terminated on March 31, 1998.
(9) Includes 19,167 shares issuable upon the exercise of outstanding options
exercisable within 60 days of December 31, 1998.
(10) Includes 3,334 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1998.
(11) Includes an aggregate 579,332 shares subject to options held by officers
and directors which options are exercisable within 60 days after December
31, 1998. In addition, this total includes an aggregate 857,584 shares
held by a director of the Company, beneficial ownership for such shares
is disclaimed within the meaning of Rule 13d-3 under the Exchange Act.
69
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into an employment agreement with its Chief Executive
Officer on July 3, 1991, which provides for a six-month severance payment in
the event of termination of employment. To ensure the continued services of
the Company's Chief Executive Officer in light of the Company's efforts to
effect a strategic partnering transaction, and based on its determination that
the Chief Executive Officer's knowledge of the Company and its business were
necessary to such efforts, on August 21, 1998, the Compensation Committee
approved the grant of a $300,000 retention bonus payable to the Chief
Executive Officer upon change of control of the Company. On August 21, 1998
the Company entered into a mutual release agreement with Marc Willard, an
officer of the Company. In consideration for Mr. Willard's full release
relating to the Company's acquisition of ColourPass (of which Mr. Willard was
an 80% partner), the parties agreed to a cash bonus of $70,000, a cash payment
of $200,000 upon the acquisition of the Company, and a stock option grant of
175,000 shares. In addition, in light of the resignation of the Company's
former Chief Financial officer on May 15, 1998, the Company entered into a
consulting agreement on May 14, 1998 with The Brenner Group LLC pursuant to
which the Company has retained the services of its Acting Chief Financial
Officer. Under the terms of the consulting agreement, the Company is obligated
to pay The Brenner Group LLC a fee of $155.00 per hour and a bonus of $175,000
upon change of control or recapitalization which occurs within six months of
the expiration of the agreement or any extensions thereto.
In March 1997, the Company issued an interest-free note receivable to the
Chief Financial Officer of $10,000. In June 1997, the Company issued an
additional note receivable to that officer of $80,000 which bore interest at
6.8% per annum and of which $5,000 was repaid in November 1997. In October
1997 the Chief Financial Officer's employment was terminated. Consulting fees
and severance expenses due to the officer as of December 31, 1997 amounted to
approximately $43,000 and were recorded as a reduction to the principal
amounts of the notes receivable. The remaining unpaid balance at December 31,
1997 of approximately $42,000 was repaid in 1998.
To facilitate the relocation of the Company's Executive Vice President from
the U.K. to the United States, in November 1997, the Company issued an
irrevocable zero-interest standby letter of credit in favor of Barclays' Bank
on behalf of the Executive Vice President for an unsecured standby personal
line of credit in the amount of $175,000. No amounts were drawn down under
this letter of credit, which expired May 31, 1998.
The Company has entered into an indemnification agreement with each of its
executive officers and directors that may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or services as director or officer and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified. In connection with the Merger, Gretag has agreed to
provide directors' and officers' liability insurance covering the parties who
are presently covered by the Company's current directors' and officers'
insurance policies, on terms substantially no less advantageous, provided that
Gretag shall not be required to pay annual premiums on coverage of $225,000 to
secure such policies.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested directors on the Board of Directors, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
On March 18, 1997, the Company completed a merger with ColourPass, a
business in the United Kingdom, in which ColourPass was merged with Raster
Graphics System Limited, a wholly owned subsidiary of the Company. Pursuant to
the terms of the merger, the Company's Executive Vice President (who was an
80% stockholder of ColourPass) received 176,340 shares of Common Stock of the
Company.
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<PAGE>
PROPERTIES
Raster Graphics has leased facilities in six locations. Its main
headquarters of approximately 62,000 square feet is located in San Jose,
California, of which approximately 31% is used for administration and sales
and marketing, approximately 6% is used as a storage facility, and
approximately 63% is used for research and development, manufacturing, and
assembly. The Company's other facilities are comprised of 33,000 square feet
in Newark, California used as a storage and distribution facility, 11,000
square feet in Midvale, Utah, used primarily for administration, sales and
marketing and research and development, and 7,600 square feet, 5,700 square
feet, and 6,800 square feet in Germany, France and England respectively, used
primarily for administration and sales and marketing. The Company believes its
facilities are adequate to support its operations through 1998.
LEGAL PROCEEDINGS
Following the Company's announcement that it would restate its earnings for
its third fiscal quarter in 1997, several putative class action lawsuits were
filed in the California Superior Court and in the United States District Court
in the Northern District of California against the Company, its Chairman,
Chief Executive Officer and President, and certain of its officers and
directors. Cases filed in California Superior Court are: Ginter et al. v.
Raster Graphics, Inc. et al. (CV772401), filed March 14, 1998, and Beshear v.
Raster Graphics, Inc. et al. (CV773294), filed April 14, 1998. Cases filed in
the United States District Court in the Northern District of California are:
Grimm v. Raster Graphics, Inc. et al (C-98-0807-FMS), filed March 2, 1998,
Dowgos v. Raster Graphics, Inc. et al. (C-98-0938-MJJ), filed March 10, 1998,
and Moore et al. v. Raster Graphics, Inc. (C-98-1489-SBA).
In substance, the complaints allege that the Company made false and
misleading statements regarding the introduction of its PiezoPrint 5000 and
the Company's financial results for its third fiscal quarter and its expected
results for its fourth fiscal quarter in 1997. The complaints further allege
that by making these purportedly false and misleading statements, the
defendants violated Sections 10(b) and 20 of the Securities Exchange Act of
1934 and certain sections of the California Corporations Code. Plaintiffs 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. In October 1998, the Company entered into a Memorandum of
Understanding with the securities class action plaintiffs, which contains the
essential terms of settlement of the above-referenced class actions. In
consideration for a mutually agreed release, the plaintiffs will receive $4.5
million, $850,000 of which will be paid by the Company and the balance of
which will be paid by the Company's insurance carrier. Such sums have been
placed in escrow pending final approval of the settlement. The settlement is
conditional upon receiving final judicial approval. Although the United States
District Court for the Northern District of California on December 11, 1998
granted preliminary approval of the settlement, there can be no assurances
final judicial approval will be obtained. The Company has not admitted any
liability in connection with the settlement.
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.
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<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock has been traded in the over-the-counter market
under the Nasdaq symbol RGFX since the Company's initial public offering on
August 8, 1996 until April 21, 1998, at which time the Company's Nasdaq symbol
was changed to RGFXE due to delinquent filing of Form 10-K for December 31,
1997. On May 21, 1998, the Company's stock was delisted from the Nasdaq
National Market due to the Company's failure to meet the filing requirements
of the Securities and Exchange Act of 1934. Since May 21, 1998, the Company's
Common Stock has been listed under the symbol RGFX on the over-the-counter
"Pink Sheets" of the National Quotation Bureau. Prior to the initial public
offering, no public market existed for the Company's Common Stock.
The prices per share reflected in the table represent the range of high and
low closing prices in the Nasdaq National Market System for the quarters
indicated.
<TABLE>
<CAPTION>
High Low
------- -----
<S> <C> <C>
1996
Third quarter ended September 30, 1996......................... 11 1/4 8 1/8
Fourth quarter ended December 31, 1996......................... 12 1/2 7 5/8
1997
First quarter ended March 31, 1997............................. 11 7/8 6 1/8
Second quarter ended June 30, 1997............................. 8 1/2 5 1/8
Third quarter ended September 30, 1997......................... 8 3/8 6 5/8
Fourth quarter ended December 31, 1997......................... 8 5/16 4
1998
First quarter ended March 31, 1998............................. 5 2 1/4
Second quarter ended June 30, 1998............................. 2 1/16 1/4
Third quarter ended September 30, 1998......................... 1 1/4 3/8
Fourth quarter ended December 31, 1998......................... 1 1/4
</TABLE>
Historically, the Company has not paid cash dividends on its common stock
and there is no plan to pay dividends in the near future.
The Company had approximately 2,901 stockholders of record as of February 9,
1999.
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<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company. This historical data should be read in conjunction with the attached
consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in Item 7 of this Form 10-K. In addition, in order to
take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company hereby notifies readers that the
factors set forth above in "Risk Factors" as well as other factors, could in
the future affect, and in the past have affected, the Company's actual results
and could cause the Company's results for future quarters to differ materially
from those expressed in any forward looking statements made by or on behalf of
the Company, including without limitation those made in the following
discussion.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
December 31, December 31, December 31, December 30, December 31, September 30, Septemper 30,
1997 1996 1995(2) 1994 1993 1998 1997
------------ -------------- -------------- ------------ ------------ ------------- -------------
(Restated) (5) (Restated) (5)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues........... $ 48,928 $42,629 $28,870 $13,235 $14,719 $33,102 $35,507
Cost of revenues....... 42,754 (6) 25,343 18,691 9,704 9,942 23,313 27,856
Gross profit........... 6,174 17,286 10,179 3,531 4,777 9,789 7,651
Operating expenses:
Research and
development......... 5,763 4,516 3,373 2,748 2,179 4,679 4,269
Sales, general and
administrative...... 13,725 9,189 5,389 3,012 2,492 7,630 7,157
Allowance for
doubtful accounts... 4,394 403 509 -- -- 5,036 3,012
Merger related
expenses (1)........ 139 -- -- -- -- -- 139
Write-off of acquired
goodwill (2)........ 1,211 -- -- -- -- -- --
Acquired in-process
research and
development (3)..... -- -- 889 -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 25,232 14,108 10,160 5,760 4,671 17,345 14,577
-------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. (19,058) 3,178 19 (2,229) 106 (7,556) (6,926)
Interest income
(expense), net......... 403 309 49 101 (60) 2 358
Income (loss) before
provision for income
taxes.................. (18,655) 3,487 68 (2,128) 46 (7,554) (6,568)
Provision for income
taxes.................. 310 425 82 -- 5 205 127
-------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $(18,965) $ 3,062 $ (14) $(2,128) $ 41 $(7,759) $(6,695)
======== ======= ======= ======= ======= ======= =======
Net income per share
(diluted) (4)......... $ (2.01) $ 0.35 $ -- (0.81) $ (0.71)
======== ======= ======= ======= ======= ======= =======
Shares used in per share
Calculation
(diluted).............. 9,426 8,642 6,025 9,597 9,384
======== ======= ======= ======= ======= ======= =======
<CAPTION>
Nine Months Ended
---------------------------
December 31, December 31, December 31, December 30, December 31, September 30, September 30,
1997 1996 1995 1994 1993 1998 1997
------------ -------------- -------------- ------------ ------------ ------------- -------------
(Restated) (5) (Restated) (5)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheets Data:
Cash and short term
investments........... $ 5,327 $16,063 $ 1,550 $ 1,607 $ 4,148 $ 1,971 $ 8,257
Total assets........... 25,558 (6) 36,578 13,122 7,912 9,010 15,315 36,391
Long-term debt......... 164 178 605 338 -- 134 38
Total stockholders'
equity................ 8,305 26,927 6,794 3,801 5,900 595 20,499
</TABLE>
- -------
(1) In March 1997 the Company completed a merger with ColourPass and incurred
$139,000 of merger related expenses. (See Notes to Consolidated Financial
Statements.)
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<PAGE>
(2) In September 1997 the Company acquired Datagraph and recorded goodwill of
$1,211,000; after subsequent review the intangible asset was written off.
(See Notes to Consolidated Financial Statements.)
(3) In August 1995, the Company acquired Onyx and incurred a charge of
$889,000 for acquired in-process research and development. (See Notes to
Consolidated Financial Statements.)
(4) See Notes to Consolidated Financial Statements and Management's Discussion
and Analysis.
(5) Restated for the pooling of interests with ColourPass. (See Notes to
Consolidated Financial Statements.)
(6) Includes a charge of $9.3 million for the write-down of inventory.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has restated previously issued financial results for each of the
quarters in the nine months ending September 30, 1997. The restated financial
results primarily reflect revisions to net revenues and related costs,
unrecorded liabilities, inventory reserves, the allowance for bad debt and the
write-off of the Datagraph Intangible Asset. See Forms 10-Q/A for the periods
ended March 31, June 30 and September 30, 1997, filed with the Securities and
Exchange Commission.
On February 26, 1998 the Company announced its financial results for the
year ended December 31, 1997. The Company reported revenue of $54.7 million,
gross profit of $19.5 million, operating expenses of $20.6 million and a net
loss of $1.2 million for fiscal 1997. On April 1, 1998 the Company announced
that it would revise its 1997 financial results.
In March 1998, after consultation with its independent accountants, the
Board of Directors of the Company performed a review of the Company's
accounting and business practices. By mid-April the Board of Directors became
aware of pervasive errors and irregularities that ultimately affect the dollar
amount and timing of reported revenues in 1997. The Board of Directors
instructed that an analysis be conducted on these matters.
The irregularities took numerous forms and were primarily the result of a
lack of compliance with the Company's procedures and controls. The Company has
concluded that the earnings process for a significant number of printer sales
were not complete at the time of shipment. For example, the Company determined
that revenue had been recognized without proper documentation and that revenue
had been recognized on printer sales when shipment to customers had not taken
place. Further, the Company has determined that arrangements with a number of
resellers resulted in significant concessions or allowances that were not
accounted for when the revenue was originally reported as earned.
In addition, the Company has determined that its allowances for doubtful
accounts receivable balances and excess and obsolete inventory, and the
realizable value of inventory and the goodwill recorded on the acquisition of
Datagraph had been incorrectly estimated.
As a result, for the year ended December 31, 1997 the Company reversed
recorded revenues of $5.8 million, recorded additional cost of revenues of
$7.6 million, and additional operating expenses of $4.6 million. In addition,
the Company has restated its previously reported results for each interim
period in the nine months ended September 30, 1997.
To ensure compliance with the Company's revenue recognition policies,
beginning in 1998, on a quarterly basis, all printer sales transactions are
reviewed individually to confirm that the customer has executed the purchase
contract, the credit department has approved the customer's credit and
determined that the customer has paid or has the ability to pay, and the
Company's shipping records reflect that the printer was shipped to the
customer. The Company has also revised its sales commission policy to pay
commissions only when a printer sales invoice has been fully paid by the
customer.
The Company has also restated the net assets purchased on the acquisition of
Datagraph, a distributor of LFDP systems in France. The original figures were
based on an estimate, which has since been revised to reflect actual values.
In particular, an intangible asset of $1,420,000 was initially recorded and
was revised to $1,211,000. This intangible asset was written off in the fourth
quarter of 1997 following a revision to the Company's sales forecasts.
Datagraph recently commenced bankruptcy proceedings. See "--Nine Months Ended
September 30, 1998; and 1997."
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
Overview
Raster Graphics was established in 1987 initially to develop low-cost
electrostatic raster printers for the computer-aided design ("CAD") market.
Raster Graphics commenced shipments of its first printer, a 22-inch printer,
in 1989, followed by a 24-inch printer in 1990 and a 36-inch printer in 1992.
75
<PAGE>
In 1993, the Company identified the on-demand production large format
digital printing ("LFDP") market as a new opportunity to develop a product
based on its proprietary high-speed printhead technology. As a result, in 1993
the Company shifted its product focus and began to develop the DCS 5400
specifically for the LFDP market. The Company began shipping the DCS 5400 in
July 1994. Since the Company began commercial production of the DCS 5442 in
January 1996 as a second generation to the DCS 5400, this line has,
substantially replaced the DCS 5400. In December 1996, the Company introduced
the PiezoPrint 1000, an inkjet printer manufactured by a third party, that is
targeted at the lower priced entry level production market. In March 1997, the
Company introduced the PiezoPrint 5000 as a mid-range, price/performance
product. It is the Company's intent to discontinue actively marketing and
selling the PiezoPrint 1000 in 1998 when existing inventory has been
exhausted. The Company has no current plans to replace the PiezoPrint 1000
with another entry level printer. However, the future success of the Company
will likely depend on its ability to develop and market new products that
offer different levels of performance for the production segment of the LFDP
market and upon its ability to get additional financing.
In order to provide a complete digital printing solution to its customers,
the Company began shipping Onyx's image processing software with its digital
printers in July 1994. Onyx develops and markets image processing software for
the Company's digital printers as well as printers manufactured by companies
such as CalComp, Encad, Hewlett-Packard and ColorgrafX. In August 1995, the
Company acquired Onyx. Onyx supplies its software to Raster Graphics and also
sells its software products to OEMs, VARs, systems integrators and other
printer manufacturers. Onyx's current image processing software product,
PosterShop, was introduced in April 1996 as a replacement for Onyx's Imagez
image processing software product, which Onyx had been shipping since May
1991. Although the Company has no current plans to replace its PosterShop
product, the Company will likely introduce new versions of its image
processing software in the future.
Raster Graphics also sells related consumables, including specialized inks
and papers which it acquires from third party suppliers and resells under the
Raster Graphics name for use in the Company's digital printers. The sale of
consumables generates recurring revenues which the Company believes will
continue to increase to the extent that the installed base of printing systems
expands. As the Company develops new printers, it may need to develop new
consumables to be used by its new printer products.
In the United States, Raster Graphics also derives revenues from maintenance
contracts of installed systems and printers, including the Company's installed
base of 22-inch, 24-inch and 36-inch printers, which it no longer sells.
Revenue is also generated from the sale of spare parts.
Raster Graphics' end user customers, OEMs, VARs, and distributors submit
purchase orders that generally require product shipment within two to eight
weeks from receipt of order. Accordingly, the Company does not use order
backlog as a primary basis for management planning for longer periods.
Revenues are not recognized until products have been shipped and all
contingencies have been removed.
Cost of revenues includes materials, labor, overhead and software royalties.
Cost of revenues as a percentage of revenue varies depending upon the revenue
mix generated through end user, OEM, VAR and distributor sales, and the
revenue mix generated from Onyx software license fees, printing systems sales,
consumables sales and service fees.
Raster Graphics expenses research and development costs as incurred.
Research and development expenses have increased from year to year, and Raster
Graphics expects further increases in research and development expenses in the
future due to the development of new products.
Raster Graphics' sales and marketing expenses and general and administrative
expenses have also increased to support the revenue growth of the Company. The
Company's strategy is to distribute its products through a direct sales force,
as well as through OEMs, VARs and distributors. Raster Graphics also incurs
sales and marketing expenses in connection with product promotional
activities. The Company intends to strengthen its domestic and international
sales and marketing organizations. The Company believes that sales and
marketing expenses may continue to increase in absolute dollar amounts and as
a percentage of revenues.
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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 December 31, 1997, the Company had an
accumulated deficit of $34.4 million. The Company was profitable in 1996, and
reported a loss in 1997 and 1995. There can be no assurance that the Company
will be profitable in the future.
Business Combinations
On September 30, 1997, Raster Graphics acquired Datagraph, a French-based
distributor of large-format digital imaging systems. In exchange for the
outstanding stock of Datagraph, the Company agreed to pay approximately
$1,100,000 in a series of payments through September 30, 1998. The acquisition
was accounted for as a purchase. Including acquisition costs, the transaction
resulted in goodwill of $1,211,000 which, based on the Company's current sales
forecasts, was written off during the fourth quarter. The operating results of
Datagraph prior to the acquisition are not material in relation to the
Company. (See Notes to Consolidated Financial Statements.) Datagraph recently
commenced bankruptcy proceedings.
On March 18, 1997, the Company completed a merger with ColourPass, a
business in the United Kingdom, in which ColourPass was merged with Raster
Graphics System Limited, a wholly owned subsidiary of the Company. The
combination was accounted for as a pooling of interests.
Results of Operations
The following table sets forth for the periods indicated selected items of
the Company's consolidated statements of operations expressed as a percentage
of its net revenues:
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
------------------------------------------ ----------------------------
December 31, December 31, December 31, September 30, September 30,
1997 1996 1995 1998 1997
------------ -------------- -------------- ------------- --------------
(Restated) (4) (Restated) (4) (Restated) (4)
<S> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 87.4 59.5 64.7 70.4 78.5
----- ----- ----- ----- -----
Gross profit............ 12.6 40.5 35.3 29.6 21.5
Operating expenses:
Research and
development.......... 11.8 10.6 11.7 14.1 12.0
Sales and marketing... 20.1 17.1 15.5 23.0 20.2
General and
administrative....... 7.9 4.4 3.2 15.2 8.5
Allowance for doubtful
accounts............. 9.0 0.9 1.8 -- --
Merger related
expenses(1).......... 0.3 -- -- -- 0.4
Write off of acquired
Goodwill(2).......... 2.5 -- -- -- --
Acquired in-process
research and
development(3)....... -- -- 3.1 -- --
Total operating
expenses............. 51.6 33.0 35.3 52.4 41.1
----- ----- ----- ----- -----
Operating income
(loss)................. (39.0) 7.5 0.0 (22.8) (19.5)
Interest income, net.... 0.8 0.7 0.2 0.0 1.0
----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes.................. (38.2) 8.2 0.2 (22.8) (18.5)
Provision for income
taxes.................. 0.6 1.0 0.2 0.6 0.4
----- ----- ----- ----- -----
Net income (loss)....... (38.8%) 7.2% 0.0% (23.4) (18.9)
===== ===== ===== ===== =====
</TABLE>
- --------
(1) In March 1997 the Company completed a merger with ColourPass and incurred
$139,000 of merger related expenses. (See Notes to Consolidated Financial
Statements.)
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(2) In September 1997 the Company acquired Datagraph and recorded goodwill of
$1,211,000; after subsequent review the intangible asset was written off.
(See Notes to Consolidated Financial Statements.)
(3) In August 1995 the Company acquired Onyx and incurred a charge of $889,000
for acquired in-process research and development. (See Notes to
Consolidated Financial Statements.)
(4) Restated for the pooling of interests with ColourPass (See Notes to
Consolidated Financial Statements.)
Fiscal Year Ended December 31, 1997
Raster Graphics' results of operations for fiscal 1997 reflect an increase
in net revenue over the prior fiscal year. Net revenue for the year ended
December 31, 1997, grew 14.8%, to $48.9 million, compared to sales of $42.6
million recorded in fiscal 1996. This increase was primarily due to the growth
in sales of printer systems, increase in sales of consumables, and sales by
the Company's subsidiaries. Sales for the year ended December 31, 1996, grew
47.7%, to $42.6 million, compared to sales of $28.9 million recorded in fiscal
1995. The increase was mainly attributable to growth of sales of printer
systems following the introduction of the DCS 5442 printing system, increase
in sales of consumables, increase in sales of Onyx software and sales by the
Company's German subsidiary.
Future revenue growth will depend on a number of factors, including the
Company's ability to develop, manufacture, market and sell innovative and
reliable new products, customer satisfaction, market growth, competitive
developments, product mix, vendor performance, and the Company's ability to
grow and raise additional capital.
Printer revenues, which include sales of printer systems manufactured by the
Company, were $21.5 million, $26.0 million and $20.3 million for 1997, 1996
and 1995, respectively. These sales represent 44%, 61% and 70% of net revenue,
respectively. The increase in printer revenue in 1996 over 1995 was primarily
due to the introduction of Company's electrostatic printer and increased
market acceptance of the Company's products. The decrease in revenues in 1997
over 1996 was largely the result of complications of the company's release of
the PP5000 in 1997 including product issues and the errors and irregularities
that lead to the Company restating its 1997 financial results.
Consumables revenues, which include the sale of inks, toners, and media used
in the Company's printer systems, were $16.2 million, $10.2 million and $5.6
million for 1997, 1996 and 1995, respectively. These sales represent 33%, 24%
and 19% of net revenue, respectively. Although the increase in consumables
revenue is attributable to the increase in the Company's customer base, there
can be no assurance these increases will continue. Some of the Company's
customers have purchased and will continue to purchase consumables from
suppliers other than the Company. If a significant number of current or future
purchasers of the Company's printing systems were to purchase consumables from
suppliers other than the Company, the Company's business would be materially
adversely affected.
Service revenues, which include revenue received from maintenance agreements
and service calls, were $4.8 million, $2.7 million, and $1.7 million for 1997,
1996 and 1995 respectively. These sales represent 10%, 6% and 6% of net
revenue, respectively. Service revenue from maintenance agreements is
recognized over the term of the agreement and revenue from service calls is
recognized upon completion. The increase in service revenues is attributable
to the increase in the Company's customer base. As the Company's customers are
not required to purchase service contracts or general service from the
Company, there can be no assurance that service revenues will continue at
these levels or at all.
Other revenues, which include software revenue, revenue received from the
distribution of competitor products, and miscellaneous revenue was $6.4
million, $3.7 million, and $1.3 million for 1997, 1996 and 1995 respectively.
These sales represent 13%, 9%, and 4% of net revenue respectively. The
increase in other revenues is primarily attributable to software revenues
generated from Onyx Graphics Corporation, a wholly owned subsidiary of the
Company.
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<PAGE>
International sales, which include export sales and sales shipped by the
Company's European operations, were $19.3 million, $22.0 million and $16.2
million for 1997, 1996 and 1995, respectively. These sales represented 39.5%,
51.6%, and 56.1% of net revenue, respectively. Future international revenues
will depend on international customer acceptance of the PiezoPrint Printing
systems, the establishment of new distribution arrangements and sales by the
Company's German and U.K. subsidiaries, and will be subject to unexpected
changes in economic conditions, regulatory requirements and tariffs, longer
customer payment cycles, fluctuation in currency exchange rates, seasonal
factors and risks associated with managing business operations in
geographically distant locations. No assurance can be given that international
revenues will continue at current rates, or at all.
No customer accounted for more than 10.0% of net revenues in 1997. Oce, a
European distributor, accounted for 4.8% and 10.9% of net revenues for 1996
and 1995, respectively.
Gross Profit. Gross profit was $6.2 million, $17.3 million and $10.2
million, or 12.6%, 40.5% and 35.3% of revenues, for 1997, 1996 and 1995,
respectively. The decrease in gross margin in 1997 over 1996 was primarily due
to a change in product mix from higher-margin printer products to lower-margin
consumables and services, higher manufacturing overhead as a percentage of
sales due to a decrease in the number of printers sold, the acquisition of
Datagraph, which has lower gross margins, significantly increased inventory
reserves and higher warranty and repair expenses. Based on recent
developments, Datagraph has commenced bankruptcy proceedings and is in the
process of liquidation. The improved gross margin in 1996 over 1995 was
primarily due to increases in sales of higher margin Onyx software products as
a percentage of net revenue, higher gross margin for products sold through the
Germany subsidiary, as well as improved manufacturing efficiency. The
Company's future level of gross profit will depend on a number of factors,
including product mix and its ability to control variable expenses relative to
revenue levels, maintain a revenue base over which to allocate fixed costs to
develop, manufacture, market and sell innovative and reliable new products.
Costs of Sales for 1997 also include a charge of $9.3 million for the write
down of excess and obsolete inventory items. The write down reflects the
Company's current expectations of future sales for all of its product lines
updated for actual sales through September 22, 1998. The Company has
previously purchased inventory based on its future sales forecasts with
purchases at the beginning of fiscal 1997 reflecting the Company's
expectations for sales of its newly introduced printer, the PP5000. These
expectations were subsequently revised as a result of the Company and its
customers experiencing operational problems with the PP5000. The Company
received printheads from its sole-source supplier which displayed quality
problems after shipment of the printer to customer sites. In addition, during
the development of consumables for the PP5000, the Company found that oil-
based inks used in this printer had certain limitations which did not allow
the Company to develop a photogloss media which was compatible with the
printer. The lack of photogloss media limited the market acceptance of the
printer.
As a result of the problems encountered with the PP5000 and the general
reduction in demand for the Company's products during 1997 the Company revised
it's sales forecast, which resulted in a write-down of inventory. This
calculation took into consideration actual printer sales through mid-September
1998 and those printers shipped to customers that, following the reversal of
revenues, were classified as consignment inventory.
Research and Development. Research and development expenses were $5.8
million, $4.5 million and $3.4 million, or 11.8%, 10.6% and 11.7% of net
revenues, for 1997, 1996 and 1995, respectively. The absolute dollar increases
from year to year were primarily due to increased payroll and related
expenses, including the Onyx engineering staff, which the Company purchased in
mid 1995, and increased engineering material expenditures related to the
development of new products. The Company intends to continue to dedicate a
substantial proportion of its resources to research and development activities
in order to expand its product lines, including printers, to achieve higher
throughput speed and higher image quality, and to enhance its PosterShop image
processing software. However, due to depleted cash, cash equivalents and short
term investments, the Company is reviewing measures to reduce research and
development expenses on an on-going basis, but there can be no assurances that
any such measures, if taken, will be successful.
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<PAGE>
Sales and Marketing. Sales and marketing expenses were $9.9 million, $7.3
million and $4.5 million, or 20.1%, 17.1% and 15.5% of net revenues, for 1997,
1996 and 1995, respectively. The primary causes of the absolute dollar
increases have been increases in payroll and payroll-related expenses due to
increases in personnel, expenses associated with participation in additional
trade shows and other expenses related to the launch of the PiezoPrint 5000,
and to a lesser degree, travel-related expenses. Due to depleted cash, cash
equivalents and short term investments, the Company is reviewing measures to
reduce Sales and Marketing expenses on an on-going basis. Operating expenses
continue to be consistent with historical levels. Although measures have been
considered, the company has taken no action to date to reduce these
expenditures. There can be no assurances that any such measures, if taken,
will be successful.
General and Administrative. General and administrative expenses, including
the allowance for doubtful accounts, were $8.2 million, $2.3 million and $1.4
million, or 16.9%, 5.3% and 5.0% of net revenues, for 1997, 1996 and 1995,
respectively. The increase in absolute amounts of expenditures in 1997
reflected the increase in bad debt reserve, the increased cost of payroll and
related expenses as well as the increased cost of operating as a public
company for a full year. The increase in 1996 was primarily related to
increased cost of payroll and payroll-related expenses as well as the
increased cost of operating as a public company for part of the year. Due to
depleted cash, cash equivalents and short term investments, the Company is
reviewing measures, including head count reductions, to reduce General and
Administrative expenses on an on-going basis but there can be no assurances
that any such measures, if taken, will be successful.
Merger Related Expenses. In March 1997, the Company completed a merger with
ColourPass, a business in the United Kingdom, in which ColourPass was merged
with Raster Graphics System Limited, a wholly owned subsidiary of the Company.
The combination was accounted for as a pooling of interests. In connection
with the merger the Company incurred $139,000 of merger related expenses.
Write-off of Acquired Goodwill. On September 30, 1997, Raster Graphics
acquired Datagraph, a French-based distributor of large-format digital imaging
systems. In exchange for the outstanding stock of Datagraph, the Company
agreed to pay approximately $1,100,000 in a series of payments through
September 30, 1998. The acquisition was accounted for as a purchase. Including
acquisition costs, the transaction resulted in goodwill of $1,211,000 which,
based on the Company's current sales forecasts, was written off during the
fourth quarter. In addition, based on recent developments, Datagraph has
commenced bankruptcy proceedings and is in the process of liquidation. The
operating results of Datagraph prior to the acquisition are not material in
relation to the Company. (See Notes to Consolidated Financial Statements.)
Acquired In-Process Research and Development. In August 1995, the Company
acquired Onyx for stock and other consideration valued at $1.5 million. The
assets acquired included tangible assets valued at $866,000, intangible assets
of $454,000, less liabilities assumed of $570,000, and software in the
development stage valued at approximately $750,000 which was expensed in the
September 1995 quarter as it had not yet reached technological feasibility and
did not have alternative future uses. In addition, the Company wrote off
$139,000 in the September 1995 quarter for redundant PostScript licenses that
the Company had purchased for the Company's development of a similar image
processing software product.
Interest Income (Expense). Net interest income was $403,000, $309,000 and
$49,000 for 1997, 1996 and 1995, respectively. Higher interest income in 1997
was a result of investing cash raised from the Company's initial public
offering of common stock for a full year.
Provisions for Income Taxes. The Company recorded a tax provision in 1997
despite generating an operating loss with the Company's effective tax rate on
the consolidated pretax loss for 1997 being 2%, compared to an effective tax
rate of 12% and 121% on consolidated pretax income for 1996 and 1995,
respectively. The tax provision for 1997 results primarily from taxes on
income in foreign jurisdictions despite an overall loss. The effective tax
rate for 1996 differs from the statutory rate primarily due to the tax benefit
of utilizing net operating loss carryforwards and is lower than the 1995 tax
rate due to a high 1995 tax rate caused by alternative minimum taxes.
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<PAGE>
As of December 31, 1997, the Company has federal and state net operating
loss carryforwards of approximately $23 million and $8 million, respectively.
The Company also has federal and California tax credit carryforwards of
approximately $1.2 million and $704,000, respectively. The net operating loss
and credit carryforwards will expire in the years 2002 through 2012, if not
utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Changes Resulting From Limitations on Capital Availability. The Company's
inability to make timely vendor payments has strained vendor relationships.
Some vendors have required payments prior to shipment. The Company's inability
to stock its consumables inventory has negatively impacted associated
revenues. The Company's worsened financial position has also limited its
ability to attract highly qualified employees, thereby increasing consulting
expenses.
Nine Months Ended September 30, 1998; and 1997
Net Revenues. Net revenues for the nine months ended September 30, 1998,
were $33.1 million, a decrease of 6.8% over the comparable period of fiscal
1997. The decrease is primarily attributable to a decrease in sales of printer
systems and sales of consumables.
Future revenue growth will depend on a number of factors, including the
Company's ability to develop, manufacture, market and sell innovative and
reliable new products, customer satisfaction, market growth, competitive
developments, product mix, vendor performance and the Company's ability to
manage growth, if any.
Printer revenues, which include sales of printer systems manufactured by the
Company, were $10.3 million and $17.0 million for the periods ended September
30, 1998, and 1997, respectively, a decrease of 39.6%. These sales represent
31% and 48% of net revenue, respectively. The decrease in printer revenue is
primarily due to a decrease in sales of the customers printing systems
resulting from operational problems with the Company's PP5000 which was
released in 1997, customers lack of confidence in the stability of continued
operations of Raster Graphics following the Company's announcement to restate
1997 financial results and the Company's delisting on Nasdaq.
Consumables revenue, which include the sale of inks, toners, and media used
in the Company's printer systems, were $16.0 million and $11.5 million for the
periods ended September 30, 1998, and 1997, respectively, an increase of
38.6%. These sales represent 48% and 33% of net revenue, respectively.
Although the increase in consumables revenue is attributable to the increase
in the Company's customer base, there can be no assurance these increases will
continue. Some of the Company's customers have purchased and will continue to
purchase consumables from suppliers other than the Company. If a significant
number of current or future purchasers of the Company's printing systems were
to purchase consumables from suppliers other than the Company, the Company's
business would be materially adversely affected.
Service revenues, which include revenue received from maintenance agreements
and service calls, were $3.7 million and $3.6 million for the periods ended
September 30, 1998, and 1997, respectively, an increase of 2.3%. These sales
represent 11% and 10% of net revenue, respectively. Service revenue from
maintenance agreements is recognized over the term of the agreement and
revenue from service calls is recognized upon completion. The increase in
service revenues is attributable to the increase in the Company's customer
base. As the Company's customers are not required to purchase service
contracts or general service from the Company, there can be no assurance that
service revenues will continue at these levels or at all.
Other revenues, which include software revenue, revenue received from the
distribution of competitor products, and miscellaneous revenue were $3.2
million and $3.4 million for the periods ended September 30,
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1998, and 1997, respectively, a decrease of 6.3%. These sales represent 10%
and 9% of net revenue, respectively. The decrease in other revenue is
attributable to the Company's transition away from the distribution of
competitor products by its European subsidiaries.
International sales, which include export sales and direct sales of the
Company's German, United Kingdom and French operations, were $16.4 million for
the nine months ended September 30, 1998, which represented 49.4% of net
revenue during this period. International sales were $20.0 million for the
nine months ended September 30, 1997, which represented 56.3% of net revenue
during this period. The Company's German, French, and United Kingdom
subsidiaries experienced a reduction in sales of consumables and printer
systems during the nine months ended September 30, 1998, which contributed to
the decrease in international sales as a percentage of net revenues. 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. 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 profits were $9.8 million and $7.7 million
for the nine months ended September 30, 1998 and 1997, respectively, an
increase of 27.9%. The fluctuations in gross profit for the nine months ended
September 30, 1998, and 1997, were primarily the result of excess and obsolete
inventory reserve adjustments following a revision on the Company's estimate
of future printer sales. For the nine months ended September 30, 1998, and
1997, respectively, gross profit represented 29.6% and 21.5% 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 nine
months ended September 30, 1998, were $4.7 million, an increase of 9.6% in
comparison to the nine months ended September 30, 1997. This increase is
attributable to an increase in staffing and related benefits. 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 nine months ended
September 30, 1998, were $7.6 million, an increase of 6.6% in comparison to
the nine months ended September 30, 1997. The increase in sales and marketing
expenses was primarily a result of increased staffing and related benefits,
and tradeshow expenses. The Company expects to continue to increase its sales
and marketing expenses in an effort to expand domestic and international
markets, introduce new products, and establish and expand new distribution
channels.
General and Administrative. General and administrative expenses for the nine
months ended September 30, 1998, were $5.0 million, an increase of 67.2% in
comparison to the nine months ended September 30, 1997. The increase in
general and administrative expenses was primarily the result of increased
consulting and legal expenses. In the first quarter of 1998, the Company
accrued $850,000 for settlement of the security litigation. The Company
believes that its general and administrative expenses may 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.
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On September 30, 1997, Raster Graphics acquired Datagraph, a French-based
distributor of large-format digital imaging systems. The acquisition was to
facilitate the Company's transition from using third-party distributors, such
as Oce, to using in-house resources. 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 which, after acquisition costs, resulted
in goodwill of $1,211,000. This purchase price was based on sales forecasts
produced by the Company at the time that assumed that Datagraph would be able
to transition its sales model from selling low-end printers manufactured by a
competitor to a network of dealers, to selling in addition the high-end Raster
Graphics printers directly to end users.
Following the acquisition, Datagraph's supplier of low-end printers
cancelled its contract, leaving Datagraph to distribute only the Company's
products. In addition, the Company was not able to effect such a transition
with the result that during the quarter ended December 31, 1997 Datagraph
experienced a shortfall in anticipated revenues causing management to revise
its sales forecasts and to write-off the goodwill associated with the
Datagraph acquisition. This situation continued in 1998 with further revenue
shortfalls being experience in the nine months ended September 30, 1998
resulting in a loss for that period. Further, it became evident to management
during the third quarter of 1998, that Datagraph required significant
additional support to effect the planned transition in its sales model. As a
result of the significant liquidity constraints at Raster Graphics it was
determined that such support could not be given and the decision was then
taken for Datagraph to commence bankruptcy proceedings.
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, 1998, is (2.4%), and (2.7%) respectively, compared to an effective rate of
(2%) on consolidated pretax loss for the three and nine month periods ended
September 30, 1997. The tax provision for the three and nine month periods
ended September 30, 1997, and September 30, 1998, result from taxes on foreign
jurisdictions and federal and state minimum taxes despite an overall loss.
Trends and Uncertainties
Risks Associated with Introduction of New Product. The Company introduced
its PiezoPrint 5000 in March 1997. This product is based on relatively new
technology, is complex and must be reliable and durable. The Company is
continuing to make upgrades and improvements in the features of the PiezoPrint
5000. Nevertheless, despite research and testing, the Company and its
customers have experienced some operational issues with the PiezoPrint 5000,
which the Company believes it is successfully addressing. However, these
operational problems have resulted in delayed payments by customers, requests
for return of printers, greater than anticipated expense incurred servicing
printers and actual returns of printers, all of which had a material adverse
effect on the Company's business, financial condition and results of
operations for 1997 and 1998. The Company believes that the upgrade of faulty
printheads will continue into 1999. Management has estimated the expected cost
of performing work under printer warranties, which is based in part on the
numbers of units sold, the likelihood of operating problems occurring and the
cost of repair and has included in cost of revenues approximately $653,000 for
the expected costs. No estimate can be made of the range of amounts of loss
that are reasonably possible should the warranty work not be successful. In
addition, there can be no assurance that the Company will successfully resolve
any future problem in the manufacture or operation of its printers or any new
product. Failure of the Company to resolve any future manufacturing or
operational problems with its printers or any new product in a timely manner
could result in similar material adverse effects on the Company's business,
financial condition and results of operations.
Slower than Expected Revenue Growth. The Company's sales of the PiezoPrint
5000 have been slower than expected due in large part to the lack of certain
types of compatible media that can be run on the PiezoPrint 5000. During the
development of consumables for the PiezoPrint 5000, the Company found that the
oil based inks used in this printer had certain limitations which did not
allow the Company to develop a photogloss media which was compatible with the
printer. This lack of a photogloss media limited the market acceptance of the
printer. The resulting reduction in anticipated revenue from the sale of
PiezoPrint 5000 printers had a material adverse effect on the Company's
business, financial condition and results of operations for 1997. While the
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Company is continuing to add additional types of compatible media to its
product line for use on the PiezoPrint 5000, the Company expects that its
revenue growth will be slower than historical growth rates. Additionally,
revenue growth in 1997 was adversely affected by the Company's efforts to
transition its U.S. distribution model from direct to an indirect sales model.
It is expected that this transition will continue into 1999.
Inventory Reserves. Inventories are stated at the lower of cost (first-in,
first-out) or fair market value. The Company has recorded a write-down of
inventory of $10.4 million at December 31, 1997 of which $9.3 million was
recorded in the current year. In preparation of the 1997 restated quarterly
results, the Company performed a detailed review of its inventory reserves at
each of the three quarters and year ended 1997. This review included an
analysis of net realizable value and an analysis of excess and obsolete
inventory at each of the quarters and year ended 1997. Management has
developed a program to reduce inventories to levels that are consistent with
forecasted sales.
Allowance for Doubtful Accounts. The Company reports accounts receivable at
net realizable value. The Company has recorded a bad debt allowance of $4.7
million and a charge to general and administrative expenses. The increase in
the Company's allowance for doubtful accounts reflects the difficulty that the
Company has experienced in collecting amounts due. Collection difficulties
have resulted from a number of factors including the Company's decision in
1997 to sell a greater proportion of printers to end users, which has resulted
in the Company being subject to a greater amount of credit risk than has
previously been the case. In particular, a number of customers, particularly
those based in AsiaPac and Latin America, have experienced liquidity problems,
making collection of the amount due to the Company doubtful. In addition, the
problems experienced with the PP5000, introduced in 1997, have resulted in
some customers refusing to pay for other product shipped by the Company.
Management has undertaken efforts to collect amounts owed by its customers and
to reduce the accounts receivable balance to more desirable levels in the near
term.
Uncertainty Regarding Asian and Latin American Markets. A significant number
of the Company's customers and suppliers are based in Asia and Latin America.
The financial instability in these regions has and may have an adverse impact
on the financial position of customers and suppliers in the region, which
could impact the Company's future revenues and operations, including the
ability of customers to pay the Company. As a result of experiencing
collection problems from its Asian and Latin American customers in 1997 as the
Company did not require letters of credit, the Company is planning to require
sales to these regions to be secured by letters of credit or transacted on a
prepaid wire transfer basis. Should the current volatility in Asia and Latin
America continue, either the Company or the Company's customers may be unable
to sell its products in the region. The inability to generate revenue in this
region, or the inability to collect amounts due, would have a material adverse
impact on the Company's business, financial condition and results of
operations.
Significant Fluctuations in Quarterly Results. The Company's quarterly
operating results have varied significantly in the past and are likely to vary
significantly in the future based upon a number of factors, including general
economic conditions, the introduction or market acceptance of new products
offered by the Company and its competitors, changes in the pricing policies of
the Company or its competitors, the volume and timing of customer orders, the
level of product and price competition, the relative proportion of printer and
consumables sales, the Company's ability to collect accounts receivables, the
continued availability of sole source components, the continued availability
of consumables from independent vendors, fluctuations in research and
development expenditures, the impact of future Company acquisitions, the
continued availability of financing arrangements for certain of the Company's
customers, the Company's success in expanding its direct sales force and
indirect distribution channels, the risks related to international operations,
the loss of key suppliers and customers, problems incurred in managing
inventories or accounts receivables, a change in the product mix sold by the
Company, price decreases in inventory, trade barriers established by foreign
countries, as well as other factors. Additionally, because the purchase of a
digital printer or printing system involves a significant capital commitment,
the Company's printer and printing system sales cycle is susceptible to delays
and lengthy acceptance procedures associated with large capital expenditures.
Moreover, due to the Company's high average sales price and low unit volume
per month, a delay in the sale of a few units could have a material adverse
effect on the results of operations for a financial quarter.
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Quarterly revenues and operating results depend primarily on the volume,
timing, shipping and acceptance of orders during the quarter, which are
difficult to forecast due to the length of the sales cycle. A significant
portion of the Company's operating expenses are relatively fixed in the short
term, and planned expenditures are based on sales forecasts. If revenue levels
are below expectations, net income (loss), if any, may be disproportionately
affected because only a small portion of the Company's expenses vary with
revenue in the short term, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Although
the Company has experienced growth in revenue in recent years, there can be no
assurance that the Company will sustain such revenue growth or return to
profitability on an operating basis in any future period. In particular,
operating results for the period ended September 30, 1998, indicate that
Company revenues have decreased and expenses have increased. In order to
return to profitability, the Company must take active measures to reverse this
trend. There can be no assurances that this trend will be reversed or that the
Company will return to profitability. For the foregoing reasons, the Company
believes that period-to-period comparisons of its results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Further, in the third and fourth quarters of 1997, the Company's revenues and
operating results were below the expectations of public market analysts and
investors, which adversely affected the price of the Company's Common Stock.
It is likely that in some future period the Company's revenues or operating
results will again be below expectations. In such event, the price of the
Common Stock could be materially adversely affected.
Possible Volatility of Stock Price. In recent years, the stock market in
general, and the stock prices of technology companies in particular, have
experienced extreme price fluctuations, sometimes without regard to the
operating performance of particular companies. Factors such as quarterly
variation in actual or anticipated operating results, changes in earnings
estimates by analysts, market conditions in the industry, announcements by
competitors, regulatory actions and general economic conditions may have a
significant effect on the market price of the Common Stock. Following
fluctuations in the market price of a corporation's securities, securities
class action litigation has often resulted.
Reliance on Third-Party Distribution. The Company relies heavily on a
network of distributors, original equipment manufacturers ("OEMs") and value
added resellers ("VARs") for both domestic and international sales. The
Company currently maintains distribution, OEM and VAR agreements for its
printing systems and printers with Keundo and Lisle Kelco for distribution of
its products in Canada; Sumitomo-3M Ltd. ("Sumitomo-3M"), Marubeni Electronics
Co. Ltd. ("Marubeni") and Kimoto Co., Ltd. ("Kimoto") for distribution of its
products in Japan; and Sihl for distribution of its products in Europe. In
addition, the Company distributes its image processing software products
through a number of domestic and international OEMs, VARs and distributors.
There can be no assurance that the Company's independent OEMs, VARs and
distributors will maintain their relationships with the Company or that the
Company will be able to recruit additional or, if necessary, replacement OEMs,
VARs or distributors. The loss of one or more of the Company's OEMs, VARs or
distributors could have a material adverse effect on the Company's business,
financial condition and results of operations.
In general, the Company's agreements with its OEMs, VARs and distributors
are not exclusive, and each of the Company's OEMs, VARs and distributors can
cease marketing the Company's products with limited notice and with little or
no penalty. Some of the Company's OEMs, VARs and distributors offer
competitive products manufactured by third parties. In addition, some of these
customers may consider the Company's products to be competitive offerings and,
as a result, there can be no assurance that such customers will continue
marketing the Company's products. Further, there can be no assurance that the
Company's OEMs, VARs and distributors will give a high priority to the
marketing of the Company's products as compared to competitors' products or
alternative solutions, or that such OEMs, VARs and distributors will continue
to offer the Company's products. Any reduction or delay in sales of the
Company's products by its OEMs, VARs or distributors could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Although the Company seeks information from foreign customers that purchase
products from the Company's OEMs, VARs and distributors, it generally does not
deal directly with them and cannot directly
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observe their experience with the Company's products. The Company also does
not have direct control over the marketing and support efforts of its OEMs,
VARs and distributors in foreign countries. This may result in the inability
of the Company to identify potential opportunities with these customers and a
potential delay by the Company in the recognition and correction of any
problems with such OEM, VAR or distributor sales or support organizations.
Failure of the Company to respond to customer preferences or experience with
its products or the failure of OEM, VAR or distributor supported customers to
market and support the Company's products successfully, could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, third-party distribution provides the Company with less
information regarding the amount of inventory that is in the process of
distribution. This lack of information can reduce the Company's ability to
predict fluctuations in revenues resulting from a surplus or a shortage in its
distribution channels and contribute to volatility in the Company's financial
results, cash flow, and inventory balances.
Competition. The market for printing equipment and related software and
consumables is extremely competitive. Suppliers of equipment for the LFDP
market compete on the basis of speed, print quality, price and the ability to
provide complete solutions, including service. Certain of the Company's
competitors are developing or have introduced products to address the LFDP
market. Among these companies are 3M, ColorgrafX, Encad, Hewlett-Packard,
Calcomp, and ColorSpan, which manufacture LFDP printers, and Cactus, a
division of 3M, (Star) and Visual Edge, which develop LFDP image processing
software. A variety of potential actions by any of the Company's competitors,
could have a material adverse effect on the Company's business, financial
condition and results of operations. Such actions may include reduction of
product prices, increased promotion, announcement or accelerated introduction
of new or enhanced products, product giveaways, product bundling or other
competitive actions. In addition, companies that are currently targeting the
photographic enlargement, screen and offset printing markets may enter the
LFDP market in the future or may increase the performance or lower the costs
of such alternate printing processes in a manner that would allow them to
compete more directly with the Company for LFDP customers. Furthermore,
companies that supply consumables, such as ink and paper, to the Company could
compete with the Company by not selling such consumables to the Company or by
widely selling such consumables directly or through other channels to the
Company's customers. Such competition would have a material adverse effect on
the Company's business, financial condition and results of operations.
Many of the companies that currently compete with the Company or that may
compete with the Company in the future have longer operating histories and
significantly greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base,
than the Company. As a result, these competitors may be able to respond more
quickly and/or effectively to new or emerging technologies and changes in
customer requirements or to devote greater resources to the development,
promotion, sale and support of their products than the Company. These
companies may have the ability to offer superior payment terms. Consequently,
the Company expects to continue to experience increased competition, which
could result in significant price reductions, loss of market share and lack of
acceptance of new products, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete against
current or future competitors successfully or that competitive pressures faced
by the Company will not have a material adverse effect upon its business,
financial condition and results of operations.
Product Competition. The introduction of the PiezoPrint 5000 has adversely
impacted sales of the Company's DCS 5442 printer to the extent that future
purchasers favor the lower priced inkjet alternatives. Accordingly, there can
be no assurance that revenue generated by sales of the Company's inkjet
products will compensate for the decrease in revenue resulting from declining
sales of its electrostatic products. The corresponding decrease in total
revenue would have a material adverse effect upon the Company's business,
financial condition and results of operations.
International Revenues. The Company's international revenues accounted for
approximately 39.5%, 51.6%, and 56.1% of the Company's revenues in 1997, 1996
and 1995, respectively. The Company makes a material amount of sales to third
party distributors in international markets. The Company expects that
international sales will continue to account for a significant portion of its
total revenues in future periods.
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International sales are subject to certain inherent risks, including
instability of foreign economies, such as the weak economic conditions
effecting certain Asian and Latin America economies in the latter part of 1997
and 1998, unexpected changes in regulatory requirements and tariffs,
government controls, political instability, longer payment cycles, increased
difficulties in collecting accounts receivable and potentially adverse tax
consequences. The Company's inability to obtain foreign regulatory approvals
on a timely basis could also have a material adverse effect on the Company's
business, financial condition and results of operations. Sales from the
Company's German, French and UK subsidiaries are denominated in local
currencies. Accordingly, fluctuations in currency exchange rates could cause
the Company's products to become relatively more expensive to end users in a
particular country, leading to a reduction in sales in that country. The
Company utilized foreign currency forward exchange contracts to manage some of
its foreign currency firm purchase commitments. At December 31, 1997, the
Company held a foreign currency forward contract which matured in January 1998
to buy 25.6 million Japanese yen for $200,000. The fair value of the yen
underlying this instrument at December 31, 1997, was $196,000. Purchases of
the PiezoPrint 1000 from the Company's sole source supplier are denominated in
Japanese yen and have resulted in some foreign currency exchange rate
fluctuation exposure. The impact of future exchange rate fluctuations cannot
be predicted adequately. There can be no assurance that any hedging techniques
implemented by the Company would be successful or that the Company's results
of operations will not be materially adversely affected by exchange rate
fluctuations. In general, certain seasonal factors and patterns impact the
level of business activities at different times in different regions of the
world. For example, sales in Europe are adversely affected in the third
quarter of each year as many customers and end users reduce their business
activities during the summer months. These seasonal factors and currency
fluctuation risks could have a material adverse effect on the Company's
quarterly results of operations. Further, because the Company has operations
in different countries, the Company's management must address differences in
regulatory environments and cultures. Failure to address these differences
successfully could be disruptive to the Company's operations.
Environmental. The Company is subject to local laws and regulations
governing the use, storage, handling and disposal of the inks, varnishes and
finishing solutions sold for use with the Company's printers. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by such laws and regulations,
and while the Company is not aware of any notice or complaint alleging any
violation of such laws or regulations, risk of accidental contamination,
improper disposal or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that the Company will not
be required to incur significant costs to comply with environmental laws and
regulations in the future.
Difficulties in Managing Growth. The Company has experienced growth in
recent years, which has placed demands on the Company's administrative,
operational and financial personnel, information systems and financial and
administrative controls, manufacturing operations, research and development,
technical support and other resources. Additionally, certain of the Company's
officers have recently joined the Company. Failure to manage the changes in
any of these areas would have a material adverse effect on the Company's
business, financial condition and results of operations.
Need to Attract and Retain Highly Skilled Personnel. The success of the
Company depends to a large extent upon its ability to retain and continue to
attract highly skilled personnel. Competition for employees in the high
technology sector in general, and in the LFDP industry in particular, is
intense, and there can be no assurance that the Company will be able to
attract and retain enough qualified employees. If the business of the Company
increases, it may become increasingly difficult to hire, train and assimilate
the new employees needed. The Company believes that the loss of its Chief
Executive Officer could have a material adverse effect on the Company's
business, financial condition or results of operations. With the exception of
employment agreements containing initial compensation terms and severance
obligations with respect to the Company's Chief Executive Officer, Acting
Chief Financial Officer, Executive Vice President and Vice President of
Domestic Sales, the
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Company has not entered into employment agreements with any of its key
personnel. Additionally, the Company has not required its key personnel to
enter into non-competition agreements with the Company. The Company has not
procured key man insurance for any of its employees. The Company's inability
to retain and attract key employees would have a material adverse effect on
the Company's business, financial condition and results of operations.
Year 2000 Compliance. The "Year 2000 issue" arises because many computer
systems and programs were designed to handle only a two-digit year, not a
four-digit year. These computers may interpret "00" as the year 1900 and could
either stop processing date-related computations or could process them
incorrectly.
The Company has not experienced any significant Year 2000 problems to date.
The Company has examined the potential impact of the Year 2000 issue on its
printer and image processing software products and believes that its products
are Year 2000 compliant, meaning that the use or occurrence of dates on or
after January 1, 2000 will not materially affect the performance of Company
products to correctly create, store, process and output information related to
such dates. The Company's printer system products, including embedded
technology, are not affected by the Year 2000 issue because the custom
operating systems designed into the DCS and PiezoPrint systems are insensitive
to year code. The Company's PosterShop image processing software product
utilizes more than a 2-digit year code, and therefore will not be effected by
the change to the year 2000.
The Company has determined that with an upgrade to its current information
systems, those systems will be able to process the Year 2000 accurately and
accordingly does not anticipate any Year 2000 issues from its own information
systems, databases or programs as long as it can successfully complete this
upgrade. The Company has incurred approximately $15,000 in costs associated
with its Year 2000 upgrades and expects that the total costs of this upgrade
will not exceed $50,000 and that this upgrade will be complete by mid-1999.
However, the Company could be adversely impacted by Year 2000 issues faced by
major distributors, suppliers, customers, vendors, and financial service
organizations with which the Company interacts. The Company is in the process
of contacting third parties to determine the impact that third parties which
are not Year 2000 compliant may have on the operations of the Company. The
Company estimates that this process will be complete, and that upgrades will
be accomplished, by mid-1999. Based on its contacts with material third
parties, the Company is not presently aware of any Year 2000 issues related to
third parties that would have a material adverse effect on the Company.
The Company does not plan to have an independent verification of its Year
2000 compliance program. While approaches to reducing risks of interruption
due to supplier failures will vary by business and facility, options include
identification of alternate suppliers and accumulation of inventory to assure
production capability where feasible or warranted. These activities are
intended to provide a means of managing risk, but cannot eliminate the
potential for disruption due to third party failure. The Company is also
dependent upon customers for sales and cash flow. Year 2000 interruptions in
customers' operations could result in reduced sales, increased inventory or
receivable levels and cash flow reductions. The Company will, however, take
steps to monitor the status of customers as a means of determining risks and
alternatives.
Based on its revue and analysis to date, the Company expects that its most
likely worst-case scenario for the Year 2000 problem is that a limited number
of the Company's internal systems may produce reports with incorrect dates or
otherwise have difficulties processing information with dates and that the
Company may experience limited delays in purchases from customers. The Company
expects to develop a contingency plan for its expected worst-case scenario by
the third quarter of 1999. The Company's Year 2000 plan is expected to
significantly reduce the level of uncertainty about the potential Year 2000
problem and, in particular about the Year 2000 compliance and readiness of the
Company's suppliers, resellers and distributors. The Company believes that,
with completion of the Year 2000 plan, the possibility of significant
interruptions of normal operations should be reduced. However, due to the
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
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Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
private sales of preferred stock and common stock of $24.7 million, its
initial public offering of common stock in 1996, issuance of convertible debt,
bank loans, equipment lease financing and private loans. For the year ended
December 31, 1997 and for the same period in 1996 and 1995, $8.3 million,
$283,000 and $599,000 of cash was used in operations, respectively. For fiscal
1997, net cash used in operations was due primarily to net loss incurred
partially offset by a decrease in accounts receivable and increases in amounts
payable and other accrued liabilities. For fiscal 1996 net cash used in
operations was due primarily to increases in inventories and accounts
receivable associated with higher net revenues, which were partially offset by
net income and an increase in accounts payable.
Net cash provided by (used) in investing activities was $9.0 million,
($15.0) million and ($1.1) million for the years ended December 31, 1997, 1996
and 1995, respectively. The Company incurred $2.7 million of capital
expenditure in 1997, $1.9 million in 1996 and $1.1 million in 1995. The
Company had net receipts of $11.5 million from short term cash investments in
1997 and made net purchases of $13.1 million in 1996.
Financing activities provided net cash of $405,000, $16.7 million and $1.6
million for the years ended December 31, 1997, 1996 and 1995, respectively. In
August 1996, the Company successfully completed its initial public offering of
securities which yielded net proceeds of $16.9 million. In fiscal 1995, $1.5
million was raised by issuing Series C preferred stock. The proceeds from the
sale of these equity securities were partially offset by payments on notes and
capital lease obligations.
To date, the Company has not invested in derivative securities or any other
financial instrument that involves a high level of complexity or risk.
Management expects that, in the future, cash in excess of current requirements
will be invested in investment grade, interest-bearing securities.
At December 31, 1997, the Company had $5.3 million of cash and cash
equivalents and short term investments. At September 30, 1998, the Company had
$2.0 million of cash, cash equivalents and short-term investments. The Company
also had available a $4.1 million bank line of credit that was to expire on
December 31, 1998, which was secured by the tangible assets of the Company.
There were no borrowings under the line of credit as September 30, 1998. The
bank line of credit was terminated November 17, 1998.
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 $145,000
and $263,000 for the nine months ended September 30, 1998, and 1997,
respectively, and cash received from loan proceeds of $500,000.
In order to continue as a going concern, the Company will need to raise
additional capital that will be used to offset expected losses from future
operations. Also, the Company expects the additional capital to be used for
payment of restructuring costs, including headcount reductions in various
functions of the Company. The Company plans to raise the additional capital
through cost containment measures that will align spending levels with revenue
projections, planned reduction of inventory to meet required customer order
levels, improvement for collection of outstanding trade receivables, and
raising additional equity and debt financing. There can be no assurance that
management will be successful in accomplishing these plans and objectives.
Failure to accomplish these plans or objectives would have a material effect
on the Company's business, financial condition, and results of operation.
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 has entered into a Loan and
Pledge Agreement with Gretag Imaging Group, Inc. providing for a loan facility
secured by 100% of the issued stock of Onyx Graphics Corporation (see Note 15
regarding subsequent events). The Company's future capital requirements,
however, depend on numerous factors, including, without limitation, the
success of marketing, sales and distribution
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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.
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. As
of December 31, 1998, the outstanding loan amount was $3,350,00, plus accrued
interest of $54,966.67. In addition, Gretag has the option to purchase up to
$5,000,000 of the Company's Common Stock in exchange for forgiving the loan
and paying the balance in cash. Pursuant to the Asset and Subsidiary Stock
Option Agreement, (i) if the Agreement and Plan of Merger is terminated,
Gretag has the option to acquire Onyx for $5,000,000 less the amount drawn
down under the loan facility, or (ii) if the Company's stockholders do not
vote in favor of the Merger, if the Company accepts a superior offer to sell
the Company or upon certain other events, Gretag has the option to acquire the
Company's inkjet technology for $6,000,000 less the amount drawn down under
the loan facility. Pursuant to the terms of the Stockholders Agreement,
stockholders of the Company holding approximately 20% of the Company's
outstanding Common Stock have agreed to vote in favor of the Merger and
against any other proposal to acquire the Company. The Merger and the
Agreement and Plan of Merger requires stockholder approval and consummation of
the Merger is conditioned upon settlement of the class action lawsuits against
the Company. (See Notes to the Consolidated Financial Statements for a
description of amounts payable on a change in control.)
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file with the Securities and Exchange Commission (the "SEC") initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and holders of
more than ten percent of the Company's Common Stock are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely upon review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997 all
Section 16(a) filing requirements applicable to the Company's officers,
directors and holders of more than ten percent of the Company's Common Stock
were complied with.
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INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of Raster Graphics, Inc. at December
31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, included in the Proxy Statement of Raster Graphics, Inc. at
Annex G, have been audited by Ernst & Young LLP, independent auditors ("E&Y"),
as set forth in their reports thereon (which contain an explanatory paragraph
describing conditions that raise substantial doubt about the Company's ability
to continue as a going concern) appearing elsewhere herein, and are included
in reliance upon such report give upon the authority of such firm as experts
in accounting and auditing.
On October 23, 1998, the Company received a letter from E&Y informing the
Company that the client-auditor relationship between the Company and E&Y had
ceased. E&Y has declined to stand for re-election as the Company's auditors.
E&Y's reports with respect to the Company's financial statements for each of
the two fiscal years ended December 31, 1996 and 1997 did not contain an
adverse opinion or a disclaimer of opinion and were not qualified as to
uncertainty, audit scope or accounting principles. E&Y's report with respect
to the Company's financial statements for fiscal year ended December 31, 1997
was modified to include an explanatory paragraph stating that there is
substantial doubt about the Company's ability to continue as a going concern.
The financial statements did not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
In connection with the audits of the Company's financial statements for each
of the two fiscal years ended December 31, 1996 and 1997 and in the subsequent
interim period preceding cessation of the client-auditor relationship between
the Company and E&Y, there were no disagreements with E&Y on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope and procedures which, if not resolved to the satisfaction of E&Y would
have caused E&Y to make reference to the matter in connection with their
report.
During the Company's fiscal years ended December 31, 1997 and 1996, and in
the subsequent interim period preceding the cessation of the auditor-client
relationship between the Company and E&Y, the following reportable events
occurred:
On February 2, 1998, E&Y informed the Audit Committee of the Company's Board
of Directors that in connection with the audit of the Company's fiscal year
1997 consolidated financial statements, the lack of appropriate resources, the
lack of control over the recording of revenue, an unreliable accounting
system, and a lapse in controls over the Company's subsidiaries, resulted in
delays in closing the books and difficulty in accumulating accurate
information necessary for financial statement disclosure in a timely manner.
E&Y considered this condition to be a material weakness. As a result of this
material weakness and at various times during the performance of their audit,
E&Y advised the Company of the need to significantly expand the scope of their
audit.
Further, at various times during the performance of their audit and as
documented in their letter to the Audit Committee dated September 25, 1998,
E&Y informed the Company and Audit Committee of various conditions that it
considered to be errors and irregularities. These errors and irregularities
took numerous forms and were primarily the result of a lack of compliance with
the Company's procedures and controls. In addition, E&Y stated that over time
a number of factors contributed to an environment that allowed the
circumvention of established procedures and controls. E&Y considered that
collectively these conditions represented a material weakness.
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OTHER MATTERS
At the time of preparation of this Proxy Statement, the Board knows of no
other matters which will be acted upon at the Annual Meeting other than the
approval of the Merger Agreement and the transactions contemplated thereby and
the election of Class II directors. If any other matters are presented for
action at the Annual Meeting or at any adjournment or adjournments thereof, it
is intended that the proxies will be voted with respect thereto in accordance
with the best judgment and in the discretion of the proxy holders.
By Order of the Board of Directors,
RAKESH KUMAR
President
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ANNEX A
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- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
between
GRETAG IMAGING GROUP, INC.
GRETAG ACQUISITION CORP.
and
RASTER GRAPHICS, INC.
Dated as of October 6, 1998
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- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
ARTICLE 1 The Merger................................................... A-1
1.1.The Merger............................................... A-1
1.2.The Closing.............................................. A-1
1.3.Effective Time........................................... A-2
Certificate of Incorporation and Bylaws of the Surviving
ARTICLE 2 Corporation.................................................. A-2
2.1.Certificate of Incorporation............................. A-2
2.2.Bylaws................................................... A-2
ARTICLE 3 Directors and Officers of the Surviving Corporation.......... A-2
3.1.Directors................................................ A-2
3.2.Officers................................................. A-2
Effect of the Merger on Securities of Merger Sub and the
ARTICLE 4 Company...................................................... A-2
4.1.Merger Sub Stock......................................... A-2
4.2.Company Securities....................................... A-2
4.3.Exchange of Certificates Representing Common Stock....... A-3
4.4.Adjustment of Merger Consideration....................... A-4
4.5.Dissenting Company Stockholders.......................... A-4
ARTICLE 5 Representations and Warranties of the Company................ A-5
5.1.Existence; Good Standing; Corporate Authority............ A-5
5.2.Authorization, Validity and Effect of Agreements......... A-5
5.3.Compliance with Laws..................................... A-5
5.4.Capitalization........................................... A-5
5.5.Subsidiaries............................................. A-6
5.6.No Violation............................................. A-6
5.7.Company Reports; Proxy Statement......................... A-7
5.8.Litigation............................................... A-8
5.9.Absence of Certain Changes............................... A-8
5.10.Taxes................................................... A-9
5.11.Employee Benefit Plans.................................. A-10
5.12.Labor and Employment Matters............................ A-10
5.13.Brokers and Finders..................................... A-11
5.14.Fairness Opinion........................................ A-11
5.15.Licenses and Permits.................................... A-11
5.16.Environmental Matters................................... A-11
5.17.Material Contracts...................................... A-12
5.18.Intellectual Property; Technology....................... A-12
5.19.Required Vote of Company Stockholders................... A-14
5.20.State Statutes.......................................... A-14
5.21.Disclosures............................................. A-15
ARTICLE 6 Representations and Warranties of Purchaser and Merger Sub... A-15
6.1.Existence; Good Standing; Corporate Authority............ A-15
6.2.Authorization, Validity and Effect of Agreements......... A-15
6.3.Proxy Statement.......................................... A-15
6.4.No Violation............................................. A-15
6.5.Financing................................................ A-16
6.6.Brokers and Finders...................................... A-16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
ARTICLE 7 Covenants................................................... A-16
7.1.No Solicitation......................................... A-16
7.2.Interim Operations...................................... A-17
7.3.Filings; Other Action................................... A-20
7.4.Access to Information................................... A-21
7.5.Publicity............................................... A-21
7.6.Further Action.......................................... A-21
7.7.Insurance; Indemnity.................................... A-22
7.8.Restructuring of Merger................................. A-22
7.9.Employees and Employee Benefit Plans.................... A-22
7.10.Stockholder Approval; Preparation of Proxy Statement... A-22
7.11.Additional Agreements of the Company................... A-23
7.12.Transfer Taxes......................................... A-24
ARTICLE 8 Conditions.................................................. A-24
8.1.Conditions to Each Party's Obligation to Effect the
Merger...................................................... A-24
8.2. Additional Conditions to Obligations of Purchaser and
Merger Sub to Effect the Merger........................ A-25
8.3.Additional Conditions to Obligations of the Company..... A-25
ARTICLE 9 Termination; Amendment; Waiver.............................. A-26
9.1.Termination............................................. A-26
9.2.Effect of Termination................................... A-27
9.3.Amendment............................................... A-27
9.4.Extension; Waiver....................................... A-27
ARTICLE 10 General Provisions.......................................... A-28
10.1.Nonsurvival of Representations and Warranties.......... A-28
10.2.Notices................................................ A-28
10.3.Assignment; Binding Effect............................. A-28
10.4.Entire Agreement....................................... A-29
10.5.Fees and Expenses...................................... A-29
10.6.Governing Law.......................................... A-30
10.7.Headings............................................... A-30
10.8.Interpretation......................................... A-30
10.9.Investigations......................................... A-30
10.10.Severability.......................................... A-30
10.11.Enforcement of Agreement.............................. A-30
10.12.Counterparts.......................................... A-30
DEFINITIONS............................................................. iii
DISCLOSURE SCHEDULE
EXHIBIT I Memorandum of Understanding
</TABLE>
ii
<PAGE>
DEFINITIONS
<TABLE>
<CAPTION>
Defined Term Section Reference
------------ -----------------
<S> <C>
"Acquisition Agreement"....................................... Section 7.1(b)
"Acquisition Proposal"........................................ Section 7.1
"affiliate"................................................... Section 10.8
"Agreement"................................................... First Paragraph
"associate"................................................... Section 10.8
"Board" or "Board of Directors"............................... Section 7.15
"Cap"......................................................... Section 7.7(a)
"Certificate"................................................. Section 4.2(b)
"Closing"..................................................... Section 1.2
"Closing Date"................................................ Section 1.2
"Commercial Software"......................................... Section 5.18(h)
"Common Stock"................................................ Section 4.2(a)
"Company"..................................................... First Paragraph
"Company Benefit Plans"....................................... Section 5.11
"Company Intellectual Property"............................... Section 5.18(b)
"Company Owned Intellectual Property"......................... Section 5.18
"Company Reports"............................................. Section 5.7(a)
"Company Software"............................................ Section 5.18(h)
"Company Stockholder Approval"................................ Section 5.19
"Computer Systems"............................................ Section 5.18(i)
"Consents".................................................... Section 7.3
"Contract" or "Contracts"..................................... Section 5.6
"Current Policies"............................................ Section 7.7(a)
"Delaware Courts"............................................. Section 10.6
"Derivative" or "Derivatives"................................. Section 5.17
"DGCL"........................................................ Section 4.5
"Disclosure Letter"........................................... Section 5
"Dissenting Common Stock"..................................... Section 4.5
"Effective Time".............................................. Section 1.3
"Employee Agreements"......................................... Section 5.11
"Encumbrances"................................................ Section 5.5
"Environmental Laws".......................................... Section 5.16(a)
"excess parachute payment".................................... Section 5.11
"Exchange Act"................................................ Section 5.6
"Exchange Fund"............................................... Section 4.3(a)
"Fairness Opinion"............................................ Section 5.14
"Foreign Antitrust Laws"...................................... Section 5.6
"Governmental Entity"......................................... Section 5.3
"group"....................................................... Section 8.2(g)
"Hazardous Substances"........................................ Section 5.16(b)
"HSR Act"..................................................... Section 5.6
"Information Statement"....................................... Section 5.7(b)
"Inkjet Business"............................................. Option Agreement
"Inkjet Option"............................................... Option Agreement
"Intellectual Property"....................................... Section 5.18(j)
"Laws"........................................................ Section 5.3
"Litigation".................................................. Section 5.8
"Loan Agreement".............................................. Recitals
"Losses"...................................................... Section 7.7(b)
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of October 6, 1998 (this
"Agreement"), among Gretag Imaging Group, Inc., a Delaware corporation
("Purchaser"), Gretag Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Purchaser ("Merger Sub"), and Raster Graphics, Inc., a
Delaware corporation (the "Company").
RECITALS
WHEREAS, the Boards of Directors of Purchaser, Merger Sub and the Company
each have determined that it is advisable and in the best interests of their
respective companies and stockholders for Purchaser to acquire the Company
upon the terms and subject to the conditions set forth herein;
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Purchaser's and Merger Sub's willingness to enter into this
Agreement, the Purchaser and the Company are entering into an Asset and
Subsidiary Stock Option Agreement (the "Option Agreement"), pursuant to which
Purchaser shall have the right, upon the occurrence of certain conditions, to
purchase certain assets of the Company and/or the shares of Onyx Graphics
Corporation ("O-Sub"), a wholly owned Subsidiary of the Company;
WHEREAS, concurrently with the execution of this Agreement and as a
condition and inducement to the Purchaser's and Merger Sub's willingness to
enter into this Agreement, certain stockholders of the Company, Purchaser and
Merger Sub are entering into a Stockholders Agreement (the "Stockholders
Agreement"), pursuant to which such stockholders have agreed, among other
things, to vote their shares in favor of the Merger;
WHEREAS, the Board of Directors of the Company has approved the transactions
contemplated by the Option Agreement and the Stockholders Agreement;
WHEREAS, concurrently with the execution of this Agreement, the Company and
Purchaser have entered into a Loan and Pledge Agreement, dated as of the date
hereof (the "Loan Agreement") pursuant to which Purchaser has agreed to
advance certain amounts to the Company; and
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection herewith.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
The Merger
1.1. The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time, Merger Sub shall be merged with and into the Company in
accordance with this Agreement, and the separate corporate existence of Merger
Sub shall thereupon cease (the "Merger"). The Company shall be the surviving
corporation in the Merger (sometimes hereinafter referred to as the "Surviving
Corporation"). The Merger shall have the effects specified in the DGCL.
1.2. The Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of
Debevoise & Plimpton, 875 Third Avenue, New York, New York, at 10:00 a.m.,
local time, as soon as practicable following the satisfaction (or waiver if
permissible) of the conditions set forth in Article 8 or at such other time,
date or place as Purchaser and the Company may agree. The date on which the
Closing occurs is hereinafter referred to as the "Closing Date."
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<PAGE>
1.3. Effective Time. If all the conditions to the Merger set forth in
Article 8 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 9, the parties
hereto shall cause a Certificate of Merger meeting the requirements of
Sections 103 and 251 of the DGCL to be properly executed and filed in
accordance with such Sections on the Closing Date. The Merger shall become
effective at the time of filing of the Certificate of Merger with the
Secretary of State of the State of Delaware in accordance with the DGCL or at
such later time which the parties hereto shall have agreed upon and designated
in such filing as the effective time of the Merger (the "Effective Time").
ARTICLE 2
Certificate of Incorporation and Bylaws
of the Surviving Corporation
2.1. Certificate of Incorporation. The Certificate of Incorporation of
Merger Sub in effect immediately prior to the Effective Time shall be adopted
as the Certificate of Incorporation of the Surviving Corporation, until duly
amended in accordance with applicable law, except that the name of the
Surviving Corporation shall be "Raster Graphics, Inc."
2.2. Bylaws. The Bylaws of the Company in effect immediately prior to the
Effective Time shall be adopted as the Bylaws of the Surviving Corporation,
until duly amended in accordance with applicable law.
ARTICLE 3
Directors and Officers of the Surviving Corporation
3.1. Directors. The directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation as of the
Effective Time and until their successors are duly appointed or elected in
accordance with applicable law.
3.2. Officers. The officers of the Company immediately prior to the
Effective Time, together with such additions thereto as Merger Sub shall
designate, shall be the officers of the Surviving Corporation as of the
Effective Time and until their successors are duly appointed or elected in
accordance with applicable law.
ARTICLE 4
Effect of the Merger on Securities
of Merger Sub and the Company
4.1. Merger Sub Stock. At the Effective Time, each share of common stock,
$0.01 par value per share, of Merger Sub outstanding immediately prior to the
Effective Time shall be converted into and exchanged for one validly issued,
fully paid and nonassessable share of common stock, $0.001 par value per
share, of the Surviving Corporation.
4.2. Company Securities.
(a) At the Effective Time, each share of Common Stock, par value $0.001 per
share (the "Common Stock") of the Company, together with the associated
Rights, issued and outstanding immediately prior to the Effective Time (other
than shares of Common Stock owned by Purchaser or Merger Sub or held by the
Company or owned or held by any of their respective Subsidiaries, all of which
shall be canceled as provided in Section 4.2(c), and other than shares of
Dissenting Common Stock) shall, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into the right to receive cash
in the amount of $1.2968 per share, without
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<PAGE>
interest (the "Merger Consideration"). Except where the context otherwise
requires, all references herein to shares of Common Stock shall include the
associated Rights.
(b) As a result of the Merger and without any action on the part of the
holders thereof, at the Effective Time, all shares of Common Stock shall cease
to be outstanding and shall be automatically canceled and retired and shall
cease to exist, and each holder of shares of Common Stock (other than Merger
Sub, Purchaser, the Company and each of their respective Subsidiaries) shall
thereafter cease to have any rights with respect to such shares of Common
Stock, except the right to receive, without interest, the Merger Consideration
in accordance with Section 4.3 upon the surrender of a certificate or
certificates (a "Certificate") representing such shares of Common Stock or,
with respect to shares of Dissenting Common Stock, payment of the appraised
value of shares of Dissenting Common Stock in accordance with Section 4.5.
(c) Each share of Common Stock issued and owned or held by Purchaser, Merger
Sub, the Company or any of their respective Subsidiaries at the Effective Time
shall, by virtue of the Merger, cease to be outstanding and shall be
automatically canceled and retired without payment of any consideration
therefor.
(d) All options (individually, an "Option" and collectively, the "Options")
outstanding immediately prior to the Effective Time under any Company stock
option plan or stock purchase plan (the "Stock Option Plans"), whether or not
then exercisable, shall be canceled and each holder of an Option will be
entitled to receive, for each share of Common Stock subject to an Option, an
amount in cash equal to the excess, if any, of the Merger Consideration over
the per share exercise price of such Option, without interest. The amounts
payable pursuant to this Section 4.2(d) shall be subject to all applicable
withholding of taxes. The Company shall use its reasonable best efforts to
obtain all necessary consents of the holders of Options to the cancellation of
the Options in accordance with this Section 4.2(d).
4.3. Exchange of Certificates Representing Common Stock.
(a) Prior to the Effective Time, Purchaser shall appoint a commercial bank
or trust company having net capital of not less than $100,000,000 and which is
reasonably satisfactory to the Company, to act as paying agent hereunder for
payment of the Merger Consideration upon surrender of Certificates (the
"Paying Agent"). Purchaser shall, or shall cause the Surviving Corporation to,
provide the Paying Agent with cash in amounts necessary to pay for all the
shares of Common Stock pursuant to Section 4.2(a) and to make all payments in
connection with the Options pursuant to Section 4.2(d), as and when such
amounts are needed by the Paying Agent. Such amounts shall hereinafter be
referred to as the "Exchange Fund."
(b) Promptly after the Effective Time, Purchaser shall cause the Paying
Agent to mail to each holder of record of shares of Common Stock immediately
prior to the Effective Time (i) a letter of transmittal which shall specify
that delivery shall be effected, and risk of loss and title to such
Certificates shall pass, only upon delivery of the Certificates to the Paying
Agent and which letter shall be in customary form and have such other
provisions as Purchaser may reasonably specify and (ii) instructions for
effecting the surrender of such Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate to the Paying Agent together
with such letter of transmittal, duly executed and completed in accordance
with the instructions thereto, and such other documents as may reasonably be
required by the Paying Agent, the holder of such Certificate shall be entitled
to receive in exchange therefor the amount of cash into which shares of Common
Stock theretofore represented by such Certificate shall have been converted
pursuant to Section 4.2, and the shares represented by the Certificate so
surrendered shall forthwith be canceled. No interest will be paid or will
accrue on the cash payable upon surrender of any Certificate. In the event of
a transfer of ownership of Common Stock which is not registered in the
transfer records of the Company, payment may be made with respect to such
Common Stock to such a transferee if the Certificate representing such shares
of Common Stock is presented to the Paying Agent, accompanied by all documents
required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid.
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<PAGE>
(c) At and after the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the shares of Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
canceled and exchanged as provided in this Article 4.
(d) Any portion of the Exchange Fund (including the proceeds of any interest
and other income received by the Paying Agent in respect of all such funds)
that remains unclaimed by the former stockholders of the Company six months
after the Effective Time shall be delivered to the Surviving Corporation. Any
former stockholders of the Company who have not theretofore complied with this
Article 4 shall thereafter look only to the Surviving Corporation for payment
of any Merger Consideration that may be payable upon surrender of any
Certificates such stockholder holds, as determined pursuant to this Agreement,
without any interest thereon.
(e) None of Purchaser, the Company, the Surviving Corporation, the Paying
Agent or any other person shall be liable to any former holder of shares of
Common Stock for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(f) If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed and, if required by the Surviving Corporation,
the posting by such person of a bond in such reasonable amount as the
Surviving Corporation may direct as indemnity against any claim that may be
made against it with respect to such Certificate, the Paying Agent will issue
in exchange for such lost, stolen or destroyed Certificate the Merger
Consideration payable in respect thereof pursuant to this Agreement.
4.4. Adjustment of Merger Consideration. If, subsequent to the date of this
Agreement but prior to the Effective Time, the outstanding shares of Common
Stock shall have been changed into a different number of shares or a different
class as a result of a stock split, reverse stock split, stock dividend,
subdivision, reclassification, split, combination, exchange, recapitalization
or other similar transaction, the Merger Consideration shall be appropriately
adjusted.
4.5. Dissenting Company Stockholders. Notwithstanding any provision of this
Agreement to the contrary, if required by the DGCL but only to the extent
required thereby, shares of Common Stock which are issued and outstanding
immediately prior to the Effective Time and which are held by holders of such
shares of Common Stock who have properly exercised appraisal rights with
respect thereto (the "Dissenting Common Stock") in accordance with Section 262
of the Delaware General Corporation Law ("DGCL") will not be exchangeable for
the right to receive the Merger Consideration, and holders of such shares of
Dissenting Common Stock will be entitled to receive payment of the appraised
value of such shares of Dissenting Common Stock in accordance with the
provisions of such Section 262 unless and until such holders fail to perfect
or effectively withdraw or lose their rights to appraisal and payment under
the DGCL. If, after the Effective Time, any such holder fails to perfect or
effectively withdraws or loses such right, such shares of Dissenting Common
Stock will thereupon be treated as if they had been converted into and have
become exchangeable for, at the Effective Time, the right to receive the
Merger Consideration, without any interest thereon. Notwithstanding anything
to the contrary contained in this Section 4.5, if (i) the Merger is rescinded
or abandoned or (ii) the stockholders of the Company revoke the authority to
effect the Merger, then the right of any stockholder to be paid the fair value
of such stockholder's Dissenting Common Stock pursuant to Section 262 of the
DGCL shall cease. The Company will give Purchaser prompt notice of any demands
and withdrawals of such demands received by the Company for appraisals of
shares of Dissenting Common Stock. The Company shall not, except with the
prior written consent of Purchaser, make any payment with respect to any
demands for appraisal or offer to settle or settle any such demands.
A-4
<PAGE>
ARTICLE 5
Representations and Warranties of the Company
The Company hereby represents and warrants to Purchaser and Merger Sub as of
the date hereof and as of the Effective Time as follows, except as
specifically disclosed in the writing from the Company to Purchaser and Merger
Sub that is dated the date of this Agreement and that is identified by the
Company to Purchaser as the disclosure letter to this Agreement (the
"Disclosure Letter"):
5.1. Existence; Good Standing; Corporate Authority. Each of the Company and
its Subsidiaries is (i) a corporation duly incorporated, validly existing and
in good standing under the laws of its jurisdiction of incorporation and (ii)
is duly licensed or qualified to do business as a foreign corporation and is
in good standing under the laws of any other state of the United States or any
other jurisdiction in which the character of the properties owned or leased by
it or in which the transaction of its business makes such licensure,
qualification or good standing necessary, except where the failure to be so in
good standing or to be so licensed or qualified, individually or in the
aggregate, would not have a material adverse effect on the business,
operations, results of operations, assets, financial condition or prospects of
the Company and its Subsidiaries taken as a whole (a "Material Adverse
Effect"). Each of the Company and its Subsidiaries has the requisite corporate
power and authority to own, operate and lease its properties and carry on its
business as now conducted. The Company has heretofore delivered to Purchaser
true and correct copies of the Certificate of Incorporation and Bylaws of the
Company as currently in effect.
5.2. Authorization, Validity and Effect of Agreements. The Company has the
requisite corporate power and authority to execute and deliver this Agreement
and the Option Agreement and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and the
Option Agreement by the Company, the execution and delivery of the
Stockholders Agreement by the stockholders who are parties thereto and the
consummation by the Company of the transactions contemplated hereby and
thereby have been duly and validly authorized by the Board of Directors, and
no other corporate proceedings on the part of the Company or its stockholders
are necessary to authorize this Agreement, the Stockholders Agreement or the
Option Agreement or to consummate the transactions contemplated hereby or
thereby (other than the approval of this Agreement and the Merger by the
holders of a majority of the shares of Common Stock, if required by applicable
law). The Board of Directors has duly adopted resolutions determining that the
Merger is advisable and the terms of the Merger are fair to, and in the best
interests of, the Company and the Company's stockholders and recommending that
the Company's stockholders approve the Merger and this Agreement. Each of this
Agreement and the Option Agreement has been duly and validly executed and
delivered by the Company, and (assuming this Agreement and the Option
Agreement each constitutes a valid and binding obligation of Purchaser and
Merger Sub) constitutes the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
5.3. Compliance with Laws. Except as set forth in the Disclosure Letter,
neither the Company nor any of its Subsidiaries is in violation of any
foreign, federal, state or local law, statute, ordinance, rule, regulation,
order, judgment, ruling or decree ("Laws") of any foreign, federal, state or
local judicial, legislative, executive, administrative or regulatory body or
authority or any court, arbitration, board or tribunal (each such entity, a
"Governmental Entity") applicable to the Company or any of its Subsidiaries or
any of their respective properties or assets, except for violations which,
individually or in the aggregate, would not have a Material Adverse Effect.
5.4. Capitalization. The authorized capital stock of the Company consists of
50,000,000 shares of Common Stock and 2,000,000 shares of preferred stock,
$0.001 par value (the "Preferred Stock"). As of October 5, 1998, (a) 9,599,525
shares of Common Stock were issued and outstanding, (b) 30,000 shares of
Preferred Stock were subject to Preferred Stock Purchase Rights ("Rights")
issued pursuant to the Preferred Shares Rights Agreement, dated as of February
4, 1998, between the Company and U.S. Stock Transfer Corporation, as rights
agent (the "Rights Agreement"), (c) Options to purchase an aggregate of
1,628,408 shares
A-5
<PAGE>
of Common Stock were outstanding, 1,628,408 shares of Common Stock were
reserved for issuance upon the exercise of outstanding Options and 430,300
shares were reserved for future grants under the Stock Option Plans, and there
were no stock appreciation rights or limited stock appreciation rights
outstanding other than those attached to such Options, (d) no shares of Common
Stock were held by the Company in its treasury, and (e) no shares of Common
Stock of the Company were held by the Company's Subsidiaries. Except for the
Rights, the Warrants and the Options, the Company has no outstanding bonds,
debentures, notes or other obligations or securities entitling the holders
thereof to vote (or which are convertible into or exercisable for securities
having the right to vote) with the stockholders of the Company on any matter.
The Disclosure Letter sets forth for each Option and Warrant, (i) its exercise
price, (ii) its expiration date, (iii) the first date upon which it becomes
exercisable, and (iv) the number of shares of Common Stock (or the securities)
for which it is exercisable. Since December 31, 1997, the Company (i) has not
issued any shares of Common Stock, (ii) has granted Options to purchase an
aggregate of 487,900 shares of Common Stock under the Stock Option Plans, and
(iii) has not split, combined or reclassified any of its shares of capital
stock. All issued and outstanding shares of Common Stock are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights.
Except for the Rights, the Options and pursuant to the Loan Agreement and
except as set forth in this Section 5.4 or in the Disclosure Letter, there are
no other shares of capital stock of the Company, no securities of the Company
convertible or exchangeable for shares of capital stock or voting securities
of the Company, and no existing options, warrants, calls, subscriptions,
convertible securities, or other rights, agreements or commitments which
obligate the Company or any of its Subsidiaries to issue, transfer or sell any
shares of capital stock of, or equity interests in, the Company or any of its
Subsidiaries. There are no outstanding obligations of the Company or any
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of the Company and, other than outstanding Options, there are no awards
outstanding under the Stock Option Plans or any other outstanding stock-
related awards. After the Effective Time, the Surviving Corporation will have
no obligation to issue, transfer or sell any shares of capital stock of the
Company or the Surviving Corporation pursuant to any Options or any Company
Benefit Plan. Except as set forth in the Disclosure Letter, there are no
voting trusts or other agreements or understandings to which the Company or
any of its Subsidiaries is a party with respect to the voting of capital stock
of the Company or any of its Subsidiaries.
5.5. Subsidiaries. Except as set forth in the Disclosure Letter, (i) the
Company owns, directly or indirectly through a Subsidiary, all of the
outstanding shares of capital stock (or other ownership interests having by
their terms ordinary voting power to elect directors or others performing
similar functions with respect to such Subsidiary) of each of the Company's
Subsidiaries, and (ii) each of the outstanding shares of capital stock of each
of the Company's Subsidiaries (other than O-Sub) is duly authorized, validly
issued, fully paid and nonassessable, and is owned, directly or indirectly, by
the Company free and clear of all liens, pledges, security interests, claims
or other encumbrances ("Encumbrances"). Each of the outstanding shares of
capital stock of O-Sub is duly authorized, validly issued, fully paid and
nonassessable and is owned directly by the Company, free and clear of all
Encumbrances. The Disclosure Letter sets forth for each Subsidiary of the
Company: (i) its name and jurisdiction of incorporation or organization; (ii)
its authorized capital stock or share or equity capital; (iii) the number of
issued and outstanding shares of capital stock or share or equity capital; and
(iv) the holder or holders of such shares. Except for interests in the
Company's Subsidiaries or as set forth in the Disclosure Letter, neither the
Company nor any of its Subsidiaries owns directly or indirectly any interest
or investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or other entity.
5.6. No Violation. Except as set forth in the Disclosure Letter, neither the
execution and delivery by the Company of this Agreement or the Option
Agreement nor the consummation by the Company of the transactions contemplated
hereby or thereby will: (i) violate, conflict with or result in a breach of
any provisions of the Certificate of Incorporation or Bylaws (or comparable
constituent documents) of the Company or any of its Subsidiaries; (ii)
violate, conflict with, result in a breach of any provision of, constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, result in the termination or in a right of
termination of, accelerate the performance required by or benefit obtainable
under, result in the triggering of any payment or other obligations pursuant
to, result in the creation of any Encumbrance upon any of the properties of
the Company or its Subsidiaries (including, without limitations, the assets
subject to the Option
A-6
<PAGE>
Agreement and the shares of O-Sub) under, or result in there being declared
void, voidable, subject to withdrawal, or without further binding effect, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of trust or any license, franchise, Permit, lease, contract, plan,
agreement or other instrument, commitment or obligation to which the Company
or any of its Subsidiaries is a party, by which the Company or any of its
Subsidiaries or any of their respective properties is bound, or under which
the Company or any of its Subsidiaries or any of their respective properties
is entitled to a benefit (each of the foregoing, to the extent the same have
any continuing force or effect, a "Contract" and collectively, "Contracts"),
except for any of the foregoing matters which, individually or in the
aggregate, would not have a Material Adverse Effect, prevent or materially
delay the consummation of the transactions contemplated hereby (a "Material
Delaying Effect") or prevent or materially delay the consummation of the
transactions contemplated by the Option Agreement; (iii) other than the
filings provided for in Section 1.3, the filings required under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Exchange Act"), or filings in connection with the
maintenance of qualification to do business in other jurisdictions (the
filings disclosed in the Disclosure Letter in response to this clause (iii),
the other filings referred to in this clause (iii) and the Other Antitrust
Filings and Consents required or permitted to be made or obtained,
collectively, the "Regulatory Filings"), require any consent, approval or
authorization of, or declaration, filing or registration with, any
Governmental Entity, including any such consent, approval, authorization,
declaration, filing or registration under any Laws of any foreign jurisdiction
relating to antitrust matters or competition ("Foreign Antitrust Laws") or any
other Law of any foreign jurisdiction, except for those consents, approvals,
authorizations, declarations, filings or registrations the failure of which to
obtain or make, individually or in the aggregate, would not have a Material
Adverse Effect or a Material Delaying Effect; or (iv) violate any Laws
applicable to the Company, any of its Subsidiaries or any of their respective
assets, except for violations which, individually or in the aggregate, would
not have a Material Adverse Effect.
5.7. Company Reports; Proxy Statement. (a) The Company has made available to
Purchaser each registration statement, report, proxy statement or information
statement (as defined under the Exchange Act) prepared by it for filing with
the Securities and Exchange Commission (the "SEC") since December 31, 1995,
each in the form (including exhibits and any amendments thereto) filed with
the SEC (collectively, as amended or restated, the "Company Reports"). As of
their respective dates (or the respective dates of the latest amendment
thereto or restatement thereof), the Company Reports and, when filed, the
Pending Reports, (i) complied, or will comply, as to form in all material
respects with the applicable requirements of the Securities Act of 1933, as
amended, and the rules and regulations thereunder (the "Securities Act") and
the Exchange Act and (ii) did not, or will not, contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each of the
consolidated balance sheets of the Company included in or incorporated by
reference into the Company Reports (including the related notes and schedules)
fairly presents the consolidated financial position of the Company and its
consolidated Subsidiaries as of its date, and each of the consolidated
statements of earnings and cash flows of the Company included in or
incorporated by reference into the Company Reports (including any related
notes and schedules) fairly presents the results of operations, earnings or
cash flows, as the case may be, of the Company and its Subsidiaries for the
periods set forth therein, in each case in accordance with generally accepted
accounting principles consistently applied during the periods involved, except
as may be noted therein. The unaudited financial statements of the Company for
the periods ended March 31, 1998 and June 30, 1998 (the "Unaudited 1998
Financial Statements"), previously provided to Merger Sub have been prepared
using the same accounting principles and policies and in a manner consistent
with the financial statements of the Company and its Subsidiaries for the
period ended December 31, 1996 and fairly present the consolidated financial
position of the Company and its consolidated Subsidiaries as of March 31, 1998
and June 30, 1998, respectively, and the consolidated results of their
operations, changes in stockholders' equity and statements of cash flow for
the periods ended March 31, 1998 and June 30, 1998, respectively. Except as
set forth in the Disclosure Letter, neither the Company nor any of its
Subsidiaries has any liabilities or obligations, contingent or otherwise,
except (i) liabilities and obligations in the respective amounts reflected or
reserved against in the Company's consolidated balance sheet as of December
31, 1997,
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included in the Company Reports or (ii) liabilities and obligations incurred
in the ordinary course of business since that date which individually or in
the aggregate would not have a Material Adverse Effect.
(b) The Proxy Statement will comply as to form in all material respects with
the Exchange Act and, at the respective times filed with the SEC or first
published, sent or distributed to the stockholders of the Company, will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, that the Company makes no representation or warranty
as to any information included in the Proxy Statement that was provided by
Purchaser or Merger Sub. If at any time prior to the Closing Date the Company
shall obtain knowledge of any facts with respect to itself, any of its
officers and directors or any of its Subsidiaries that would require the
supplement or amendment to any of the foregoing documents in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or to comply with applicable Laws, such amendment or
supplement shall be promptly filed with the SEC and, as required by Law,
disseminated to the stockholders of the Company, and in the event Purchaser
shall advise the Company as to its obtaining knowledge of any facts that would
make it necessary to supplement or amend the Proxy Statement, the Company
shall promptly amend or supplement such document as required and distribute
the same to its stockholders.
5.8. Litigation. Except as set forth in the Disclosure Letter, there are no
claims, actions, suits, proceedings, arbitrations, investigations or audits
(collectively, "Litigation") by a third party (including a Governmental
Entity) pending or, to the knowledge of the Company, threatened against the
Company or any of its Subsidiaries, other than those which, individually or in
the aggregate, would not have a Material Adverse Effect. Except as set forth
in the Disclosure Letter, no Governmental Entity has indicated an intention to
conduct any audit, investigation or other review with respect to the Company
or any of its Subsidiaries. No Person has notified the Company that it or any
other Person intends to terminate, renegotiate or otherwise modify or object
to the settlement (the "Settlement"), reached on August 18, 1998, the terms of
which are identical in all material respects to the Memorandum of
Understanding ("MOU") attached hereto as Exhibit I (with the changes
specifically set forth in the Disclosure Schedule), with respect to the In re
Raster Graphics Securities Litigation, No. C-980807-FMS pending in the United
States District Court for the Northern District of California and Ginter, et
al. v. Raster Graphics, Inc. et al., Civil No. CV 772401 pending in Santa
Clara Superior Court (collectively, the "Settlement Litigation"), and to the
knowledge of the Company, there is no reason that the Settlement will not be
timely approved by the appropriate courts of competent jurisdiction in
substantially the form described in the MOU. The aggregate amount of damages
and costs (including legal fees) that the Company will incur as a result of
the final disposition of the Litigation described in the second and fourth
paragraphs of Schedule 5.8 of the Disclosure Letter shall not exceed $400,000.
5.9. Absence of Certain Changes. Except as set forth in the Disclosure
Letter, since December 31, 1996, the Company and its Subsidiaries have
conducted their business only in the ordinary course of such business
consistent with past practices, and there has not been (i) any Material
Adverse Effect suffered by the Company or any of its Subsidiaries; (ii) any
declaration, setting aside or payment of any dividend or other distribution
with respect to the capital stock of the Company or its Subsidiaries (other
than wholly-owned Subsidiaries) or any repurchase, redemption or any other
acquisition by the Company or its Subsidiaries of any outstanding shares of
capital stock or other securities of, or other ownership interests in, the
Company or its Subsidiaries; (iii) any change in accounting principles,
practices or methods; (iv) any entry into or amendment of any employment
agreement with, or any increase in the rate or terms (including, without
limitation, any acceleration of the right to receive payment) of compensation
payable or to become payable by the Company or any of its Subsidiaries to,
their respective directors, officers or employees, except increases in the
ordinary course of business in accordance with the past practice of the
Company; (v) any entry into or amendment of any increase in the rate or terms
(including, without limitation, any acceleration of the right to receive
payment) of any bonus, insurance, pension or other employee benefit plan or
arrangement covering any such directors, officers or employees, except
increases in the ordinary course of business in accordance with the past
practice of the Company; (vi) any revaluation by the Company or any of its
Subsidiaries of any of their respective assets, including, without limitation,
write-downs of inventory or write-offs of accounts receivable; (vii) any
transaction or commitment
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made by the Company or any of its Subsidiaries to buy or sell any assets that
are or would be material to the Company's business; or (viii) any other
transaction or event that, had it occurred after the date of this Agreement,
would constitute a breach of the covenant contained in Section 7.2(b).
5.10. Taxes. Except as set forth in the Disclosure Letter:
(a) Each of the Company and its Subsidiaries has timely filed (subject to
extensions) all U.S. federal income Tax Returns and all other material Tax
Returns required to be filed by it, and has duly paid or caused to be paid on
its behalf all Taxes shown to be due on such returns or otherwise due and
payable. Such Tax Returns of the Company and the Subsidiaries are true and
complete in all material respects, except where failure to be so true or
complete would not have a Material Adverse Effect. The most recent
consolidated financial statements contained in the Company Reports reflect an
adequate reserve in accordance with generally accepted accounting principles
for all Taxes payable by the Company and its Subsidiaries for all taxable
periods and portions thereof through the date of such financial statements.
(b) No material deficiencies for any Taxes have been proposed, asserted or
assessed against the Company or any of the Subsidiaries that have not been
fully paid or adequately provided for in the appropriate financial statements
of the Company and its Subsidiaries, no waivers of the time to assess any
Taxes are outstanding, and no power of attorney granted by the Company or any
Subsidiary with respect to any Taxes is currently in force. No material issues
relating to Taxes have been raised in writing by any governmental authority
during any presently pending audit or examination.
(c) There are no material Encumbrances for Taxes on any of the assets of the
Company or the Subsidiaries or the shares of O-Sub (other than for current
taxes not yet due and payable).
(d) The Company and the Subsidiaries have complied in all material respects
with all applicable laws, rules and regulations relating to the payment and
withholding of Taxes.
(e) None of the Company or the Subsidiaries has filed a consent under
Section 341(f) of the Code.
(f) None of the Company or the Subsidiaries is a party to any agreement that
could obligate it to make any payments that would not be deductible by reason
of Section 280G of the Code.
(g) Neither the Company nor, since the date of its acquisition by the
Company, any Subsidiary is a party to any tax allocation, tax sharing
agreement, any closing agreement or similar agreement relating to Taxes.
(h) No U.S. federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any U.S.
federal income or material state, local or foreign Taxes or Tax Returns of the
Company or any of the Subsidiaries and neither the Company nor any of the
Subsidiaries has received a written notice of any pending audit or proceeding.
(i) Neither the Company nor, since the date of its acquisition by the
Company, any Subsidiary has agreed to or is required to make any material
adjustment under Section 481(a) of the Code.
(j) The Company has not been (and will not be) a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code during
the 5-year period ending at the Effective Time.
(k) The statute of limitations with respect to the U.S. federal income tax
liability of the Company has expired with respect to the year 1993 and all
earlier years.
(l) For the purpose of this Agreement, (A) the terms "Tax" or "Taxes" shall
mean all taxes, fees, duties, tariffs, levies, imposts, or other charges of
any kind (together with any interest, penalties, additions to tax or
additional amounts imposed by any taxing authority with respect thereto),
including, without limitation, taxes or other charges on or with respect to
income, franchise, gross receipts, property, sales, use, profits, capital
stock,
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payroll, employment, social security, workers compensation, unemployment
compensation or net worth, taxes or charges in the nature of excise,
withholding, ad valorem, stamp, transfer, value added or gains taxes; license
registration and documentation fees; and customs duties, tariffs and similar
charges of any kind whatsoever, and (B) the term "Tax Return" shall mean any
report, return, document, declaration or any other information or filing
required to be supplied to any taxing authority with respect to Taxes.
5.11. Employee Benefit Plans. All employee benefit plans and other benefit
arrangements covering employees of the Company or any of its Subsidiaries or
to which the Company or any of its Subsidiaries are required to contribute
(the "Company Benefit Plans") and all employee agreements providing
compensation, severance, retention, change in control or other benefits to any
employee or former employee of the Company or any of its Subsidiaries, other
than agreements which have been satisfied in full (the "Employee Agreements")
are set forth in the Disclosure Letter. True and complete copies of (1) the
Company Benefit Plans and any related agreement, (2) the most recent annual
report and actuarial valuation (if applicable), and (3) the Employee
Agreements have been made available to Purchaser. Any Company Benefit Plan
intended to be qualified under Section 401(a) of the Code has received a
determination letter and, to the knowledge of the Company, continues to
satisfy the requirements for such qualification. No Company Benefit Plan nor
the Company nor any Subsidiary has incurred any material liability or penalty
under Section 4975 of the Code or Section 502(i) of ERISA or engaged in any
transaction that is reasonably likely to result in any such material liability
or penalty. Each Company Benefit Plan that the Company does not maintain and
administer has been maintained and administered in compliance in all material
respects with its terms and with ERISA and the Code to the extent applicable
thereto, and to the knowledge of the Company, each other Company Benefit Plan
has been maintained and administered in compliance in all material respects
with its terms and with ERISA and the Code to the extent applicable thereto.
There is no pending or, to the knowledge of the Company, threatened Litigation
against or otherwise involving any of the Company Benefit Plans and no
Litigation has been brought against or with respect to any such Company
Benefit Plan, except for any of the foregoing which, individually or in the
aggregate, would not have a Material Adverse Effect. Except as set forth in
the Disclosure Letter, neither the Company nor any of its Subsidiaries has any
current or expected liability with respect to any Company Benefit Plan that is
not fully reflected in the materials delivered to Purchaser as described above
nor is any asset of the Company nor any of its Subsidiaries subject to any
lien under Code section 401(a)(29), ERISA section 302(f) or Code section
412(n), ERISA section 4068 or arising out of any action filed under ERISA
section 4301(b). Neither the Company nor any of its Subsidiaries that is, or
has been treated as a "single employer" together with the Company under
section 414(b), 414(c) or 414(m) of the Code, has incurred any liability which
can subject any of the parties to this Agreement to material liability under
section 4062, 4063 or 4064 of ERISA. Neither the Company nor any of its
Subsidiaries is required to contribute to any multi-employer plan within the
meaning of section 4001(a)(3) of ERISA. Neither the Company nor any of its
Subsidiaries has incurred any withdrawal liability within the meaning of
section 4201 of ERISA. Except as described in the Company Reports, neither the
Company nor any of its Subsidiaries maintains or contributes to any plan or
arrangement which provides or has any liability to provide life insurance or
medical or other employee welfare benefits to any employee or former employee
upon his or her retirement or termination of employment, and neither the
Company nor any of its Subsidiaries has ever represented, promised or
contracted (whether in oral or written form) to any employee or former
employee that such benefits would be provided. Except as set forth in the
Disclosure Letter, (i) the execution of, and performance of the transactions
contemplated in, this Agreement will not (either alone or upon the occurrence
of any additional or subsequent events) constitute an event under any benefit
plan, policy, arrangement or agreement or any trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee and (ii) no payment
or benefit which will or may be made by the Company, any of its Subsidiaries,
or Purchaser or Merger Sub with respect to any employee will constitute an
"excess parachute payment" within the meaning of Section 280G(b)(1) of the
Code.
5.12. Labor and Employment Matters. Except as set forth in the Disclosure
Letter, (a) neither the Company nor any of its Subsidiaries is a party to, or
bound by, any collective bargaining agreement or other Contracts or
understanding with a labor union or labor organization; and (b) except as
would not, individually or
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in the aggregate, have a Material Adverse Effect, there is no (i) unfair labor
practice, labor dispute (other than routine individual grievances) or labor
arbitration proceeding pending or, to the knowledge of the Company, threatened
against the Company or its Subsidiaries, (ii) activity or proceeding by a
labor union or representative thereof to organize any employees of the Company
or any of its Subsidiaries, or (iii) lockouts, strikes, slowdowns, work
stoppages or threats thereof by or with respect to such employees. The Company
and its Subsidiaries each is in compliance with all Laws regarding employment,
employment practices, terms and conditions of employment and wages, except for
such noncompliance which, individually or in the aggregate, would not have a
Material Adverse Effect.
5.13. Brokers and Finders. Except for Hambrecht and Quist pursuant to an
engagement letter, a true and complete copy of which has previously been
delivered to Purchaser, no broker, dealer or financial advisor is entitled to
receive from the Company or any of its Subsidiaries any broker's, finder's or
investment banking fee in connection with this Agreement or the transactions
contemplated hereby.
5.14. Fairness Opinion. The Company has received the opinion (the "Fairness
Opinion") of Hambrecht and Quist to the effect that, as of the date of this
Agreement, the terms of the Merger and the Merger Consideration are fair from
a financial point of view to the holders of Common Stock. The Company has been
authorized by Hambrecht and Quist to permit the inclusion of the Fairness
Opinion and references thereto, subject to prior review and consent by
Hambrecht and Quist (such consent not to be unreasonably withheld or delayed),
in the Proxy Statement.
5.15. Licenses and Permits. Except as set forth in the Disclosure Letter,
the Company and its Subsidiaries have, and/or have caused to be maintained,
all necessary licenses, permits, certificates of need, approvals and
authorizations (collectively, "Permits") from all Governmental Entities
required to lawfully conduct their respective businesses as presently
conducted, except for those Permits the lack of which, individually or in the
aggregate, would not have a Material Adverse Effect, and (a) no Permit is
subject to revocation or forfeiture by virtue of any existing circumstances,
(b) there is no Litigation pending or, to the knowledge of the Company,
threatened to modify or revoke any Permit, and (c) no Permit is subject to any
outstanding order, decree, judgment, stipulation, or investigation that would
be likely to affect such Permit, except for instances of any of the foregoing
items (a) through (c) which, individually or in the aggregate, would not have
a Material Adverse Effect.
5.16. Environmental Matters. (a) Except as set forth in the Disclosure
Letter, the Company and each of its Subsidiaries' operation and use of its
assets, including its owned and leased real property, are in compliance in all
respects with all applicable Laws relating to the protection of human health
or the environment ("Environmental Laws"), except to the extent that any such
noncompliance would not have a Material Adverse Effect on the Company. The
Company and each of its Subsidiaries have obtained all environmental, health
and safety permits necessary for the operation of its respective business as
presently conducted, and all such permits are in full force and effect and the
Company and each of its Subsidiaries are in compliance in all respects with
the terms and conditions of each such permit, except, in each case, to the
extent that any such noncompliance would not have a Material Adverse Effect on
the Company. Except as set forth in the Disclosure Letter, neither the Company
nor any of its Subsidiaries has received any notice of, nor is there, any
administrative or judicial investigation, proceeding or action with respect to
any material violation, alleged or proven, of Environmental Laws by the
Company or any of its subsidiaries or otherwise involving its owned or leased
real property.
(b) Except as set forth in the Disclosure Letter, none of the Company or any
of its Subsidiaries has taken or failed to take any action that has resulted
in or will result in any liability or obligation relating to (x) the
environmental conditions on, under, or about the assets of the Company or any
of its Subsidiaries or any of their respective owned or leased real property,
or any properties owned, leased, operated or used by the Company or any of its
Subsidiaries or any predecessor of the Company or any of its Subsidiaries at
the present time or in the past, including, without limitation, the air, soil
and groundwater conditions at such properties or (y) the past or present use,
management, handling, transport, treatment, generation, storage, disposal or
release of any
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Hazardous Substances, except in the case of clauses (x) and (y) above, to the
extent such liability or obligation would not have a Material Adverse Effect.
"Hazardous Substances" means asbestos-containing material and any and all
hazardous or toxic substances, materials or wastes as defined or listed under
the Resource Conservation and Recovery Act, the Toxic Substances Control Act,
the Comprehensive Environmental Response, Compensation and Liability Act or
any comparable state statute or any regulation promulgated under any of such
federal or state statutes.
5.17. Material Contracts. The Disclosure Letter sets forth a list as of the
date hereof of all (i) Contracts for borrowed money or guarantees thereof,
other than Contracts entered into in the ordinary course of business
consistent with the past practice of the Company involving less than $25,000
individually or $250,000 in the aggregate or Contracts between the Company and
any of its wholly owned Subsidiaries or between any of the Company's wholly
owned Subsidiaries, (ii) Contracts involving any rate swap transaction, basis
swap, forward rate transaction, commodity swap, commodity option, equity or
equity index swap, equity or equity index option, bond option, interest rate
option, foreign exchange transaction, cap transaction, floor transaction,
collar transaction, currency swap transaction, cross-currency rate swap
transaction, currency option or any other similar transaction (including any
option with respect to any of these transactions), or any combination of these
transactions (each a "Derivative" and collectively, "Derivatives"), other than
Derivatives entered into in the ordinary course of business consistent with
the past practice of the Company and with the Company's policies regarding
Derivatives as previously disclosed to Purchaser, (iii) Contracts containing
covenants by the Company or any Subsidiary restricting its ability or the
ability of any of the affiliates of the Company or any of its Subsidiaries to
engage in any line of business, (iv) Contracts to purchase materials, supplies
or other assets, other than purchase orders entered into in the ordinary
course of business consistent with the past practice of the Company and other
Contracts involving obligations of less than $25,000 individually and $250,000
in the aggregate, (v) Contracts to purchase or acquire advertising or other
product promotion or brand support other than spot orders purchased in the
ordinary course of business or involving commitments by the Company of less
than $25,000, (vi) Contracts with distributors, brokers or sales agents for
the distribution of the products of the Company, other than Contracts
involving or likely to involve payments of less than $200,000 per year,
(vii) Contracts entered into by the Company since January 1, 1993 and in which
the Company's surviving liability (including indemnities) could reasonably be
expected to exceed $100,000 and involving the sale or other disposition by the
Company of one or more business units, divisions or entities (including former
Subsidiaries), (viii) Contracts involving the investment, including by way of
capital contribution, loan or advance, by the Company or any of its
Subsidiaries of more than $25,000 in any other person, firm or entity (other
than wholly-owned Subsidiaries), other than investments no longer owned by the
Company or its Subsidiaries, (ix) promotion Contracts in the United States
with the Company's ten largest customers having a term of longer than three
(3) months, and (x) other Contracts under which the obligation of the Company
and its Subsidiaries is $100,000 or more or are otherwise material to the
business of the Company and its Subsidiaries, taken as a whole (all Contracts
described in each of the categories (i) through (x) above, "Material
Contracts"). All Contracts to which the Company or any of its Subsidiaries is
a party or by which any of their respective assets are bound are valid and
binding, in full force and effect and enforceable against the parties thereto
in accordance with their respective terms, except where the failure to be so
valid and binding, in full force and effect or enforceable would not
individually or in the aggregate have a Material Adverse Effect. There is not
under any such Contract, any existing default, or event, which after notice or
lapse of time, or both, would constitute a default, by the Company or any of
its Subsidiaries, or to the knowledge of the Company, any other party, other
than any such defaults or events which, individually or in the aggregate,
would not have a Material Adverse Effect.
5.18. Intellectual Property; Technology.
(a) The Disclosure Letter sets forth a complete and correct list of all
Intellectual Property that is owned by the Company or any Subsidiary (the
"Company-Owned Intellectual Property"), provided that Company-Owned
Intellectual Property shall include, but the Disclosure Letter need not set
forth, inventions, processes, formulae, trade secrets, know-how or
confidential information that are not reduced to tangible form or that are not
susceptible to legal protection by filing or registration with any
Governmental Entity.
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(b) Except as set forth in the Disclosure Letter, all the Intellectual
Property used by the Company or any Subsidiary or held by it for future use in
connection with, necessary for the conduct of or otherwise material to the
operation of the business of the Company (the "Company Intellectual
Property"), is owned by the Company or such Subsidiary. Except as set forth in
the Disclosure Letter, the Company or a Subsidiary has the exclusive right to
use the Company Intellectual Property for the life thereof for the purpose or
purposes for which it is being used or intended to be used, free from (i) any
Encumbrances and (ii) any requirement of royalty payments, obligations,
license fees, charges or other payments, or material conditions or
restrictions whatsoever. Immediately after the Effective Time, the Surviving
Corporation shall own or have licensed to it all the Company Intellectual
Property, in each case free from Encumbrances and on the same terms and
conditions as in effect prior to the Effective Date.
(c) There is no Company Intellectual Property that the Company does not
either own or have the right to use.
(d) The Disclosure Letter sets forth all written or oral agreements and
arrangements (i) pursuant to which the Company or a Subsidiary has licensed
Intellectual Property to, or the use of Intellectual Property is otherwise
permitted (through non-assertion, settlement or similar agreements or
otherwise) with respect to, any other Person, and (ii) pursuant to which the
Company or a Subsidiary has had Intellectual Property licensed to it, or has
otherwise been permitted to use Intellectual Property (through non-assertion,
settlement or similar agreements or otherwise). All of the agreements and
arrangements set forth in the Disclosure Letter: (i) are in full force and
effect and enforceable in accordance with their terms, and no default exists
or is threatened thereunder by the Company or a Subsidiary or any other
Person, (ii) license or permit that which they purport to license or permit,
(iii) are free and clear of all Encumbrances, and (iv) do not contain any
change in control or other terms or conditions that will become applicable or
inapplicable as a result of the consummation of the transactions contemplated
by this Agreement or the Option Agreement.
(e) The conduct of the business of the Company and the Subsidiaries does not
infringe any Intellectual Property or other rights of any Person. None of the
Company Intellectual Property is being infringed, misappropriated or otherwise
used or available for use by any Person without written authority from the
Company, except as set forth in the Disclosure Letter.
(f) No claim or demand of any Person has been made or, to the knowledge of
the Company, threatened, nor is there any litigation that is pending or, to
the knowledge of the Company, threatened, that (i) challenges the rights of
the Company in respect of any Company Intellectual Property, (ii) asserts that
the Company is infringing or otherwise in conflict with, or is (except as set
forth in the Disclosure Letter) required to pay any royalty, license fee,
charge or other amount with regard to, any Company Intellectual Property, or
(iii) claims that any default exists under any agreement or arrangement set
forth or required to be disclosed in the Disclosure Letter. None of the
Company Intellectual Property is subject to any material outstanding order,
ruling, decree, judgment or stipulation by or with any court, tribunal,
arbitrator or other Governmental Entity.
(g) The Company-Owned Intellectual Property has been duly registered with,
filed in or issued by, as the case may be, the United States Patent and
Trademark Office, the United States Copyright Office or other filing offices,
domestic or foreign, to the extent necessary or desirable to ensure full
protection under any applicable Laws. The Disclosure Letter sets forth a
complete list of such Company-Owned Intellectual Property that is registered
with, filed in or issued by, as the case may be, the United States Patent and
Trademark Office, the United States Copyright Office or other filing offices,
domestic or foreign, and such registrations, filings, issuances and other
actions remain in full force and effect. Except as set forth in the Disclosure
Letter, the Company and its Subsidiaries have taken all necessary actions to
ensure full protection of the Company Intellectual Property under any
applicable Law.
(h) The Company or a Subsidiary has valid licenses to all copies of all
Software that it utilizes in connection with the conduct of its business and
that it does not own ("Commercial Software"), and the use by the Company or
such Subsidiary of such Commercial Software, including without limitation all
modifications and enhancements thereto (whether created by the Company or by a
third party) is in full compliance with the terms
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and provisions of such licenses. The Company or such Subsidiary owns all
right, title and interest in and to all Software marketed or licensed by it to
its customers or held for use or in development for marketing and licensing to
its customers (collectively, the "Company Software"), including but not
limited to all Intellectual Property rights therein and thereto, except for
Commercial Software identified in the Disclosure Letter as Software
incorporated into the Company Software. Set forth in the Disclosure Letter is
a full and complete list of (i) the Company Software and (ii) all Commercial
Software utilized by the Company or a Subsidiary in connection with the
conduct of its business. None of the Commercial Software or Company Software,
and no use thereof by the Company or permitted use by its licensees, infringes
upon or violates any patent, copyright, trade secret or other Intellectual
Property right of any person or entity, and no claim or demand with respect to
any such infringement or violation has been made or, to the best knowledge of
the Company, threatened. There are no defects in the Company Software that
would prevent such Software from performing in all material respects the tasks
and functions that it was intended to perform except those which can be cured
without a Material Adverse Effect.
(i) The Company has conducted an inventory of all (i) Company Software and
(ii) Software owned or licensed by it as well as the hardware and embedded
microcontrollers in non-computer equipment used by the Company in connection
with, necessary for or otherwise material to the operation of its business
(collectively, the "Computer Systems") in order to determine which parts of
the Computer Systems are not Year 2000 Compatible and to estimate the cost of
rendering such Computer Systems Year 2000 Compatible prior to January 1, 2000.
Based on the above-referenced inventory, the Company represents and warrants
that the Computer Systems are either Year 2000 Compatible or will be Year 2000
Compatible prior to July 1, 1999; the estimated cost of rendering the Computer
Systems Year 2000 Compatible is $50,000, of which $50,000 has been or will be
incurred by the Company. "Year 2000 Compatible" means that the Computer
Systems to the extent required for their particular use (x) correctly perform
date data century recognition, and calculations that accommodate same century
and multi-century formulas and date values; (y) operate or are expected to
operate on a basis comparable to their current operation during and after
calendar year 2000 A.D., including but not limited to leap years; and (z)
shall not end abnormally or provide invalid or incorrect results as a result
of date data which represents or references different centuries or more than
one century.
(j) "Intellectual Property" means the United States and foreign trademarks,
service marks, trade names, trade dress, copyrights, and similar rights,
including registrations and applications to register or renew the registration
of any of the foregoing, the United States and foreign letters patent and
patent applications, inventions, processes, designs, formulae, trade secrets,
know-how, confidential information, Software, data and documentation, and all
similar intellectual property rights, tangible embodiments of any of the
foregoing (in any form or medium including electronic media), and licenses of
any of the foregoing.
(k) "Software" means all computer programs, including all source code and
object code versions thereof, in any and all forms and media, whether recorded
on paper, magnetic media or other electronic or non-electronic media
(including data and all related documentation, user manuals, training
materials, flow charts, diagrams, descriptive tests and programs, computer
print-outs, underlying tapes, computer databases and similar items) and
computer applications and operating programs.
5.19. Required Vote of Company Stockholders. Unless the Merger may be
consummated in accordance with Section 253 of the DGCL, the only vote of the
stockholders of the Company required to adopt this Agreement and approve the
Merger is the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock (the "Company Stockholder Approval"). No greater or
other vote of the stockholders of the Company is required by Law or the
Certificate of Incorporation or Bylaws of the Company to adopt this Agreement
and the Option Agreement and to approve the Merger and the transactions
contemplated by the Option Agreement.
5.20. State Statutes. The Board of Directors has approved the Merger, this
Agreement, the Option Agreement, the Loan Agreement and the Stockholders
Agreement, and such approval is sufficient to render inapplicable to the
Merger, this Agreement, the Option Agreement, the Loan Agreement, the
Stockholders
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Agreement and the transactions contemplated by this Agreement, the Option
Agreement, the Loan Agreement and the Stockholders Agreement, the provisions
of Section 203 of the DGCL to the extent, if any, such Section is applicable
to the Merger, this Agreement, the Option Agreement, the Loan Agreement, the
Stockholders Agreement and the transactions contemplated by this Agreement,
the Option Agreement, the Loan Agreement and the Stockholders Agreement. To
the knowledge of the Company, no other state takeover statute or similar
statute or regulation applies or purports to apply to the Merger, this
Agreement, the Option Agreement, the Loan Agreement the Stockholders Agreement
or the transactions contemplated by this Agreement, the Option Agreement, the
Loan Agreement or the Stockholders Agreement. The provisions of Section 2115
of the California General Corporation Law do not and shall not apply to the
Company, the Merger or the transactions contemplated by this Agreement, the
Option Agreement, the Loan Agreement or the Stockholders Agreement.
5.21. Disclosures. This Agreement and the Disclosure Letter furnished by the
Company or any of its Subsidiaries pursuant hereto, taken as a whole, do not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements contained herein, in light of the circumstances under which they
were made, not misleading.
ARTICLE 6
Representations and Warranties of Purchaser and Merger Sub
Purchaser and Merger Sub hereby jointly and severally represent and warrant
to the Company as of the date hereof and as of the Effective Time as follows:
6.1. Existence; Good Standing; Corporate Authority. Each of Purchaser and
Merger Sub is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation.
6.2. Authorization, Validity and Effect of Agreements. Each of Purchaser and
Merger Sub has the requisite corporate power and authority to execute and
deliver this Agreement and the Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Option Agreement and the consummation by Purchaser and
Merger Sub of the transactions contemplated hereby and thereby have been duly
and validly authorized by the respective Boards of Directors of Purchaser and
Merger Sub, as applicable, and by Purchaser as the sole stockholder of Merger
Sub, and no other corporate proceedings on the part of Purchaser or Merger Sub
are necessary to authorize this Agreement or the Option Agreement or to
consummate the transactions contemplated hereby or thereby. Each of this
Agreement and the Option Agreement has been duly and validly executed and
delivered by Purchaser and Merger Sub, and (assuming this Agreement and the
Option Agreement each constitutes a valid and binding obligation of the
Company) constitutes the valid and binding obligation of each of Purchaser and
Merger Sub, enforceable against Purchaser and Merger Sub in accordance with
their respective terms.
6.3. Proxy Statement. None of the information supplied by Purchaser or
Merger Sub for inclusion in the Proxy Statement, at the respective times filed
with the SEC and distributed to stockholders of the Company, will contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
6.4. No Violation. Neither the execution and delivery of this Agreement or
the Option Agreement by Purchaser and Merger Sub nor the consummation by them
of the transactions contemplated hereby or thereby will (i) violate, conflict
with or result in any breach of any provision of the Certificate of
Incorporation or Bylaws of Merger Sub or Purchaser, in each as amended; (ii)
other than the Regulatory Filings and pursuant to the Foreign Antitrust Laws,
require any consent, approval or authorization of, or declaration, filing or
registration with, any Governmental Entity, the lack of which, individually or
in the aggregate, would have a material adverse effect on the ability of
Purchaser or Merger Sub to consummate the transactions contemplated hereby;
and (iii) violate any Laws applicable to Purchaser or Merger Sub or any of
their respective assets, except for
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violations which, individually or in the aggregate, would not have a material
adverse effect on the ability of Purchaser or Merger Sub to consummate the
transactions contemplated hereby.
6.5. Financing. At the Effective Time, Purchaser will cause Merger Sub to
have funds available to it sufficient to consummate the Merger on the terms
contemplated hereby.
6.6. Brokers and Finders. No actions by Purchaser or Merger Sub or by anyone
acting on behalf of either of them has given rise to any valid claim against
the Company for any broker's, finder's or investment banking fee in connection
with this Agreement or the transactions contemplated hereby.
ARTICLE 7
Covenants
7.1. No Solicitation. (a) The Company and its Subsidiaries shall, and shall
direct and use reasonable efforts to cause their respective officers,
directors or employees, or any investment banker, financial advisor, attorney,
accountant or other representative to, immediately cease any discussions or
negotiations with any parties other than the Purchaser and Merger Sub that may
be ongoing with respect to an Acquisition Proposal. The Company and its
Subsidiaries shall not, and shall not authorize or permit any of their
respective officers, directors or employees or any investment banker,
financial advisor, attorney, accountant or other representative retained by it
to, directly or indirectly, (i) solicit, initiate or encourage (including by
way of furnishing non-public information), or take any other action to
facilitate, any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, an Acquisition Proposal or (ii)
participate in any discussions or negotiations regarding an Acquisition
Proposal; provided, however, that if, at any time prior to the adoption of
this Agreement by the holders of Common Stock, the Board of Directors of the
Company determines in good faith, based on the advice of outside counsel, that
failure to do so would constitute a breach of its fiduciary duties to the
Company's stockholders under applicable law, the Company, in response to an
Acquisition Proposal that (I) was unsolicited or that did not otherwise result
from a breach of this Section 7.1(a), and subject to compliance with Section
7.1(c), and (II) constitutes a Superior Proposal, may (x) furnish non-public
information with respect to the Company and its Subsidiaries to the person who
made such Acquisition Proposal pursuant to a customary and reasonable
confidentiality agreement and (y) participate in negotiations regarding such
Acquisition Proposal. Without limiting the foregoing, it is understood that
any violation of the restrictions set forth in the preceding sentence by any
director or officer of the Company or any of its Subsidiaries or any
investment banker, financial advisor, attorney, accountant or other
representative of the Company or any of its Subsidiaries, acting on behalf of
the Company or any of its Subsidiaries, shall be deemed to be a breach of this
Section 7.1(a) by the Company. For purposes of this Agreement, "Acquisition
Proposal" means any proposal or offer from any person relating to any direct
or indirect acquisition or purchase of 10% or more of the assets of the
Company or any of its Subsidiaries or any shares of any class of outstanding
equity securities of the Company or any of its Subsidiaries, any tender offer
or exchange offer that if consummated would result in any person beneficially
owning 10% or more of any class of equity securities of the Company or any of
its Subsidiaries or any merger, consolidation, business combination, sale of
substantially all the assets, recapitalization, liquidation, dissolution or
similar transaction involving the Company or any of its Subsidiaries, other
than the transactions contemplated by this Agreement. For purposes of this
Agreement, a "Superior Proposal" means any bona fide proposal made by a third
party to acquire, directly or indirectly, for consideration consisting of cash
and/or securities, 100% of the voting power of the Common Stock of or all or
substantially all the assets of the Company and its Subsidiaries and otherwise
on terms which the Board of Directors determines in good faith (based on the
written opinion of a financial advisor of nationally recognized standing
(which opinion shall be provided to the Purchaser)) to be more favorable to
the Company's stockholders than the Merger and for which financing, to the
extent required by the terms of such proposal, is then committed or which, in
the good faith judgment of the Board of Directors, is reasonably capable of
being obtained by such third party.
(b) Neither the Board of Directors nor any committee thereof shall (i)
withdraw or modify, or propose to withdraw or modify, in a manner adverse to
Purchaser, the approval or recommendation by such Board of
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Directors or such committee of this Agreement or the Merger unless there is a
Superior Proposal outstanding, (ii) approve or recommend, or propose to
approve or recommend, an Acquisition Proposal unless such Acquisition Proposal
is a Superior Proposal or (iii) cause the Company to enter into any letter of
intent, agreement in principle, acquisition agreement or other agreement (an
"Acquisition Agreement") with respect to an Acquisition Proposal unless such
Acquisition Proposal is a Superior Proposal, and unless, in each case, the
Board of Directors shall have (x) determined in good faith, based on the
advice of outside counsel, that failure to do so would constitute a breach of
its fiduciary duties to the Company's stockholders under applicable law, and
(y) terminated this Agreement pursuant to Section 9.1(c)(ii).
(c) The Company shall promptly (but in any event within one day) advise the
Purchaser orally and in writing of any Acquisition Proposal or any inquiry
regarding the making of an Acquisition Proposal including any request for
information, the material terms and conditions of such request, Acquisition
Proposal or inquiry and the identity of the person making such request,
Acquisition Proposal or inquiry. The Company will, to the extent reasonably
practicable, keep the Purchaser fully informed of the status and details
(including amendments or proposed amendments) of any such request, Acquisition
Proposal or inquiry.
(d) Nothing contained in this Section 7.1 shall prohibit the Company from at
any time taking and disclosing to its stockholders a position contemplated by
Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure
to the Company's stockholders if, in the good faith judgment of the Board of
Directors, based upon the advice of outside counsel, failure so to disclose
would constitute a breach of its fiduciary duties to the Company's
stockholders under applicable law; provided, however, neither the Company nor
its Board of Directors nor any committee thereof shall, except as permitted by
Section 7.1(b), withdraw or modify, or propose to withdraw or modify, its
position with respect to the Merger or this Agreement or approve or recommend,
or propose to approve or recommend, an Acquisition Proposal; provided,
further, that the taking of a position by the Company pursuant to Rule 14e-
2(a)(2) or (3) of the Exchange Act in respect of an Acquisition Proposal shall
not be deemed a withdrawal, a modification or a proposal to do either, of its
position with respect to the Merger for purposes hereof.
7.2. Interim Operations.
(a) From the date of this Agreement to the Effective Time, except as set
forth in the Disclosure Letter or as otherwise required pursuant to this
Agreement, unless Purchaser has consented in writing thereto, the Company
shall, and shall cause each of its Subsidiaries to:
(i) conduct its operations according to its usual, regular and ordinary
course of business consistent with past practice;
(ii) use its reasonable best efforts to preserve intact their business
organizations and goodwill, to maintain in effect all existing
qualifications, licenses, Permits, approvals and other authorizations
referred to in Sections 5.1 and 5.15, to keep available the services of
their officers and employees and to maintain, to the extent reasonably
possible given the Company's current cash position and loan from Purchaser,
satisfactory relationships with customers, suppliers, distributors,
brokers, sales agents and all other persons having business relationships
with them, including through the payment of additional compensation
reasonably acceptable to Purchaser to such distributors, brokers and sales
agents reasonably calculated to maintain at least the current level of
merchandising, distribution and shelving;
(iii) promptly notify Purchaser upon becoming aware of any material
breach of any representation, warranty or covenant contained in this
Agreement or the occurrence of any event that would cause any
representation, warranty or covenant contained in this Agreement no longer
to be true and correct in all material respects;
(iv) promptly deliver to Purchaser true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement (including the Pending Reports) and any internal monthly reports
prepared for or delivered to the Board of Directors after the date hereof;
and
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(v) deliver, within 20 business days after the end of each accounting
month, monthly consolidated financial statements, in the same format as
heretofore furnished to Purchaser, for the Company and its Subsidiaries for
and as of the end of each such month.
(b) From the date of this Agreement to the Effective Time, except as set
forth in the Disclosure Letter, unless Purchaser has consented in writing
thereto, the Company shall not, and shall not permit any of its Subsidiaries
to:
(i) amend its Certificate of Incorporation or Bylaws or comparable
governing instruments;
(ii) except with respect to the Option Agreement, the Loan Agreement or
the issuance in the aggregate of 20,000 shares of Common Stock in the
ordinary course of business consistent with the past practice of the
Company, issue, sell, pledge or otherwise dispose of any shares of its
capital stock or other ownership interest in the Company (other than
issuances of Common Stock in respect of any exercise of Options outstanding
on the date hereof and disclosed in the Disclosure Letter) or any of the
Subsidiaries, or any securities convertible into or exchangeable for any
such shares or ownership interest, or any rights, warrants or options to
acquire or with respect to any such shares of capital stock, ownership
interest, or convertible or exchangeable securities; or accelerate any
right to convert or exchange or acquire any securities of the Company or
any of its Subsidiaries for any such shares or ownership interest;
(iii) effect any stock split, reverse stock split, stock dividend,
subdivision, reclassification or similar transaction, or otherwise change
its capitalization as it exists on the date hereof;
(iv) except with respect to the Option Agreement and the Loan Agreement,
grant, confer, award or amend any option, warrant, convertible security or
other right to acquire any shares of its capital stock or take any action
to cause to be exercisable any otherwise unexercisable option under any
stock option plan or restricted stock plan;
(v) declare, set aside or pay any dividend or make any other distribution
or payment with respect to any shares of Common Stock or other capital
stock or ownership interests (other than such payments by a wholly-owned
Subsidiary to the Company or another wholly-owned Subsidiary);
(vi) directly or indirectly redeem, purchase or otherwise acquire any
shares of its capital stock or the capital stock of any of its
Subsidiaries;
(vii) sell, lease, assign, transfer or otherwise dispose of (by merger or
otherwise) any of its property, business or assets (including, without
limitation, receivables, leasehold interests or Intellectual Property and
including any sale leaseback transaction) except (i) for the sale of
inventory in the ordinary course of business, (ii) for sales of other
assets (other than assets subject to the Option Agreement) for fair value
in the ordinary course of business provided that the proceeds of such other
asset sales do not exceed $250,000 in any single transaction or $700,000 in
the aggregate prior to the Effective Time, (iii) with respect to the Option
Agreement and (iv) the dissolution of the Company's French subsidiary;
(viii) settle or compromise any pending or threatened Litigation without
Purchaser's consent (which consent will not be unreasonably withheld or
delayed), other than (a) the Settlement on terms substantially similar to
those described in the MOU, and (b) settlements of Litigations which
involve solely the payment of money (without admission of liability) not to
exceed $50,000 in any one case or $100,000 in the aggregate;
(ix) make any advance, loan, extension of credit or capital contribution
to, or purchase or acquire (by merger or otherwise) any stock, bonds,
notes, debentures or other securities of, or any assets constituting a
business unit of, or make any other investment in, any person, firm or
entity, except (a) extensions of trade credit and endorsements of
negotiable instruments and other negotiable documents in the ordinary
course of business, (b) investments in cash and cash equivalents, (c)
payroll and travel advances in the ordinary course of business and (d)
investments in wholly owned Subsidiaries;
(x) make any capital expenditures in the aggregate for the Company and
its Subsidiaries in excess of the amounts specified in the Company's budget
for capital expenditures, a true and complete copy of which
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has previously been delivered to Purchaser, or otherwise acquire assets
having a value, in the aggregate, in excess of $50,000 not in the ordinary
course of business;
(xi) incur, assume or create any indebtedness for borrowed money or the
deferred purchase price for property or services or pursuant to any capital
lease or other financing, except (a) indebtedness incurred in the ordinary
course of business consistent with past practice for working capital
purposes pursuant to the Company's existing credit facilities as disclosed
in the Disclosure Letter, and (b) with respect to the Loan and Pledge
Agreement, provided the terms of such indebtedness have been approved by
Purchaser in its reasonable discretion, and (c) for the incurrence,
assumption or creation of indebtedness in the ordinary course of business
consistent with the past practice of the Company not exceeding $100,000 in
any one instance or $250,000 in the aggregate at any one time outstanding;
or amend in a manner materially adverse to the Company, any of the
Company's existing credit facilities;
(xii) assume, guarantee or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other person except wholly-owned Subsidiaries of the Company and except for
obligations in the ordinary course of business consistent with the past
practice of the Company not exceeding $100,000 individually and $250,000 in
the aggregate;
(xiii) make any material Tax election (unless required by law or unless
consistent with prior practice) or settle or compromise any material income
tax liability except, in each case, if Purchaser is given reasonable prior
notice thereof;
(xiv) waive or amend any term or condition of any confidentiality or
"standstill" agreement to which the Company is a party and which relates to
a business combination with the Company or the purchase of shares or assets
of the Company;
(xv) grant or amend any stock-related or performance awards except for
such awards in the ordinary cause of business consistent with past practice
of the Company not to exceed $5,000 in the aggregate;
(xvi) except with respect to agreements which are terminable at will by
the Company without any material penalty to the Company, enter into or
amend any legally binding employment, severance, retention, change in
control, consulting or salary continuation agreements with any officers,
directors, employees or former employees or grant any increases in
compensation or benefits to employees other than increases to officers and
employees in the ordinary course of business consistent with the past
practice of the Company;
(xvii) adopt, amend or terminate any employee benefit plan policy,
understanding or arrangement (except as expressly contemplated by this
Agreement);
(xviii) except for purchase orders for the sale of the Company's products
in the ordinary course of business consistent with past practice, enter
into (a) any agreements with distributors or sales agents other than
agreements terminable without penalty on less than 30 days' notice, (b) any
agreements to distribute products for others or which restrict the ability
of the Company or its Subsidiaries or affiliates to compete or (c) any
other agreements, other than agreements relating to product promotions or
the Seiko Epson Agreement, that would constitute Material Contracts; or
amend any of the foregoing agreements as exist on the date hereof;
(xix) amend, change or waive (or exempt any person or entity from the
effect of) the Rights Agreement, except in connection with the transactions
contemplated by this Agreement or the Option Agreement;
(xx) make any material changes in the type or amount of their insurance
coverages;
(xxi) except as may be required by law or generally acceptable accounting
principles and with prior written notice to the Purchaser, change any
accounting principles or practices used by the Company or its Subsidiaries;
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(xxii) effect any material change in the Company's advertising, product
promotion or brand support policies or programs or commit to any
significant new product promotion or advertising campaign except, in each
case, for matters in the ordinary course of business consistent with the
past practice of the Company;
(xxiii) effect any material change in the Company's billing practices or
sales terms, or cause a material acceleration or delay in the manufacture,
shipment or sale of inventory, the collection of accounts or notes
receivable or, to the extent reasonably possible given the Company's
current cash position and loan from Purchaser, the payment of accounts or
notes payable except, in each case, for matters in the ordinary course of
business consistent with the past practice of the Company;
(xxiv) enter into any Contracts for Derivatives, except for spot, option
and forward Contracts entered into in the ordinary course of business
consistent with the past practice of the Company and with the Company's
policies regarding Derivatives as previously disclosed to Purchaser;
(xxv) waive, relinquish, release or terminate any right or claim,
including any such right or claim under any Material Contract or permit any
rights of material value to use any Intellectual Property to lapse or be
forfeited, in each case, except in the ordinary course of business
consistent with the past practice of the Company;
(xxvi) apply for, consent to, or acquiesce in, the appointment of a
trustee, receiver, sequestrator or other custodian for any substantial part
of the property of the Company or any Subsidiary, or make a general
assignment for the benefit of creditors, or permit or suffer to exist the
commencement of any bankruptcy, reorganization, debt arrangement or other
case or proceeding under any bankruptcy or insolvency law, or any
dissolution, winding up or liquidation proceeding, in respect of the
Company or any Subsidiary; or
(xxvii) agree in writing or otherwise to take any of the foregoing
actions.
7.3 Filings; Other Action. Subject to the terms and conditions herein
provided, the Company, Purchaser, and Merger Sub shall: (a) promptly make
their respective filings and thereafter make any other required submissions
under the HSR Act with respect to the Merger; (b) cooperate and consult with
one another in (i) determining which Regulatory Filings are required or, in
the case of Other Antitrust Filings, permitted to be made prior to the
Effective Time with, and which consents, approvals, Permits, authorizations or
waivers (collectively, "Consents") are required or, in the case of Other
Antitrust Consents, permitted to be obtained prior to the Effective Time from
Governmental Entities or other third parties in connection with the execution
and delivery of this Agreement, the assignment of any Contract and the
consummation of the transactions contemplated hereby, including, without
limitation, (x) all such Regulatory Filings and Consents as relate to Foreign
Antitrust Laws (the "Other Antitrust Filings" and the "Other Antitrust
Consents," respectively; collectively, the "Other Antitrust Filings and
Consents"), (y) all Consents required to transfer to the Company any Permits
or registrations held on behalf of the Company or any of its Subsidiaries by
or in the name of distributors, brokers or sales agents and (z) all Consents
set forth in Section 5.6 of the Disclosure Letter; (ii) preparing all
Regulatory Filings and all other filings, submissions and presentations
required or prudent to obtain all Consents, including by providing to the
other party drafts of such material reasonably in advance of the anticipated
filing or submission dates; and (iii) timely making all such Regulatory
Filings and timely seeking all such Consents (it being understood that the
parties will make or seek to obtain all Other Antitrust Filings and Consents,
whether mandatory or voluntary); and (c) use their reasonable best efforts to
take, or cause to be taken, all other action and do, or cause to be done, all
other things necessary, proper or appropriate to consummate and make effective
the transactions contemplated by this Agreement. It is understood that it is
principally the Company's obligation to use its reasonable best efforts to
obtain the Consents described above as soon as practicable following the date
hereof. Each of Purchaser and the Company shall use its reasonable best
efforts to contest any proceeding seeking a preliminary injunction or other
legal impediment to, and to resolve any objections as may be asserted by any
Governmental Entity with respect to, the Merger under the HSR Act or Foreign
Antitrust Laws; provided that the foregoing shall not require Purchaser to
take any action that could directly or indirectly (x) impose limitations on
the ability of Purchaser or Merger Sub (or any of their affiliates or
Subsidiaries) effectively to acquire, operate or hold, or require Purchaser,
Merger Sub or the Company or any of their respective affiliates or
Subsidiaries to dispose of or hold separate, any portion of their respective
assets
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or business that (I) is either material to the business of Purchaser and its
Subsidiaries or material to the business of the Company and its Subsidiaries,
or (II) is reasonably likely to have a Material Adverse Effect, (y) restrict
any future business activity by Purchaser, Merger Sub, the Company or any of
their affiliates or Subsidiaries that (I) is either material to the business
of Purchaser and its Subsidiaries or material to the business of the Company
and its Subsidiaries, or (II) is reasonably likely to have a Material Adverse
Effect, including, without limitation, requiring the prior consent of any
Governmental Entity to future transactions by Purchaser, Merger Sub, the
Company or any of their affiliates or Subsidiaries, or (z) otherwise adversely
affect Purchaser, Merger Sub, the Company or any of their respective
affiliates or Subsidiaries in a manner that (I) is either material to the
business of Purchaser and its Subsidiaries or material to the business of the
Company and its Subsidiaries, or (II) is reasonably likely to have a Material
Adverse Effect. If, at any time after the Effective Time, any further action
is necessary or desirable to carry out the purpose of this Agreement, the
proper officers and directors of Purchaser and the Surviving Corporation shall
take all such necessary action.
7.4. Access to Information. From the date of this Agreement to the Closing,
upon reasonable notice, the Company shall, and shall cause its Subsidiaries
to, subject to the compliance with applicable laws and confidentiality
obligations to third parties, (i) give Purchaser and its authorized
representatives reasonable access during normal business hours to all books,
records, personnel, research and other consultants, offices and other
facilities and properties of the Company and its Subsidiaries and their
accountants and accountants' work papers, (ii) permit Purchaser to make such
copies and inspections thereof as Purchaser may reasonably request and
(iii) furnish Purchaser with such financial and operating data and other
information with respect to the business and properties of the Company and its
Subsidiaries as Purchaser may from time to time reasonably request; provided
that no investigation or information furnished pursuant to this Section 7.4
shall affect any representations or warranties made by the Company herein or
the conditions to the obligations of Purchaser to consummate the transactions
contemplated hereby.
7.5. Publicity. The Company and Purchaser shall, subject to their respective
legal obligations, obtain the prior consent of the other party (which consent
will not be unreasonably withheld or delayed) before issuing any press release
or otherwise making public statements with respect to the transactions
contemplated hereby or by the Option Agreement and in making any filings with
any national securities exchange with respect thereto.
7.6. Further Action. (a ) Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effect the Merger.
(b) The Company shall not, and the Company shall cause its Subsidiaries not
to, take any action that could reasonably be expected to result in (i) any of
the representations and warranties of the Company set forth in this Agreement
that are qualified by materiality becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in
any material respect or (iii) any of the conditions set forth in Article 8 not
being satisfied (subject to the Company's right to take actions specifically
permitted by Section 7.1). The Company shall use, and the Company shall cause
its Subsidiaries to use, their reasonable efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary,
proper or advisable under applicable Laws to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
using their reasonable efforts to satisfy the conditions contained in Section
7.10(c) and Article 8.
(c) The Company shall confer with Purchaser on a regular and frequent basis
as reasonably requested by Purchaser, report on operational matters and
promptly advise Purchaser orally and, if requested by Purchaser, in writing of
any material adverse change with respect to the Company. The Company shall
promptly notify Purchaser in writing of the occurrence of any event that will
or may result in the failure to satisfy any of the conditions specified in
Section 7.10(c) or Section 8. The Company will promptly provide to Purchaser
(and its counsel) copies of all filings made by the Company with any
Governmental Entity in connection with this Agreement and the transactions
contemplated hereby. The Company will promptly apprise Purchaser of any
developments with respect to the Settlement, and will provide to Purchaser
(and its counsel) copies of all drafts of documents and all correspondence
relating to the Settlement.
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<PAGE>
7.7. Insurance; Indemnity.
(a) For a period of four years after the Effective Time, Purchaser shall
cause to be maintained officers' and directors' liability insurance covering
the parties who are currently covered, in their capacities as officers and
directors, by the Company's existing officers' and directors' liability
insurance policies (the "Current Policies") on terms substantially no less
advantageous to such parties than such Current Policies; provided, however,
that Purchaser shall not be required, in order to maintain or procure such
coverage, to pay annual premiums in excess of $225,000 (the "Cap"); and
provided, further, that if equivalent coverage cannot be obtained, or can be
obtained only by paying an amount in excess of the Cap, Purchaser shall only
be required to obtain such coverage for such four-year period as can be
obtained by paying annual premiums equal to the Cap.
(b) For a period of four years after the Effective Time, the Surviving
Corporation shall indemnify and hold harmless, to the fullest extent permitted
under applicable law, each person who is, or has been at any time prior to the
date hereof or who becomes prior to the Effective Time, an officer or director
of the Company or any of its Subsidiaries against all losses, claims, damages,
liabilities, costs or expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement (collectively, "Losses") in
connection with any Litigation arising out of or pertaining to acts or
omissions, or alleged acts or omissions, by them in their capacities as such,
which acts or omissions occurred prior to the Effective Time. Without limiting
the foregoing, the Company and after the Effective Time the Surviving
Corporation shall periodically advance expenses as incurred with respect to
the foregoing to the fullest extent permitted under applicable law provided
that the person to whom the expenses are advanced provides an undertaking to
repay such advance if it is ultimately determined that such person is not
entitled to indemnification.
7.8. Restructuring of Merger. Upon the mutual agreement of Purchaser and the
Company, the Merger shall be restructured in the form of a forward subsidiary
merger of the Company into Merger Sub, with Merger Sub being the surviving
corporation, or as a merger of the Company into Purchaser, with Purchaser
being the surviving corporation. In such event, this Agreement shall be deemed
appropriately modified to reflect such form of merger.
7.9. Employees and Employee Benefit Plans.
(a) From and after the Effective Time, Purchaser shall cause the Surviving
Corporation and any of its Subsidiaries to honor in accordance with their
terms and the past practice of the Company all existing employment and
severance agreements between the Company or any of its Subsidiaries, except as
otherwise provided herein, and any officer, director, or employee of the
Company or any of its Subsidiaries so long as such agreements shall have been
identified to Purchaser in the Disclosure Letter and to the extent such terms
are in effect on the date hereof or as otherwise provided
(b) The Company will use its reasonable best efforts consistent with past
practice and applicable law to enforce any existing non-compete and
confidentiality provisions contained in agreements with employees and former
employees.
(c) From and for two years after the Effective Time, Purchaser will, or will
cause Merger Sub, as applicable, to continue to provide each employee of the
Company and its Subsidiaries with employee benefits and other terms and
conditions of employment that are, in the aggregate, comparable to the
benefits and terms and conditions provided to each such employee by the
Company or any of its Subsidiaries, as applicable, on the Closing Date.
(d) The Company will use its reasonable best efforts to apply for and
receive from the Internal Revenue Service a favorable determination letter for
the Raster Graphics, Inc. Employees 401(k) Savings Plan & Trust.
7.10. Stockholder Approval; Preparation of Proxy Statement. (a) Subject to
the provisions of this Agreement, as promptly as practicable following the
satisfaction or waiver by Purchaser of the conditions set forth in Section
7.10(c), the Company will (i) duly call, give notice of, convene and hold a
meeting of its
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<PAGE>
stockholders (the "Stockholder Meeting") for the purpose of obtaining the
voting upon the Merger, and (ii) through its Board of Directors, declare the
advisability of the Merger and recommend to its stockholders that the Company
Stockholder Approval be given.
(b) Subject to the provisions of this Agreement, as promptly as practicable
following the satisfaction or waiver by Purchaser of the conditions set forth
in Section 7.10(c), the Company will, at Purchaser's request, prepare and file
a preliminary Proxy Statement (such proxy statement, and any amendments or
supplements thereto, the "Proxy Statement") with the SEC and will use its
reasonable best efforts to respond to any comments of the SEC or its staff and
to cause the Proxy Statement to be cleared by the SEC as soon as practicable
after responding to all such comments to the satisfaction of the staff. The
Company will notify Purchaser promptly of the receipt of any comments from the
SEC or its staff and of any request by the SEC or its staff for amendments or
supplements to the Proxy Statement or for additional information and will
supply Purchaser with copies of all correspondence between the Company or any
of its representatives, on the one hand, and the SEC or its staff, on the
other hand, with respect to the Proxy Statement or the Merger. The Company
agrees to notify the Purchaser a reasonable time prior to the filing or
distribution of the Proxy Statement of such filing or distribution. The
Company shall give the Purchaser and its counsel (who shall provide any
comments thereon as soon as practicable) the opportunity to review the Proxy
Statement prior to its being filed with the SEC and shall give the Purchaser
and its counsel (who shall provide any comments thereon as soon as
practicable) the opportunity to review all amendments and supplements to the
Proxy Statement and all responses to requests for additional information and
replies to comments prior to their being filed with, or sent to, the SEC. Each
of the Company and the Purchaser agrees to use its reasonable best efforts,
after consultation with the other party, to respond promptly to all such
comments of and requests by the SEC. As promptly as practicable after the
Proxy Statement has been cleared by the SEC, the Company shall mail the Proxy
Statement to the stockholders of the Company. If at any time prior to the
Stockholders Meeting there shall occur any event that should be set forth in
an amendment or supplement to the Proxy Statement, the Company will promptly
prepare and mail to its stockholders such an amendment or supplement. The
Company will not mail any Proxy Statement, or any amendment or supplement
thereto, to which Purchaser reasonably objects; provided, that Purchaser shall
identify its objections and fully cooperate with the Company to create a
mutually satisfactory Proxy Statement.
(c) Notwithstanding anything to the contrary in this Agreement, without the
prior written consent of Purchaser, the Company shall neither (i) call a
Stockholder Meeting for the purpose of voting on the Merger, nor (ii) file a
Proxy Statement with the SEC or otherwise publish a Proxy Statement, unless
and until each of the following conditions has been satisfied: (w) the
Settlement shall have been approved by all relevant parties and the
appropriate court of competent jurisdiction in substantially the form
described in the MOU; (x) the Company shall have filed with the SEC the
Company's Annual Report on Form 10-K for the Company's 1997 fiscal year, the
Company's Quarterly Reports on Form 10-Q for the quarterly periods ending
March 31, 1998 and June 30, 1998, respectively and, if deemed necessary by the
Company's auditors, restatements of the Company's Quarterly Reports for the
quarterly periods ending March 31, 1997, June 30, 1997, and September 30,
1997, which reports (the "Pending Reports") shall comply in form and substance
with the Exchange Act; (y) the Company shall be in compliance with all
reporting requirements applicable to the Company under the Securities Act and
the Exchange Act except such requirements, the failure of with which to
comply, would not, individually or in the aggregate, have a Material Adverse
Effect and (z) Purchaser shall not have determined in its reasonable
discretion that Section 2115 of the California General Corporation Law applies
to the Company, the Merger or any of the transactions contemplated by the
Merger Agreement and the Option Agreement.
(d) The Company shall use its reasonable best efforts to obtain the Company
Shareholder Approval.
(e) Purchaser agrees to cause all shares of Common Stock owned by Purchaser
or any Subsidiary of Purchaser to be voted in favor of the approval of the
Merger.
7.11. Additional Agreements of the Company. (a) The Company shall use its
reasonable best efforts to file the Pending Reports as promptly as practicable
after the date hereof, but in no event later than (i) October 15, 1998 for the
Pending Reports for the periods ending in 1997 and (ii) November 30, 1998 for
the periods ending
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<PAGE>
in 1998. The Company shall provide drafts of such filings to Purchaser at
Purchaser's request and shall consider any comments suggested by Purchaser;
provided, that the Company will not be in breach of the first sentence of this
Section 7.11(a) due to Purchaser's delay in providing such comments to the
Company.
(b) The Company shall use its reasonable best efforts to insure that the
Settlement shall be approved by all parties and the appropriate court of
competent jurisdiction in substantially the form described in the MOU.
(c) Except with respect to the Option Agreement and the Loan Agreement, the
Company shall (i) maintain the shares of O-Sub free and clear of all
Encumbrances for so long as either this Agreement or the Option Agreement
remains in effect; and (ii) promptly (but no later than October 15, 1998)
either remove any and all Encumbrances from the other assets subject to the
Option Agreement or provide to Purchaser evidence reasonably satisfactory to
Purchaser that such Encumbrances will be removed prior to the exercise of the
Inkjet Option.
(d) The Company shall use its reasonable best efforts to finalize, execute
and deliver an agreement with Seiko Epson Corporation (the "Seiko Epson
Agreement") covering the same matters described in the Letter of Intent, dated
April 22, 1997, between the Company and Seiko Epson Corporation, as soon as
practicable, but in no event later than November 15, 1998.
(e) The Company shall use its reasonable best efforts (including paying all
delinquent franchise taxes) to (i) restore the Company and its Subsidiaries to
good standing in the jurisdiction in which the Company or such Subsidiary, as
applicable, is incorporated or organized, and (ii) restore the Company's and
its Subsidiaries' licenses or qualifications to do business as foreign
corporations and restore them to good standing in each jurisdiction in which
the character of the properties owned or leased by it or in which the
transaction of its business makes such licensure, qualification or good
standing necessary. The Company shall use its reasonable best efforts to
maintain the good standing, licensure and qualifications of the Company and
its Subsidiaries in all relevant jurisdictions.
7.12. Transfer Taxes. Any liability for New York State Real Property
Transfer Tax and similar real property transfer taxes and real property gains
taxes imposed by any other state with respect to the transactions contemplated
by this Agreement, together with applicable interest, penalties and additions
thereto, if any, shall be paid or caused to be paid by the Purchaser.
ARTICLE 8
Conditions
8.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction or, where permissible, waiver, prior to the Effective Time,
of the following conditions:
(a) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
(b) None of the parties hereto shall be subject to any order, judgment,
injunction, decree or ruling, or other action of a court or other
Governmental Entity of competent jurisdiction restraining, enjoining or
otherwise prohibiting the Merger or the transactions contemplated by this
Agreement; provided that each of the parties shall have used its reasonable
best efforts to appeal as promptly as practicable any such order, judgment,
injunction, decree, ruling or other action.
(c) The Company Stockholder Approval shall have been obtained in
accordance with the DGCL and the Company's Certificate of Incorporation and
By-laws.
(d) Other than the filing provided for by Section 1.3, all Regulatory
Filings and Consents (including the Other Antitrust Filings and Consents)
which are necessary for the consummation of the Merger shall
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<PAGE>
have been made or obtained, or any waiting period (whether requisite or
voluntary) under any Foreign Antitrust Laws shall have expired, in each
case, to the extent that the failure to make or obtain such Regulatory
Filings or Consents or of the waiting period to have expired, in the
aggregate, is reasonably likely, individually or in the aggregate, to have
a Material Delaying Effect (all such Consents, Regulatory Filings and the
lapse of all such waiting periods being referred to as the "Requisite
Regulatory Approvals"), and all such Requisite Regulatory Approvals shall
be in full force and effect. There shall not be any statute, law, rule or
regulation that makes consummation of the Merger illegal or prohibited.
8.2. Additional Conditions to Obligations of Purchaser and Merger Sub to
Effect the Merger. The obligations of Purchaser and Merger Sub to effect the
Merger shall be subject to the satisfaction or, where permissible, waiver,
prior to the Effective Time, of the following conditions:
(a) The Settlement shall have been approved by all relevant parties and
the appropriate court of competent jurisdiction in substantially the form
described in the MOU.
(b) (i) The representations or warranties made by the Company in this
Agreement shall be true and correct in all respects as of the date hereof,
and shall be true and correct in all respects as of the Closing Date as if
made as of the Closing Date (other than representations and warranties made
as of a specified date), except where the failure to be so true and correct
(without giving effect to any materiality qualifications or thresholds
contained in such representations and warranties), individually and in the
aggregate, would not have a Material Adverse Effect or materially adversely
affect the business of Purchaser in relation to its decision to consummate
the transactions contemplated hereby, and (ii) the Company shall not have
breached or failed to comply in any material respect with any of its
obligations under this Agreement, the Loan Agreement or the Option
Agreement.
(c) There shall not have been issued, delivered, sold or granted any
shares of Common Stock pursuant to the Rights Agreement.
(d) Since the date hereof, there shall not have occurred any event,
change, effect or development that, individually or in the aggregate, would
have a Material Adverse Effect.
(e) The Seiko Epson Agreement, in form and substance reasonably
satisfactory to Purchaser, shall have been executed and delivered by all
parties thereto.
(f) Each of the Company and its Subsidiaries is validly existing and in
good standing under the laws of its jurisdiction of incorporation and is
duly licensed or qualified to do business as a foreign corporation and is
in good standing under the laws of any other state of the United States or
any other jurisdiction in which the character of the properties owned or
leased by it or in which the transaction of its business makes such
licensure, qualification or good standing necessary.
8.3. Additional Conditions to Obligations of the Company. The obligations of
the Company to effect the Merger are subject to the satisfaction or, where
permissible, waiver, prior to the Effective Time, of the following conditions:
(a) (i) The representations or warranties made by Purchaser in this
Agreement shall be true and correct in all respects as of the date hereof,
and shall be true and correct in all respects as of the Closing Date as if
made as of the Closing Date (other than representations and warranties made
as of a specified date), except where the failure to be so true and correct
(without giving effect to any materiality qualifications or thresholds
contained in such representations and warranties), individually and in the
aggregate, would not have a Material Adverse Effect, and (ii) Purchaser
shall not have breached or failed to comply in any material respect with
any of its obligations under this Agreement, the Loan Agreement or the
Option Agreement.
(b) Purchaser or Merger Sub shall have deposited the aggregate Merger
Consideration with the Paying Agent.
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<PAGE>
ARTICLE 9
Termination; Amendment; Waiver
9.1. Termination. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time,
notwithstanding approval thereof by the stockholders of the Company, if any:
(a) by mutual written consent of the Company and Purchaser;
(b) by Purchaser or the Company if:
(i) the Effective Time shall not have occurred on or before February
28, 1999 (provided that the right to terminate this Agreement pursuant
to this clause (i) shall not be available to any party whose failure to
fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Effective Time to occur on or before
such date);
(ii) there shall be any statute, law, rule or regulation that makes
consummation of the Merger illegal or prohibited or if any court or
other Governmental Entity of competent jurisdiction shall have issued
an order, judgment, decree or ruling, or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such
order, judgment, injunction, decree, ruling or other action shall have
become final and non-appealable; provided that the party terminating
this Agreement has complied with the provisions of the penultimate
sentence of Section 7.3; or
(iii) the Company Stockholder Approval shall not have been obtained
at a Stockholder Meeting duly convened therefor or at any adjournment
or postponement thereof;
(c) by the Company if:
(i) (x) any of the respective representations or warranties made by
Purchaser or Merger Sub in this Agreement shall not have been true and
correct in all respects when made, or shall thereafter have ceased to
be true and correct in all respects as if made as of such later date
(other than representations and warranties made as of a specified
date), except where the failure to be so true and correct (without
giving effect to any materiality qualifications or thresholds contained
in such representations and warranties), individually or in the
aggregate, would not have a Material Adverse Effect, or (y) Purchaser
or Merger Sub shall have breached or failed to comply in any material
respect with any of its obligations under this Agreement, which untruth
or inaccuracy or breach, in the case of clauses (x) or (y), is not
curable or, if curable, is not cured within 10 business days after
written notice thereof has been given by the Company to Purchaser;
(ii) the Company takes any of the actions described in Section
7.1(b), provided, that the Company has notified Purchaser in writing of
its intent to take any such action five days prior to the termination
of this Agreement, and the Acquisition Proposal at stake continues to
be a Superior Proposal notwithstanding any modification by Purchaser of
the terms of the Merger; provided further that the Company has complied
with the provisions of Sections 7.1(b) and (c); and provided further
that such termination under this Section 9.1(c)(ii) shall not be
effective until (x) the Company has paid to Purchaser or deposited with
a mutually acceptable escrow agent an amount equal to the sum of the
Maximum Expense Amount and the Termination Amount; and (y), the Company
has deposited with a mutually acceptable escrow agent the items set
forth in Schedule D to the Option Agreement.
(d) by Purchaser if:
(i) (A) the Company fails to file (x) the Pending Reports for the
periods ending in 1997 by October 15, 1998 or (y) the Pending Reports
for the periods ending in 1998 by November 30, 1998, (B) if the
Company, upon Purchaser's request (based upon Purchaser's reasonable
belief that events are likely to occur that would enable Purchaser to
exercise the Inkjet Option), has not placed in escrow the items set
forth in Schedule D to the Option Agreement, or (C) if the Seiko Epson
Agreement, in
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<PAGE>
form and substance reasonably satisfactory to Purchaser, has not been
executed and delivered by all parties thereto by November 15, 1998.
(ii) (A) the Company has failed by October 15, 1998 to have removed
all Encumbrances from the assets subject to the Option Agreement (other
than the O-Sub Shares) or provided to Purchaser evidence reasonably
satisfactory to Purchaser that such Encumbrances will be removed prior
to the exercise of the Inkjet Option or (B) any Encumbrance (other than
Encumbrances existing as of the date hereof and Encumbrances created
pursuant to the Loan Agreement or the Option Agreement) has been placed
on all or any portion of the O-Sub Shares or the other assets subject
to the Option Agreement, and all such Encumbrance has not been removed
within 10 calendar days after Purchaser has delivered written notice to
the Company requesting that such Encumbrance be removed.
(iii) (x) Any of the representations or warranties made by the
Company in this Agreement shall not have been true and correct in all
respects when made, or shall thereafter have ceased to be true and
correct in all respects as if made as of such later date (other than
representations and warranties made as of a specified date), except
where the failure to be so true and correct (without giving effect to
any materiality qualifications or thresholds contained in such
representations and warranties), individually and in the aggregate,
would not have a Material Adverse Effect or materially adversely affect
the business of Purchaser in relation to its decision to consummate the
transactions contemplated hereby, or (y) the Company shall have
breached or failed to comply in any material respect with any of its
obligations under this Agreement, the Loan Agreement or the Option
Agreement, which untruth or inaccuracy or breach, in the case of
clauses (x) or (y), is not curable, or is not cured within 10 business
days after written notice thereof has been given by Purchaser to the
Company;
(iv) Any corporation, entity, "group" or "person" (as defined in the
Exchange Act), other than Purchaser or Merger Sub, shall have acquired
beneficial ownership of more than 25% of the outstanding shares of
Common Stock;
(v) Since the date hereof, there shall have occurred any event,
change, effect or development that, individually or in the aggregate,
would have a Material Adverse Effect;
(vi) if the Settlement has been rejected by a court of competent
jurisdiction or otherwise terminated, and a substitute settlement that
is reasonably acceptable to Purchaser has not been entered into and
approved by such court within 30 days of such rejection or termination;
or
(vii) if the Company takes any of the actions described in Section
7.1(b) or if the Board of Directors shall have resolved to take any
such action.
9.2. Effect of Termination. If this Agreement is terminated and the Merger
is abandoned pursuant to Section 9.1 hereof, this Agreement, except for the
provisions of Section 7.11(c), Section 9.2 and Article 10, shall terminate,
without any liability on the part of any party or its directors, officers or
stockholders. Nothing herein shall relieve any party to this Agreement of
liability for breach of this Agreement or prejudice the ability of the non-
breaching party to seek damages from any other party for any breach of this
Agreement, including without limitation, attorneys' fees and the right to
pursue any remedy at law or in equity.
9.3. Amendment. To the extent permitted by applicable law, this Agreement
may be amended by action taken by or on behalf of the Board of Directors of
the Company and Purchaser at any time before or after adoption of this
Agreement by the stockholders of the Company but, after any such stockholder
approval, no amendment shall be made which decreases the Merger Consideration
or which adversely affects the rights of the Company's stockholders hereunder
without the approval of such stockholders. This Agreement may not be amended
except by an instrument in writing signed on behalf of all of the parties.
9.4. Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by action taken by or on behalf of the Board of Directors and
Purchaser, may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and
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<PAGE>
warranties contained herein by any other applicable party or in any document,
certificate or writing delivered pursuant hereto by any other applicable party
or (iii) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of any party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf
of such party.
ARTICLE 10
General Provisions
10.1. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time.
10.2. Notices. Any notice required to be given hereunder shall be sufficient
if in writing, and sent by facsimile transmission (with a confirmatory copy
sent by overnight courier), by courier service (with proof of service), hand
delivery or certified or registered mail (return receipt requested and first-
class postage prepaid), addressed as follows:
<TABLE>
<S> <C>
If to Purchaser or Merger Sub: If to the Company:
Gretag Imaging Group, Inc. Raster Graphics, Inc.
c/o Gretag Imaging, Inc. 3025 Orchard Parkway
2070 Westover Road San Jose, CA 95134
Chicopee, MA 01022
Telephone: (413) 593-6900 Telephone: (408) 232-4000
Facsimile: (413) 788-0940 Facsimile: (408) 232-4100
Attention: William Recker Attention: Rakesh Kumar
With a copy to:
Gretag Imaging Holding AG
CH-8105 Regensdorf Switzerland
Telephone: (011-411) 842-2092
Facsimile: (011-411) 842-2411
Attention: Dr. Eduard Brunner
With a copy to: With a copy to:
Debevoise & Plimpton Venture Law Group
875 Third Avenue 2800 Sand Hill Road
New York, New York 10022 Menlo Park, CA 94025
Telephone: (212) 909-6000 Telephone: (650) 854-4488
Facsimile: (212) 909-6836 Facsimile: (650) 854-1121
Attention: Edmund S. Ruffin, Jr.,
Attention: Christopher Smeall, Esq. Esq.
</TABLE>
or to such other address as any party shall specify by written notice so
given, and such notice shall be deemed to have been delivered as of the date
so telecommunicated, personally delivered or mailed.
10.3. Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties; provided, however, that either Purchaser
or Merger Sub (or both) may assign its rights hereunder to an affiliate but
nothing shall relieve the assignor from its obligations hereunder. Subject to
the preceding sentence, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns. Notwithstanding anything contained in this Agreement to the contrary,
except for the provisions of Sections 4.2(a) and 4.2(d), nothing in this
Agreement, expressed or
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<PAGE>
implied, is intended to confer on any person other than the parties hereto or
their respective heirs, successors, executors, administrators and assigns any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
10.4. Entire Agreement. This Agreement, the Disclosure Letter, the Option
Agreement, the Loan Agreement and any other documents delivered by the parties
in connection herewith constitute the entire agreement among the parties with
respect to the subject matter hereof or therewith and supersede all prior
agreements and understandings among the parties with respect thereto.
10.5. Fees and Expenses.
(a) Except as provided in Section 10.5(b), whether or not the Merger is
consummated, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party
incurring such expenses.
(b) If this Agreement is terminated by the Company pursuant to Section
9.1(b)(iii) or 9.1(c)(ii) or by Purchaser pursuant to 9.1(d)(i)(A)(x) (but
only if all the relevant Pending Reports continue not to be filed on November
30, 1998), 9.1(d)(iii), 9.1(d)(vi) or 9.1(d)(vii), the Company shall pay
Purchaser as promptly as practicable in same-day funds an aggregate amount
equal to the Purchaser Expenses. "Purchaser Expenses" shall mean the
documented reasonable out-of-pocket expenses of Purchaser, Merger Sub and
their respective affiliates incurred in connection with or arising out of the
Merger, this Agreement, the Option Agreement (including the exercise thereof),
the Loan Agreement (other than those expenses explicitly covered therein) and
the transactions contemplated hereby and thereby (including, without
limitation, amounts paid or payable to investment bankers (if any),
information agents, lending banks, fees and expenses of counsel, accountants
and consultants and printing and mailing expenses, regardless of when such
expenses are incurred); provided, that in no event shall Purchaser Expenses
exceed $1,000,000 (the "Maximum Expense Amount"); and provided further, that
if (a) for any reason the Purchaser is unable to consummate the purchase of
the Inkjet Business (as defined in the Option Agreement) in accordance with
the Option Agreement at the Combined Closing Date (as defined in the Option
Agreement) following any termination of this Agreement pursuant to Section
9.1(b)(iii), 9.1(c)(ii), 9.1(d)(iii) or 9.1(d)(vii) or (b) at any time
following the consummation of the purchase of such Inkjet Business Purchaser
is required to rescind or unwind such purchase or pay damages to the Company
or any other Person (whether pursuant to a judgment or award or by reason of
any settlement of any judicial or arbitral proceeding) as a result of or in
connection with such purchase, then the Company shall promptly pay to
Purchaser the sum of $500,000 (the "Termination Amount") in immediately
available funds in addition to the Purchaser Expenses.
(ii) If this Agreement is terminated by the Company pursuant to Section
9.1(c)(i), Purchaser shall pay the Company as promptly as practicable in same-
day funds an aggregate amount equal to the Company Expenses. "Company
Expenses" shall mean the documented reasonable out-of-pocket expenses of the
Company and its affiliates incurred in connection with or arising out of the
Merger, this Agreement, the Option Agreement and the transactions contemplated
hereby and thereby (including, without limitation, amounts paid or payable to
investment bankers, information agents, lending banks, fees and expenses of
counsel, accountants and consultants and printing and mailing expenses,
regardless of when such expenses are incurred); provided that in no event
shall Company Expenses exceed $1,000,000; and provided further that Company
Expenses shall not include any fees and expenses that would have been incurred
by the Company or its affiliates regardless of whether Purchaser and the
Company had negotiated and executed this Agreement or the Option Agreement
(including, without limitation, fees and expenses paid or payable to
accountants with respect to the preparation, restatement and filing of the
Pending Reports, and amounts paid or payable to investment bankers, counsel
and consultants for advice given with respect to the general solicitation of
potential acquirors of the Company).
(c) Each of the Company and Purchaser acknowledges that the agreements
contained in Section 10.5(b) are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, Purchaser,
on the one hand, and the Company on the other would not enter into this
Agreement; accordingly, if the Company or Purchaser fails to promptly pay any
amounts owing pursuant to this Section 10.5(b) when due, the Company or
Purchaser shall in addition thereto pay to Purchaser or the Company, as the
case may be, all
A-29
<PAGE>
costs and expenses (including, pursuant to Section 10.5(b), fees and
disbursements of counsel) incurred in collecting such amounts, together with
interest on such amounts (or any unpaid portion thereof) from the date such
payment was required to be made until the date such payment is received by
Purchaser or the Company, as the case may be, at the prime rate of Citibank,
N.A. as in effect from time to time during such period.
10.6. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws. Each of the Company, Purchaser and Merger Sub hereby
irrevocably and unconditionally consents to submit to the exclusive
jurisdiction of the courts of the State of Delaware and of the United States
of America located in the State of Delaware (the "Delaware Courts") for any
litigation arising out of or relating to this Agreement and the transactions
contemplated hereby (and agrees not to commence any litigation relating
thereto except in such courts), waives any objection to the laying of venue of
any such litigation in the Delaware Courts and agrees not to plead or claim in
any Delaware Court that such litigation brought therein has been brought in an
inconvenient forum.
10.7. Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
10.8. Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." As used in this Agreement, the words "Subsidiary," "affiliate"
and "associate" shall have the meanings ascribed thereto in Rule 12b-2 under
the Exchange Act. For purposes of this Agreement, one party shall be
considered "wholly owned" by another party if all of the shares of its
outstanding capital stock, other than directors' qualifying shares, are
beneficially owned by such other party. As used in this Agreement, the words
"to the knowledge of the Company" shall mean the knowledge of the directors
and senior officers of the Company, after reasonable investigation.
10.9. Investigations. No action taken pursuant to this Agreement, including,
without limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance
with any representations, warranties, covenants or agreements contained in
this Agreement.
10.10. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
10.11. Enforcement of Agreement.
(a) The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Delaware Court, this being in addition
to any other remedy to which they are entitled at law or in equity.
(b) The prevailing party in any judicial action shall be entitled to receive
from the other party reimbursement for the prevailing party's reasonable
attorneys' fees and disbursements, and court costs.
10.12. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof
each signed by less than all, but together signed by all, of the parties
hereto.
A-30
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
RASTER GRAPHICS, INC.
By: /s/ Rakesh Kumar
_____________________________________
Name: Rakesh Kumar
Title: President
GRETAG IMAGING GROUP, INC.
By: /s/ E. Brunner
_____________________________________
Name: Dr. Eduard M. Brunner
Title: Treasurer
GRETAG ACQUISITION CORP.
By: /s/ E. Brunner
_____________________________________
Name: Dr. Eduard M. Brunner
Title: Treasurer
A-31
<PAGE>
ANNEX B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET AND SUBSIDIARY STOCK OPTION AGREEMENT
between
GRETAG IMAGING GROUP, INC.
and
RASTER GRAPHICS, INC.
Dated as of October 6, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
THE OPTION
<C> <S> <C>
1.1 Grant of the Option.................................................. B-1
1.2 Exercise of Options.................................................. B-2
1.3 Sale and License of Inkjet Business; Sale of Shares.................. B-2
1.4 Purchase Prices...................................................... B-3
1.5 Closing.............................................................. B-3
ARTICLE II
COVENANTS OF THE PARTIES
2.1 Escrow Agent......................................................... B-4
2.2 Employees; Transitional Services..................................... B-5
2.3 Inventory............................................................ B-5
2.4 HSR Filings; Approvals............................................... B-5
2.5 Right of Inspection.................................................. B-5
2.6 Consents............................................................. B-5
2.7 Interim Operations................................................... B-5
2.8 Further Assurances................................................... B-6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1 Existence; Good Standing; Corporate Authority........................ B-7
3.2 Authorization, Validity and Effect of Agreements..................... B-7
3.3 Compliance with Laws................................................. B-7
3.4 Capitalization, etc.................................................. B-7
3.5 Assets............................................................... B-7
3.6 No Violation......................................................... B-8
3.7 Merger Agreement..................................................... B-8
</TABLE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
<TABLE>
<C> <S> <C>
4.1 Existence; Good Standing............................................. B-8
4.2 Authorization, Validity and Effect of Agreements..................... B-8
ARTICLE V
MISCELLANEOUS
5.1 Survival............................................................. B-9
5.2 Amendment............................................................ B-9
5.3 Notices.............................................................. B-9
5.4 Assignment; Binding Effect........................................... B-9
5.5 Entire Agreement..................................................... B-10
5.6 Expenses............................................................. B-10
5.7 Governing Law........................................................ B-10
5.8 Investigations....................................................... B-10
5.9 Termination.......................................................... B-10
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
5.10 Severability........................................................ B-10
5.11 Arbitration......................................................... B-10
5.12 Indemnification..................................................... B-11
5.13 Counterparts........................................................ B-12
</TABLE>
SCHEDULE A Business Assets
SCHEDULE B Ink and Paper After-Market Business
SCHEDULE C Excluded Liabilities
SCHEDULE D Escrowed Items
ii
<PAGE>
DEFINITIONS
<TABLE>
<CAPTION>
Defined Term Section Reference
------------ -----------------
<S> <C>
"Agreement"........................................... First Paragraph
"Business Assets"..................................... Section 1.1(b)
"Business Liabilities"................................ Section 1.3(a)(iv)
"Closing"............................................. Section 1.5(a)
"Closing Date"........................................ Section 1.5(a)
"Company"............................................. First Paragraph
"Company Indemnitees"................................. Section 5.12(b)
"Disclosure Letter"................................... Merger Agreement
"Effective Time"...................................... Merger Agreement
"Encumbrance"......................................... Merger Agreement
"Excluded Liabilities"................................ Section 1.3(a)(iv)
"Governmental Entity"................................. Merger Agreement
"HSR Act"............................................. Section 2.4
"Indemnified Party"................................... Section 5.12(c)
"Indemnifying Party".................................. Section 5.12(c)
"Ink and Paper After-Market Business"................. Section 1.1(b)
"Inkjet Business"..................................... Section 1.1(b)
"Inkjet Option"....................................... Section 1.1(b)
"Inkjet Option Purchase Price"........................ Section 1.1(b)
"Intellectual Property"............................... Merger Agreement
"Laws"................................................ Merger Agreement
"Loan and Pledge Agreement"........................... Section 1.4(a)
"Losses".............................................. Section 5.12(a)
"Material Adverse Effect"............................. Section 3.1
"Merger Agreement".................................... Second Paragraph
"Merger Sub".......................................... Second Paragraph
"Notes"............................................... Loan and Pledge Agreement
"Notice of Exercise".................................. Section 1.2
"O-Sub"............................................... Section 1.1(a)
"O-Sub Shares"........................................ Section 1.1(a)
"Promissory Notes".................................... Loan and Pledge Agreement
"Purchaser"........................................... First Paragraph
"Purchaser Indemnitees"............................... Section 5.12(a)
"Secondary Assets".................................... Section 1.1(b)
"Subsidiary Stock Option"............................. Section 1.1(a)
"Subsidiary Purchase Price"........................... Section 1.4(b)
</TABLE>
iii
<PAGE>
ASSET AND SUBSIDIARY STOCK OPTION AGREEMENT
ASSET AND SUBSIDIARY STOCK OPTION AGREEMENT, dated as of October 6, 1998
(this "Agreement") between Raster Graphics, Inc., a Delaware corporation (the
"Company"), and Gretag Imaging Group, Inc., a Delaware corporation
("Purchaser").
WHEREAS, the Company, Purchaser and Gretag Acquisition Corp., a Delaware
corporation (the "Merger Sub"), are, concurrently with the execution of this
Agreement, entering into an Agreement and Plan of Merger (the "Merger
Agreement");
WHEREAS, the Company designs, manufactures, markets, sells, services and
supports inkjet printer products;
WHEREAS, the Company owns all the shares of capital stock of O-Sub;
WHEREAS, as a condition to their willingness to enter into the Merger
Agreement, Purchaser and the Merger Sub have requested that the Company agree,
and, as an inducement to Purchaser and Merger Sub to enter into the Merger
Agreement, the Company has agreed, to grant the Inkjet Option and the
Subsidiary Stock Option to Purchaser on the terms and subject to the
conditions set forth herein; and
WHEREAS, certain capitalized terms not defined herein shall have the meanings
ascribed to them in the Merger Agreement;
NOW, THEREFORE, to induce Parent to enter into, and in consideration of the
entering into of, the Merger Agreement and of the mutual covenants and
agreements set forth herein, the parties agree as follows:
ARTICLE I
THE OPTION
1.1 Grant of the Option. The Company hereby grants to Purchaser:
(a) the irrevocable right and option (the "Subsidiary Stock Option") as
further set forth herein to purchase for the Subsidiary Purchase Price all
of the issued and outstanding shares of common stock, par value $0.001 per
share (the "O-Sub Shares"), of Onyx Graphics Corporation ("O-Sub") on the
terms set forth herein; and
(b) the irrevocable right and option as further set forth herein (the
"Inkjet Option") to purchase for the Inkjet Option Purchase Price (i) all
of the assets (not including the Secondary Assets) (the "Business Assets")
used or held for use in connection with, necessary for the conduct of or
otherwise material to the Inkjet Business, including, without limitation,
all rights, contracts, goodwill, studies, prepaid advertising,
endorsements, commercial and retail inventories, supplies, customer lists,
contractual rights, Intellectual Property, machinery, equipment, molds,
parts, spare parts, components, tooling, fixture and equipment
specifications, studies, blueprints and drawings, printed materials,
quality specifications and instructions, design specifications, process
specifications for labor and equipment, work in process and all other
property, assets and rights of every kind, nature and description, real,
personal or mixed, tangible or intangible (including goodwill), whether
accrued, contingent or otherwise, and whether now existing or hereinafter
acquired and wherever situated as more fully described in Schedule A; and
(ii) the right and license to use the Secondary Assets, solely in
connection with the Inkjet Business as it is now or may in the future be
conducted.
"Inkjet Business" means the design, manufacture, sales, service and
support of the Company's inkjet printer products, provided that the Inkjet
Business shall not include the Ink and Paper After-Market Business.
B-1
<PAGE>
"Ink and Paper After-Market Business" means the Company's after-market
ink and paper business for the Company's inkjet printer products, as more
fully described in Schedule B.
"Secondary Assets" means the Intellectual Property of the Company that
is, in the Company's reasonable determination, subject to Purchaser's
reasonable agreement therewith, used primarily in connection with or held
for use primarily in connection with the operation of any business of the
Company other than the Inkjet Business.
1.2 Exercise of Options. Subject to the provisions set forth below,
Purchaser shall have the right:
(a) to exercise the Inkjet Option upon the termination of the Merger
Agreement pursuant to Section 9.1(b)(iii), 9.1(c)(ii), 9.1(d)(iii) or
9.1(d)(vii), thereof; provided that the Purchaser has not exercised the
Subsidiary Stock Option; and provided further that if the Merger Agreement
is terminated pursuant to Section 9.1(d)(iii), Purchaser may exercise the
Inkjet Option only if (i) the breach or breaches of representations,
warranties or covenants that were the reason for such termination would,
individually or in the aggregate, have a Material Adverse Effect or a
Material Delaying Effect, and (ii) such breach or breaches were not caused
solely by actions or inactions of the Purchaser;
(b) to exercise the Subsidiary Stock Option upon the termination of the
Merger Agreement for whatever reason; provided that the Purchaser has not
exercised the Inkjet Option.
Purchaser may elect to exercise the Inkjet Option or the Subsidiary Stock
Option by giving written notice (the "Notice of Exercise") to the Company
stating that it has elected to exercise the Inkjet Option or the Subsidiary
Stock Option, as the case may be; provided that such Notice of Exercise is
given within 90 days of the occurrence of any of the events set forth in
subsections (a) or (b) above. If Purchaser has not exercised the Inkjet Option
or the Subsidiary Stock Option during such 90-day period, the Inkjet Option
and the Subsidiary Stock Option shall expire and shall no longer be of any
force or effect.
1.3 Sale and License of Inkjet Business; Sale of Shares. (a) Subject to the
terms and conditions of this Agreement, if the Inkjet Option has been
exercised, on the Closing Date:
(i) The Company shall sell, transfer, convey, assign and deliver to
Purchaser, and Purchaser shall purchase, acquire and accept from the
Company, all of the Company's right, title and interest in and to the
Business Assets.
(ii) The Company shall grant, and hereby grants upon the Closing, to
Purchaser a perpetual, worldwide, nontransferable, royalty-free and fully
paid-up right and license to use the Secondary Assets solely in connection
with the Inkjet Business as it is now or may in the future be conducted.
The parties shall negotiate in good faith a license agreement containing
customary and commercially reasonable terms relating to the maintenance of
the Secondary Assets, infringement, indemnification, confidentiality and
other terms, provided that the failure to agree upon such license agreement
shall not affect the rights granted in this Section 1.3(a)(ii).
(iii) Solely to the extent any of the Business Assets are currently used
by the Company in connection with any business of the Company (other than
the Inkjet Business) as currently conducted, Purchaser shall grant, and
hereby grants upon the Closing, to the Company a perpetual, worldwide,
nontransferable (except for transfers in connection with the sale of the
Company, provided the transferee assumes in writing all of the obligations
of the Company under such license, including, without limitation, the
confidentiality and non-competition obligations contained therein),
royalty-free and fully paid-up right and license to use the Business Assets
in connection with such business of the Company. The parties shall
negotiate in good faith to a license agreement containing customary and
commercially reasonable terms relating to the maintenance of the Business
Assets, infringement, indemnification, confidentiality and other terms,
provided that the failure to agree upon such license agreement shall not
affect the rights granted in this Section 1.3(a)(iii). Notwithstanding
anything to the contrary contained herein, for a period of five years
commencing on the date of the exercise of the Inkjet Option, the Company
shall have no right anywhere in the world to use or permit other persons or
entities to use any of the Business Assets in connection with any business
similar to or competitive with the Inkjet Business.
B-2
<PAGE>
(iv) Purchaser shall assume all liabilities and obligations associated
with the Inkjet Business (including without limitation all contracts and
commitments), other than liabilities and obligations associated with the
Secondary Assets, but excluding any long-term indebtedness and all other
such liabilities and obligations as are or have been incurred outside the
ordinary course of business of the Inkjet Business, including, without
limitation, the liabilities identified in Schedule C (collectively, the
"Excluded Liabilities"); provided that, by mutual agreement, the Company
and Purchaser shall make such adjustments as to which of such rights,
contracts, properties, assets, goodwill and business are to be purchased
and which of such liabilities and obligations are to be assumed as shall be
necessary to settle the obligations, rights and accounts existing between
the Inkjet Business on the one hand and the Company and its affiliates and
other divisions on the other hand at the time of the Closing so that such
obligations, rights and accounts are settled and canceled as of the Closing
and are not transferred to or assumed by Purchaser. The liabilities and
obligations to be assigned and assumed pursuant to this subsection
1.3(a)(iv) are hereinafter referred to as the "Business Liabilities."
(b) Subject to the terms and conditions of this agreement, if the Subsidiary
Stock Option has been exercised, on the Closing Date:
(i) The Company shall sell to Purchaser, and Purchaser shall purchase,
the O-Sub Shares.
(ii) As of the Closing Date, the account receivable from the Company up
to $1,500,000 on O-Sub's balance sheet shall be canceled, provided that the
net equity on O-Sub's balance sheet shall in no event be less than
$1,100,000.
(c) As promptly as practicable following the Closing Date with respect to
the exercise of the Subsidiary Stock Option, the parties shall negotiate in
good faith a distribution agreement with commercially reasonable terms for the
distribution of software products from O-Sub to the Company for resale with
the Company's products.
1.4 Purchase Prices. (a) The aggregate purchase price to be paid by
Purchaser for the sale of the Business Assets and the license rights granted
under Section 1.3(a)(ii) to the Secondary Assets upon exercise of the Inkjet
Option and at the Closing shall be $6,000,000 (the "Inkjet Option Purchase
Price"), plus the grant of the license described in Section 1.3(c) and the
assumption of the Business Liabilities. The Purchaser may pay the Inkjet
Option Purchase Price, upon its election, by the cancellation, in an aggregate
amount up to the Inkjet Option Purchase Price, of (i) outstanding Promissory
Notes under the Loan and Pledge Agreement dated as of the date hereof, between
the Company and Purchaser (the "Loan and Pledge Agreement"), and (ii) any
accrued interest thereon through the date of such cancellation, the balance,
if any, of such Inkjet Option Purchase Price to be paid in cash.
(b) The purchase price to be paid by the Purchaser for the sale of the O-Sub
Shares upon exercise of the Subsidiary Stock Option and at the Closing shall
be $5,000,000 (the "Subsidiary Purchase Price"). The Purchaser may pay the
Subsidiary Purchase Price, upon its election in an aggregate amount up to the
Subsidiary Purchase Price, by (i) the cancellation of any outstanding
Promissory Notes under the Loan and Pledge Agreement, and (ii) any accrued
interest thereon through the date of such cancellation, the balance, if any,
of such Subsidiary Purchase Price to be paid in cash.
1.5 Closing. (a) The closing of the purchase of the Inkjet Business pursuant
to the Inkjet Option, or the O-Sub shares pursuant to the Subsidiary Stock
Option, as the case may be (the "Closing"), shall take place at 10:00 a.m.,
New York City time at the offices of Debevoise & Plimpton, 875 Third Avenue,
New York, New York 10022 on a date (the "Closing Date") that is the later of
(i) the date of the expiration or termination of any applicable waiting period
under the HSR Act and (ii) the fifteenth business day after the delivery of an
applicable Notice of Exercise (or such other date upon which the parties
hereto may mutually agree).
B-3
<PAGE>
(b) At the Closing, if the Inkjet Option has been exercised:
(i) the Company shall deliver to Purchaser (A) such duly executed bills
of sale, deeds, endorsements, assignments and other instruments of
conveyance and transfer, in form and substance satisfactory to Purchaser,
as are necessary or appropriate in the judgment of Purchaser to vest in
Purchaser good and marketable title to the Business Assets and to grant the
license described in Section 1.3(a)(ii) and (B) all contracts, commitments,
books, records, lists, files and other data in the possession of the
Company or any of its subsidiaries or affiliates relating to the Inkjet
Business including, but not limited to, all contracts, commitments, books,
records, lists, files and other data in the possession of the Company or
any of its subsidiaries or affiliates relating to the Business Assets and
the Secondary Assets;
(ii) Purchaser will assume the Business Liabilities;
(iii) Purchaser will (A) deliver or cause to be delivered the Inkjet
Option Purchase Price in immediately available funds by wire transfer to a
bank account of the Company designated by the Company prior to the date of
the Closing; or (B) if Purchaser elects, (I) deliver to the Company such
instruments, in form and substance reasonably satisfactory to the Company,
as are necessary or appropriate in the reasonable judgment of the Company
to effect the cancellation of the outstanding Promissory Notes, and any
accrued interest thereon through the date of such cancellation, and (II)
deliver or cause to be delivered the excess of the Inkjet Option Purchase
Price over the aggregate amount of obligations canceled pursuant to clause
(B)(I) of this Section 1.5(b) in immediately available funds by wire
transfer to a bank account of the Company designated by the Company prior
to the date of the Closing.
(iv) Purchaser shall deliver to the Company such instruments, in form and
substance reasonably satisfactory to the Company, as are necessary or
appropriate in the reasonable judgment of the Company to effect the
assumption of the Business Liabilities and to grant the license described
in Section 1.3(a)(iii).
(c) At the Closing, if the Subsidiary Stock Option has been exercised:
(i) the Company shall deliver or cause to be delivered to Purchaser the
O-Sub Shares in the form of a stock certificate or certificates therefor in
good form for delivery and free and clear of all Encumbrances, registered
in the name of Purchaser or its designee against payment therefor;
(ii) Purchaser will (A) deliver or cause to be delivered the Subsidiary
Purchase Price in immediately available funds by wire transfer to a bank
account of the Company designated by the Company prior to the date of the
Closing; or (B) if Purchaser elects, (I) deliver to the Company such
instruments, in form and substance reasonably satisfactory to the Company,
as are necessary or appropriate in the reasonable judgment of the Company
to effect the cancellation of the outstanding Promissory Notes, and any
accrued interest thereon through the date of such cancellation, and (II)
deliver or cause to be delivered the excess of the Inkjet Option Purchase
Price over the aggregate amount of obligations canceled pursuant to clause
(B)(I) of this Section 1.5(c) in immediately available funds by wire
transfer to a bank account of the Company designated by the Company prior
to the date of the Closing.
ARTICLE II
COVENANTS OF THE PARTIES
2.1 Escrow Agent. If at any time Purchaser reasonably believes that events
are likely to occur that would enable Purchaser to exercise the Inkjet Option,
Purchaser may request that the Company, and the Company shall, promptly after
such request, place in escrow with a mutually acceptable escrow agent (which
would include any commercial bank or trust company having net capital of not
less than $100 million) all or some, at Purchaser's option, of the items set
forth in Schedule D. If the Inkjet Option is exercised, all such items shall
be delivered by such escrow agent to Purchaser at the Closing in conformity
with this Agreement upon tender of payment to the Company of the Inkjet Option
Purchase Price (whether pursuant to Section 1.5(b)(iii)(A) or
Section 1.5(b)(iii)(B)).
B-4
<PAGE>
2.2 Employees; Transitional Services. If the Inkjet Option is exercised,
Purchaser and the Company shall (a) use their reasonable best efforts to cause
all employees and managers of the Company primarily engaged in the Inkjet
Business to become employees of Purchaser or any of its subsidiaries
conducting the Inkjet Business, (b) use their reasonable best efforts to cause
all part-time personnel, and other third parties currently performing services
for the Inkjet Business to continue to do so, and (c) execute a transitional
services agreement with commercially reasonable consideration providing for
such head offices and other services as Purchaser deems reasonably necessary
for the continued operation and smooth uninterrupted transition of the Inkjet
Business during a six-month transition period. The Company shall be
responsible for any severance and related payments owing to or becoming due to
Company employees primarily engaged in the Inkjet Business who do not become
employees of Purchaser.
2.3 Inventory. If the Inkjet Option is exercised, the Company hereby agrees
that Purchaser shall have the right to acquire the inventory to be acquired
hereunder in the form existing as of the Closing Date, provided that such
inventory shall exclude after-market ink, toner, paper and related supplies.
2.4 HSR Filings; Approvals. The Company and Purchaser shall each use its
reasonable best efforts promptly to prepare and to make such filings (if any)
and to provide such information (if any) as may be required under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")
with respect to the purchase of the Inkjet Business pursuant to the Inkjet
Option or the O-Sub Shares pursuant to the Subsidiary Stock Option.
2.5 Right of Inspection. At any time prior to the Closing or the termination
of this Agreement, Purchaser shall have the right, at all reasonable times
during regular business hours, to inspect the books, records, and properties
of the Company primarily related to the Inkjet Business or of the O-Sub solely
for the purpose of determining whether to exercise the Inkjet Option or the
Subsidiary Stock Option. Purchaser will keep all information derived from such
inspection confidential, except as required by applicable law or to the extent
that such information is otherwise publicly available.
2.6 Consents. If the Inkjet Option is exercised, the Company shall, and
shall cause each of its Subsidiaries and affiliates to: give all required
notices and use its reasonable best efforts to obtain prior to the Closing all
material licenses, permits, consents, approvals, authorizations,
qualifications and orders of Governmental Entities and other persons relating
to the Inkjet Business as may be required in order to enable the Company to
perform its obligations hereunder, including, without limitation, all consents
and approvals required to permit it to make the sale and licenses to Purchaser
contemplated herein and to enable Purchaser to enjoy after the Closing all
rights and benefits presently enjoyed by the Company in respect of the Inkjet
Business; provided that no contract shall be amended to increase the amount
payable thereunder in order to obtain any such consent, approval or
authorization or otherwise without obtaining the prior written consent of
Purchaser. In the event any such consent or approval is not obtained on or
prior to the Closing Date, the Company shall continue to use its reasonable
best efforts to obtain any such consent or approval after the Closing Date
until such time as such consent or approval has been obtained, and the Company
will cooperate with Purchaser in any lawful and economically feasible
arrangement to provide that Purchaser shall receive the interest of the
Company in the benefits of the Business Assets and the license described in
Section 1.3(a)(ii) notwithstanding the failure to obtain such consents or
approval.
2.7 Interim Operations. Until the earlier of the Closing or the termination
of this Agreement, the Company shall, and shall cause its subsidiaries to,
unless Purchaser shall otherwise consent in writing, conduct the operations of
the Inkjet Business and of O-Sub according to their respective usual, regular
and ordinary course of business consistent with past practice and use
reasonable best efforts to preserve intact their respective business
organizations and goodwill, to keep available the services of their officers
and employees and to maintain satisfactory relationships with customers,
suppliers, distributors, brokers, sales agents and all other persons having
business relationships with them, including through the payment of additional
compensation reasonably acceptable to Purchaser to such distributors, brokers
and sales agents reasonably calculated to maintain at least the current level
of merchandising, distribution and shelving. Without limiting the generality
of
B-5
<PAGE>
the foregoing, until the earlier of the Closing or the termination of this
Agreement, unless Purchaser shall otherwise consent in writing, the Company
will:
(a) not pledge, sell, lease, assign, transfer or otherwise dispose of (by
merger or otherwise) any of (i) the O-Sub Shares (other than pursuant to
the Loan and Pledge Agreement) or (ii) the Business Assets or Secondary
Assets (including, without limitation, receivables, leasehold interests or
third party licenses or assignments of Intellectual Property and including
any sale leaseback transaction) except for the sale of inventory in the
ordinary course of business;
(b) not effect any stock split, reverse stock split, stock dividend,
subdivision, reclassification of the O-Sub Shares, or otherwise change the
capitalization of the O-Sub as it exists on the date hereof;
(c) preserve and maintain all the properties used in or relating to the
Business Assets and Secondary Assets in a normal state of repair, order and
condition, reasonable wear and use excepted;
(d) keep all the Business Assets and Secondary Assets insured (to the
extent presently insured) against any loss, either by fire, other casualty,
or theft and give notice to Purchaser of any loss involving any of the
Business Assets or Secondary Assets if such loss is at least $50,000 or
more and discuss with Purchaser whether the proceeds of any claim made in
connection with the loss should be used to replace any property damage or
loss. Any proceeds not used to replace lost or damaged property shall be
for the account of Purchaser if the Inkjet Option is exercised and
consummated at the Closing;
(e) not enter into any contract, agreement or commitment relating to all
or any part of the business conducted by O-Sub, the Business Assets or
Secondary Assets except for contracts, agreements or commitments in the
ordinary course of business consistent with past practice;
(f) maintain all the books, accounts and records relating to O-Sub and
the Inkjet Business in the usual, regular and ordinary manner, on a basis
consistent with prior years;
(g) promptly advise Purchaser in writing of any material adverse change
in the business, operations, financial condition or prospects of O-Sub or
the Inkjet Business or in the Business Assets, Secondary Assets or Business
Liabilities;
(h) comply in all material respects with the provisions of all laws,
regulations, ordinances and judicial decrees applicable to the conduct of
O-Sub and the Inkjet Business;
(i) promptly notify Purchaser of the institution of any legal proceeding
which may individually or in the aggregate have a material adverse effect
on the business, operations, properties, financial condition or prospects
of O-Sub and the Inkjet Business taken as a whole;
(j) prosecute and maintain all Intellectual Property used or held for use
in connection with the Inkjet Business or the business of O-Sub; and
(k) not take or omit to take any other action nor enter into any
agreement which would have the effect of (i) frustrating the purpose of
this Agreement or (ii) preventing or disabling the Company from delivering
the Business Assets, the Secondary Assets upon exercise of the Inkjet
Option, delivering the O-Sub Shares upon exercise of the Subsidiary Stock
Option or otherwise performing its obligations under this Agreement.
2.8 Further Assurances. Each party hereto, prior to and following the
Closing, shall cause to be promptly and duly taken, executed, acknowledged and
delivered all such further acts, documents, instruments and assurances as may
from time to time be necessary in order to protect the Company's and
Purchaser's rights under this Agreement and otherwise as may reasonably be
requested by the Company and Purchaser in order to carry out the intent and
purposes of this Agreement and the transactions contemplated hereby.
B-6
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser, as of the date
hereof and as of the Closing Date, as follows:
3.1 Existence; Good Standing; Corporate Authority. Each of the Company and
O-Sub is (i) a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and (ii) is duly
licensed or qualified to do business as a foreign corporation and is in good
standing under the laws of any other state of the United States or any other
jurisdiction in which the character of the properties owned or leased by it or
in which the transaction of its business makes such licensure, qualification
or good standing necessary, except where the failure to be so in good standing
or to be so licensed or qualified, individually or in the aggregate, would not
have a material adverse effect on the business, operations, results of
operations, assets, financial condition or prospects of the Company or O-Sub
(a "Material Adverse Effect"). Each of the Company and O-Sub has the requisite
corporate power and authority to own, operate and lease its properties and
carry on its business (including, in the case of Purchaser, the Inkjet
Business) as now conducted.
3.2 Authorization, Validity and Effect of Agreements. The Company has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by the Company and the consummation by the Company
of the transactions contemplated hereby have been duly and validly authorized
by the Board of Directors, and no other corporate proceedings on the part of
the Company or its stockholders are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by the Company, and (assuming this
Agreement constitutes a valid and binding obligation of Purchaser) constitutes
the valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
3.3 Compliance with Laws. Except as set forth in Schedule 3.3, neither the
Company nor O-Sub is in violation of any Laws of any Governmental Entity
applicable to the Company, O-Sub or any of their respective properties or
assets (including the Inkjet Business), except for violations which,
individually or in the aggregate, would not have a Material Adverse Effect.
3.4 Capitalization, etc. The Company owns all of the O-Sub Shares, and each
of the O-Sub Shares is duly authorized, validly issued, fully paid and
nonassessable and owned by the Company free and clear of all Encumbrances
(except for any Encumbrance pursuant to the Loan and Pledge Agreement). There
are no other shares of capital stock of O-Sub, no securities of O-Sub
convertible or exchangeable for shares of capital stock or voting securities
of O-Sub, and no existing options, warrants, calls, subscriptions, convertible
securities, or other rights, agreements or commitments that obligate the
Company or O-Sub to issue, transfer or sell any shares of capital stock of, or
equity interests in, O-Sub. There are no outstanding obligations of the
Company or O-Sub to repurchase, redeem or otherwise acquire any shares of
capital stock of O-Sub.
3.5 Assets. (a) The Company owns and has good title or has the right to use
all the Business Assets and Secondary Assets (except as may be disposed of in
the ordinary course of business after the date hereof and in accordance with
this Agreement), in each case free and clear of any and all Encumbrances. The
Business Assets and the Secondary Assets, taken as a whole, constitute all the
properties and assets used or held for use in connection with, necessary for
the conduct of or otherwise material to the Inkjet Business as reasonably
conducted and as conducted during the past twelve months (except inventory
sold, cash disposed of, accounts receivable collected, prepaid expenses
realized, contracts fully performed, and properties or assets replaced by
equivalent or superior properties or assets, in each case in the ordinary
course of business). There are no assets or properties used in the operation
of the Inkjet Business and owned by any Person other than the Company that
will not as of the Closing Date be leased or licensed to Purchaser under
valid, current leases or license arrangements. The Business Assets and
Secondary Assets are in all material respects adequate for the purposes
B-7
<PAGE>
for which such assets are currently used or are held for use, and are in
reasonably good repair and operating condition (subject to normal wear and
tear) and, to the knowledge of the Company, there are no facts or conditions
affecting such assets that could, individually or in the aggregate, interfere
in any material respect with the use, occupancy or operation thereof as
currently used, occupied or operated, or their adequacy for such use.
(b) Neither the purchase and sale of the Business Assets and the licenses
contemplated hereby upon the exercise of the Inkjet Option, nor the purchase
and sale of the O-Sub Shares upon the exercise of the Subsidiary Stock Option
would constitute the sale of "substantially all" of the Company's properties
and assets pursuant to Section 271 of the DGCL, and such Section 271 shall not
be applicable to any of the transactions contemplated by this Agreement.
Neither the Inkjet Business nor O-Sub represents more than 45% of (i) the book
value of the Company's assets, (ii) the Company's revenues, or (iii) the
Company's profit, in each case on a consolidated basis.
3.6 No Violation. Except as set forth in Schedule 3.6, neither the execution
and delivery by the Company of this Agreement nor the consummation by the
Company of the transactions contemplated hereby will: (i) violate, conflict
with or result in a breach of any provisions of the Certificate of
Incorporation or Bylaws (or comparable constituent documents) of the Company
or O-Sub; (ii) violate, conflict with, result in a breach of any provision of,
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, result in the termination or in a right of
termination of, accelerate the performance required by or benefit obtainable
under, result in the triggering of any payment or other obligations pursuant
to, result in the creation of any Encumbrance upon any of the Inkjet Business,
the O-Sub Shares or the O-Sub business (other than any Encumbrance created
hereunder) under, or result in there being declared void, voidable, subject to
withdrawal, or without further binding effect, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust or any
license, franchise, permit, lease, contract, plan, agreement or other
instrument, commitment or obligation to which the Company or O-Sub is a party,
by which the Company or O-Sub or any of their respective properties is bound,
or under which the Company or any of its subsidiaries or any of their
respective properties is entitled to a benefit, except for any of the
foregoing matters which individually or in the aggregate would not have a
Material Adverse Effect or prevent or materially delay the consummation of the
transactions contemplated hereby.
3.7 Merger Agreement. Each of the representations and warranties made by the
Company in the Merger Agreement (including the relevant exceptions set forth
in the Disclosure Letter) are true and correct to the extent they relate to
the conduct of O-Sub and the Inkjet Business or to the O-Sub Shares, the
Business Assets or the Secondary Assets.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to the Company, as of the date
hereof and as of the Closing Date, as follows:
4.1 Existence; Good Standing. Purchaser is a corporation duly incorporated,
validly existing and in good standing under the laws of its jurisdiction of
incorporation.
4.2 Authorization, Validity and Effect of Agreements. Purchaser has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the consummation by Purchaser and
Merger Sub of the transactions contemplated hereby and thereby have been duly
and validly authorized by the Board of Directors of Purchaser and no other
corporate proceedings on the part of Purchaser are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby or thereby.
This Agreement has been duly and validly executed and delivered by Purchaser,
and (assuming this Agreement constitutes a valid and binding obligation of the
Company) constitutes the valid and binding obligation of Purchaser,
enforceable against Purchaser in accordance with its respective terms.
B-8
<PAGE>
ARTICLE V
MISCELLANEOUS
5.1 Survival. The representations and warranties contained in this Agreement
shall not survive the Effective Time or the expiration of both the Inkjet
Option and the Subsidiary Stock Option in accordance with the terms of this
Agreement, but shall survive for a period of two years following the Closing
Date (except with respect to the representations contained in Section 3.7 that
relate to Sections 5.10 and 5.11 of the Merger Agreement which shall survive
until the expiration of the applicable statute of limitations).
5.2 Amendment. This Agreement may not be amended, modified or supplemented
except by an instrument in writing signed on behalf of all of the parties.
5.3 Notices. Any notice required to be given hereunder shall be sufficient
if in writing, and sent by facsimile transmission (with a confirmatory copy
sent by overnight courier), by courier service (with proof of service), hand
delivery or certified or registered mail (return receipt requested and first-
class postage prepaid), addressed as follows:
<TABLE>
<S> <C> <C> <C>
If to Purchaser: Gretag Imaging Group, Inc. If to the Company: Raster Graphics, Inc.
c/o Gretag Imaging, Inc. 3025 Orchard Parkway
2070 Westover Road San Jose, CA 95134
Chicopee, MA 01022
Telephone: (413) 593-6900 Telephone: (408) 232-4000
Facsimile: (413) 788-0940 Facsimile: (408) 232-4100
Attention: William Recker Attention: Rakesh Kumar
</TABLE>
With a copy to:
Gretag Imaging Holding AG
Althardstrasse 70
CH-8105 Regensdorf Switzerland
Telephone: (011-411) 842-2092
Facsimile: (011-411) 842-2411
Attention: Dr. Eduard Brunner
<TABLE>
<S> <C>
With a copy to: With a copy to:
Debevoise & Plimpton Venture Law Group
875 Third Avenue 2800 Sand Hill Road
New York, New York 10022 Menlo Park, CA 94025
Telephone: (212) 909-6000 Telephone: (650) 854-4488
Facsimile: (212) 909-6836 Facsimile: (650) 854-1121
Attention: Christopher Smeall, Esq. Attention: Edmund S. Ruffin, Jr., Esq.
</TABLE>
or to such other address as any party shall specify by written notice so
given, and such notice shall be deemed to have been delivered as of the date
so telecommunicated, personally delivered or mailed.
5.4 Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party; provided, however, that (a) Purchaser may
assign its rights hereunder to an affiliate or to any purchaser of any portion
of the business of O-Sub or the Inkjet Business after the Closing, and (b) the
Company may assign its rights hereunder to any purchaser of any portion of the
business of the Company other than the Inkjet Business or the business of O-
Sub. Subject to the preceding sentence, this Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Notwithstanding anything contained in this Agreement
to the contrary, nothing in this
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<PAGE>
Agreement, except Section 5.12, expressed or implied, is intended to confer on
any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
5.5 Entire Agreement. This Agreement (including the Exhibits and Schedules
hereto), the Loan and Pledge Agreement and the Merger Agreement and any other
documents delivered by the parties in connection herewith or therewith
constitute the entire agreement among the parties with respect to the subject
matter hereof and thereof and supersede all prior agreements and
understandings among the parties with respect thereto. Termination of the
Merger Agreement or the Loan and Pledge Agreement shall in no way limit the
applicability of any reference herein to, or any incorporation herein by
reference of, any such document or any section in any such document.
5.6 Expenses. Except as otherwise set forth in this Agreement or the Merger
Agreement, each party shall pay its own expenses incurred in connection with
this Agreement.
5.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to its rules
of conflict of laws.
5.8 Investigations. No action taken pursuant to this Agreement, including,
without limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance
with any representations, warranties, covenants or agreements contained in
this Agreement.
5.9 Termination. This Agreement and the Inkjet Option and the Subsidiary
Stock Option granted hereto shall expire upon the earlier of (a) the Effective
Time and (b) 90 days after either such option becomes exercisable pursuant to
Section 1.2.
5.10 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is unenforceable, the provision shall be interpreted to apply
to the fullest extent possible to permit the provisions of this Agreement to
be enforceable.
5.11 Arbitration. (a) Any dispute, controversy or claim arising out of,
relating to, or in connection with, this contract, or the breach, termination
or validity thereof, shall be finally settled by arbitration. The arbitration
shall be conducted in accordance with the CPR Institute for Dispute Resolution
Rules for Non-Administered Arbitration of International Disputes in effect at
the time of the arbitration, except as they may be modified herein or by
mutual agreement of the parties. The seat of the arbitration shall be New
York, NY and it shall be conducted in the English language, provided that
either party may submit testimony or documentary evidence in German and shall,
on the request of the other party, furnish a translation or interpretation
into the other language of any such testimony or documentary evidence. The
neutral organization designated to perform the functions specified in Rule 6
and Rules 7.7(b), 7.8 and 7.9 shall be the CPR Institute for Dispute
Resolution. Notwithstanding Section 5.7, the arbitration and this clause shall
be governed by the Federal Arbitration Act, 9 U.S.C. (S)(S) 1 et seq.
(b) The arbitration shall be conducted by one arbitrator. The arbitrator
shall be selected as provided in the rules specified above.
(c) In addition to the authority conferred on the arbitration tribunal by
the rules specified above, the arbitration tribunal shall have the authority
to order such production of documents as may reasonably be requested by either
party or by the tribunal itself.
(d) The arbitral award shall be in writing, state the reasons for the award,
and be final and binding on the parties. The award shall include an award of
costs, including reasonable attorneys' fees and disbursements. The
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<PAGE>
arbitration tribunal shall have the authority to make such orders for interim
relief, including injunctive relief, as it may deem just and equitable.
Judgment upon the award may be entered by any court having jurisdiction
thereof or having jurisdiction over the relevant party or its assets.
(e) The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof, this being in addition to any other remedy to
which they are entitled at law or in equity.
5.12 Indemnification. (a) By the Company. The Company covenants and agrees
to defend, indemnify and hold harmless Purchaser, its affiliates and the
officers, directors, employees, agents, advisers and representatives of each
such Person (collectively, the "Purchaser Indemnitees") from and against, and
pay or reimburse Purchaser Indemnitees for, any and all claims, liabilities,
obligations, losses, fines, costs, royalties, proceedings, deficiencies or
damages (whether absolute, accrued, conditional or otherwise and whether or
not resulting from third party claims), including out-of-pocket expenses and
reasonable attorneys' and accountants' fees incurred in the investigation or
defense of any of the same or in asserting any of their respective rights
hereunder (collectively, "Losses"), resulting from or arising out of:
(i) any inaccuracy of any representation or warranty made by the Company
herein or in connection herewith;
(ii) any failure of the Company to perform any covenant or agreement
hereunder or fulfill any other obligation in respect hereof; and
(iii) if the Inkjet Option is exercised and consummated at the Closing,
the Excluded Liabilities.
The Company's aggregate indemnification obligations with respect to any
claim for indemnification pursuant to clauses (i) and (ii) of the first
sentence of this Section 5.12(a) shall not exceed $5,000,000.
(b) By Purchaser. Purchaser covenants and agrees to defend, indemnify and
hold harmless the Company, its affiliates and the officers, directors,
employees, agents, advisers and representatives of each such Person
(collectively, the "Company Indemnities") from and against any and all Losses
resulting from or arising out of:
(i) any inaccuracy in any representation or warranty made by Purchaser
herein;
(ii) any failure of Purchaser to perform any covenant or agreement
hereunder or fulfill any other obligation in respect hereof; and
(iii) if the Inkjet Option is exercised and consummated at the Closing,
the Assumed Liabilities.
except to the extent such Losses result from or arise out of the Excluded
Liabilities or constitute Losses for which the Company is required to
indemnify Purchaser Indemnitees under Section 5.12(a). Purchaser's aggregate
indemnification obligations with respect to any claim for indemnification
pursuant to clauses (i) and (ii) of the first sentence of this Section 5.12(b)
shall not exceed $5,000,000.
(c) Indemnification Procedures. In the case of any claim asserted by a third
party against a party entitled to indemnification under this Agreement (the
"Indemnified Party"), notice shall be given by the Indemnified Party to the
party required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and the Indemnified Party shall permit the
Indemnifying Party (at the expense of such Indemnifying Party) to assume the
defense of any claim or any litigation resulting therefrom, provided that (i)
the counsel for the Indemnifying Party who shall conduct the defense of such
claim or litigation shall be reasonably satisfactory to the Indemnified Party,
(ii) the Indemnified Party may participate in such defense at such Indemnified
Party's expense, and (iii) the omission by any Indemnified Party to give
notice as provided herein shall not relieve the Indemnifying Party of its
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<PAGE>
indemnification obligation under this Agreement. Except with the prior written
consent of the Indemnified Party, no Indemnifying Party, in the defense of any
such claim or litigation, shall consent to entry of any judgment or order,
interim or otherwise, or enter into any settlement with respect to such claim
or litigation. In the event that the Indemnified Party shall in good faith
determine that the conduct of the defense of any claim subject to
indemnification hereunder or any proposed settlement of any such claim by the
Indemnifying Party might be expected to affect adversely the ability of
Purchaser to conduct its business, or that the Indemnified Party may have
available to it one or more defenses or counterclaims that are inconsistent
with one or more of those that may be available to the Indemnifying Party in
respect of such claim or any litigation relating thereto, the Indemnified
Party shall have the right at all times to take over and assume control over
the defense, settlement, negotiations or litigation relating to any such claim
at the sole cost of the Indemnifying Party, provided that if the Indemnified
Party does so take over and assume control, the Indemnified Party shall not
settle such claim or litigation without the written consent of the
Indemnifying Party, such consent not to be unreasonably withheld. In the event
that the Indemnifying Party does not accept the defense of any matter as above
provided, the Indemnified Party shall have the full right to defend against
any claim or demand and shall be entitled to settle or agree to pay in full
such claim or demand. In any event, the Indemnifying Party and the Indemnified
Party shall cooperate in the defense of any claim or litigation subject to
this Section 5.12 and the records of each shall be available to the other with
respect to such defense.
5.13 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof
each signed by less than all, but together signed by all, of the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
RASTER GRAPHICS, INC.
By: /s/ Rakesh Kumar
___________________________________
Name: Rakesh Kumar
Title: President
GRETAG IMAGING GROUP, INC.
By: /s/ E. Brunner
___________________________________
___________________________________
Name: Dr. Eduard M. Brunner
Title: Treasurer
B-12
<PAGE>
ANNEX C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOAN AND PLEDGE AGREEMENT
between
RASTER GRAPHICS, INC.
(the "Borrower")
and
GRETAG IMAGING GROUP, INC.
(the "Lender")
Dated as of October 6, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
SECTION 1. DEFINITIONS................................................... C-1
1.1.Defined Terms............................................. C-1
SECTION 2. AMOUNT AND TERMS OF LOAN; CLOSING............................. C-3
2.1.Loan...................................................... C-3
2.2.Closing................................................... C-3
SECTION 3. PAYMENT OF LOAN; INTEREST; TRANSFER........................... C-4
3.1.Repayment of the Loans.................................... C-4
3.2.Interest.................................................. C-4
3.3.Terms of Payment.......................................... C-4
3.4.Computation of Interest and Fees.......................... C-5
3.5.Indemnity................................................. C-5
3.6.Optional Prepayment....................................... C-5
3.7.Termination of Committed Amount........................... C-5
SECTION 4. PLEDGE OF COLLATERAL.......................................... C-5
4.1.Pledge of Collateral...................................... C-5
4.2.Delivery of Collateral.................................... C-5
4.3.Further Assurances........................................ C-5
4.4.Voting Rights; Dividends, etc............................. C-5
4.5.Covenants of the Borrower................................. C-6
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE BORROWER................ C-6
5.1.Corporate Status and Licensing............................ C-6
5.2.Corporate Power and Authority; Enforceable Obligations.... C-6
5.3.Compliance with Law and Other Instruments................. C-6
5.4.Litigation................................................ C-6
5.5.Consents.................................................. C-6
5.6.Financial Information..................................... C-7
5.7.Taxes, Assessments and Fees............................... C-7
5.8.Capitalization............................................ C-7
5.9.Accuracy of Information................................... C-7
5.10.Absence of Default....................................... C-7
5.11.Obligations Pari Passu................................... C-7
5.12.Withholding Tax.......................................... C-7
5.13.Title to Properties...................................... C-7
5.14.Material Adverse Change.................................. C-7
5.15.Title to Collateral; First Priority Lien................. C-7
5.16.Authorized Stock......................................... C-8
SECTION 6. CONDITIONS PRECEDENT.......................................... C-8
6.1.Borrower Approval......................................... C-8
6.2.Documentation............................................. C-8
6.3.Changes, Etc.............................................. C-8
6.4.Corporate Proceedings of the Borrower..................... C-8
6.5.Borrower Incumbency Certificate........................... C-8
6.6.Representations and Warranties............................ C-8
6.7.Performance; No Default................................... C-8
6.8.Governmental Approvals.................................... C-9
6.9.Legal Opinions............................................ C-9
</TABLE>
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<TABLE>
<S> <C> <C>
6.10.Compliance Certificate....................................................... C-9
6.11.Security Arrangements........................................................ C-9
6.12.Option Agreement............................................................. C-9
6.13.Additional Matters........................................................... C-9
SECTION 7. COVENANTS......................................................................... C-9
7.1.Senior Obligations............................................................ C-9
7.2.Limitation of Liens........................................................... C-9
7.3.Use of Proceeds............................................................... C-9
7.4.Constitutive Documents; Preservation of Existence, Etc.; Conduct of Business.. C-10
7.5.Compliance with Applicable Law................................................ C-10
7.6.Notices....................................................................... C-10
7.7.Further Assurances............................................................ C-10
7.8.Sale; Merger.................................................................. C-10
7.9.Appointment as Attorney-in-Fact............................................... C-10
7.10.Maintenance of Shares........................................................ C-11
SECTION 8. EVENTS OF DEFAULT................................................................. C-11
8.1.Events of Default............................................................. C-11
8.2.Remedies on Default, Etc...................................................... C-11
8.3.Exercise of Remedies.......................................................... C-12
SECTION 9. TAXES............................................................................. C-13
9.1.Excluded Taxes................................................................ C-13
9.2.Additional Amounts; Indemnified Taxes......................................... C-13
9.3.Other Taxes................................................................... C-13
SECTION 10. STOCK OPTION...................................................................... C-13
10.1.Grant of Stock Option........................................................ C-13
10.2.Exercise of Stock Option..................................................... C-14
10.3.Stock Option Closing......................................................... C-14
SECTION 11. MISCELLANEOUS..................................................................... C-15
11.1.Amendments and Waivers....................................................... C-15
11.2.Notices...................................................................... C-15
11.3.No Waiver; Cumulative Remedies............................................... C-15
11.4.Survival of Representations and Warranties................................... C-16
11.5.Payment of Expenses and Taxes................................................ C-16
11.6.Successors and Assigns; Assignments.......................................... C-16
11.7.Severability................................................................. C-16
11.8.Integration.................................................................. C-16
11.9.CONSENT TO JURISDICTION...................................................... C-16
11.10.Right to Set-Off............................................................ C-16
11.11.Payments.................................................................... C-17
11.12.No Partnership; Etc......................................................... C-17
11.13.Enforcement of Agreement.................................................... C-17
11.14.GOVERNING LAW............................................................... C-17
11.15.WAIVERS OF JURY TRIAL....................................................... C-17
11.16.Counterparts................................................................ C-17
EXHIBIT A Form of Promissory Note
EXHIBIT B Initial Note
</TABLE>
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LOAN AND PLEDGE AGREEMENT
October 6, 1998
Gretag Imaging Group, Inc.
c/o Gretag Imaging, Inc.
2070 Westover Road
Chicopee, MA 01022
Dear Sirs:
Raster Graphics, Inc. (the "Borrower"), a Delaware corporation, agrees with
Gretag Imaging Group, Inc. (together with its successors and permitted
assigns, the "Lender"), a company organized under the laws of Delaware, as
follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms shall have
the following meanings:
"Agreement": this Loan and Pledge Agreement, as amended, supplemented or
otherwise modified from time to time.
"Applicable Law": as to any Person, the Certificate of Incorporation and By-
Laws or other constituent documents, organizational, or governing documents of
such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding such Person or any of its property or to which such Person or
any of its property is subject.
"Borrower": as defined in the preamble hereto.
"Borrower Common Stock": as defined in subsection 10.1(a).
"Borrower Obligations": the collective reference to the unpaid principal of
and interest on the Loans and all other obligations and liabilities of the
Borrower to the Lender, whether direct or indirect, absolute or contingent,
due or to become due, or now existing or hereafter incurred, which may arise
out of, or in connection with, the Loan Agreement, and which shall include the
unpaid principal of and any accrued interest on the Initial Note and all such
obligations and liabilities of the Borrower arising out of the Initial Note.
"Business Day": a day other than a Saturday, Sunday or other day on which
commercial banks in New York, New York, or Zurich, Switzerland, are authorized
or required by law to close.
"Closing Amount": as defined in subsection 2.2(a).
"Closing Date": as defined in subsection 2.2(a).
"Closing Notice": as defined in subsection 2.2(a).
"Collateral": as defined in subsection 4.1.
"Committed Amount": U.S. Dollars 5,000,000.
"Default": any of the events specified in section 8, whether or not any
requirement for the giving of notice, the lapse of time, or both, or any other
condition, has been satisfied.
"Event of Default": any of the events specified in section 8, provided that
any requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
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"Excluded Taxes": as defined in subsection 9.1.
"Financial Statements": as defined in subsection 5.6.
"Governmental Authority": any nation or governmental entity, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Indemnified Liabilities": as defined in subsection 11.5.
"Indemnified Taxes": as defined in subsection 9.2(d).
"Initial Note": as defined in subsection 2.2(c).
"Inkjet Option": as defined in the Option Agreement.
"Lender": as defined in the preamble hereto.
"Lien": as to any Person as at any date, any mortgage, lien, pledge, adverse
claim, charge, security interest or other encumbrance existing on such date in
or on, or any interest or title existing on such date of any vendor, lessor,
lender or other secured party to or of, such Person under any conditional sale
or other title retention agreement or capital lease with respect to, any
property or asset of such Person, or the signing or filing of any financing
statement which names such Person as debtor, or the signing of any then
effective security agreement authorizing any other party as the secured party
thereunder to file any financing statement.
"Loan": any loan made by the Lender to the Borrower hereunder on a Closing
Date.
"Merger": as defined in the Merger Agreement.
"Merger Agreement": as defined in subsection 3.1.
"Option Agreement": as defined in subsection 4.5.
"O-Sub": as defined in subsection 4.1.
"O-Sub Shares": as defined in subsection 4.1.
"Other Taxes": as defined in subsection 9.3.
"Outstanding Note Obligations": as defined in subsection 10.1(d).
"Pending Reports": as defined in the Merger Agreement.
"Person": any individual, Borrower, corporation, firm, partnership, joint
venture, limited liability company, association, organization, state or agency
of a state or other entity, whether or not having a separate legal
personality.
"Promissory Note": as defined in subsection 2.2(b).
"Settlement": as defined in the Merger Agreement.
"Settlement Deposit": as defined in subsection 2.2(a).
"Stock Option": as defined in subsection 10.1(a).
"Stock Option Closing": as defined in subsection 10.3(a).
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"Stock Option Closing Date": as defined in subsection 10.3(a).
"Stock Option Consideration": as defined in subsection 10.1(b).
"Stock Option Notice Date": as defined in subsection 10.2.
"Stock Option Shares": as defined in subsection 10.1(a).
"Subsidiary": at any particular time, any Person whose affairs and policies
the Borrower controls or has the power to control, whether by ownership of
share capital, contract, the power to appoint or remove members of the
governing body of that Person or otherwise, except that the Company's French
subsidiary shall be excluded from this definition.
"Subsidiary Stock Option": as defined in the Option Agreement.
"SVB Facility": as defined in subsection 2.2(a).
"Total Obligations": as defined in subsection 2.2(a).
"U.S. Dollars": the freely transferable lawful currency of the United
States.
SECTION 2. AMOUNT AND TERMS OF LOAN; CLOSING
2.1 Loan. The Borrower shall borrow from the Lender and, subject to the
terms and conditions hereof, the Lender shall lend to the Borrower, an amount
up to the sum of the Committed Amount; provided that immediately following the
loan of any Closing Amount on the related Closing Date, the sum of the
aggregate amount of all Closing Amounts and any outstanding accrued interest
thereon shall not exceed the Committed Amount.
2.2 Closing. (a) On each of the dates (collectively referred to as the
"Closing Dates") specified by the Borrower by irrevocable notice to the Lender
(each, a "Closing Notice"), the Borrower shall borrow from the Lender the
principal amount (each, a "Closing Amount") specified in the Closing Notice
relating to such Closing Date, and the Lender shall lend the Closing Amount to
the Borrower; provided (i) the date of execution of this Agreement shall be a
Closing Date on which the Borrower shall borrow from the Lender the principal
amount of $500,000; (ii) except as expressly provided in this Section 2.2(a),
each of the Closing Amounts shall be in the amount of not more than $500,000;
(iii) the sum of the aggregate amount of all the Closing Amounts (including
the principal amount of $500,000 loaned under the Initial Note) and any
outstanding accrued interest thereon as of any Closing Date (collectively, the
"Total Obligations" from time to time), shall not exceed the Committed Amount,
and the sum of the Total Obligations and the aggregate principal amount and
any accrued interest (the "SVB Amount") outstanding under the Borrower's
credit facility with Silicon Valley Bank, or any refinancing or modification
thereof, shall not exceed $6,000,000; (iv) except as expressly provided in
this Section 2.2(a), no Closing Date may occur less than 14 calendar days
following the immediately preceding Closing Date, if any; (v) except as
expressly provided in this Section 2.2(a), a Closing Notice with respect to a
Closing Date may not be delivered less than 5 Business Days prior to such
Closing Date; (vi) no Closing shall occur following February 28, 1999;
provided further if the Borrower is obligated to deposit $850,000 (the
"Settlement Deposit") in escrow in connection with the execution and delivery
of a memorandum of understanding relating to the Settlement satisfactory in
form and substance to Lender and its counsel, the Borrower may specify a
Closing Date in a Closing Notice not less than 5 Business Days following such
notice to borrow from the Lender, and the Lender shall, subject to subsection
2.2(a)(iii) and (iv), lend to the Borrower, the Settlement Deposit in
accordance with subsection 7.3 hereof. Borrower shall give notice to Silicon
Valley Bank prior to each Closing Date of the Closing Amount and the Total
Obligations.
(b) Each Closing shall take place at the offices of Debevoise & Plimpton,
875 Third Avenue, New York, New York, at 11:00 a.m. (New York time) on the
Closing Date. At each Closing, the Borrower shall deliver to
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the Lender a promissory note, in the form of Exhibit A hereto, with respect to
the Closing Amount (each delivered note, a "Promissory Note"). If on any
Closing Date the Borrower shall fail to borrow from the Lender the amount
specified in the relevant Closing Notice as provided herein, or if at any
Closing any of the conditions to such Closing specified in Section 6 shall not
have been fulfilled to the satisfaction of the Lender, or waived by the
Lender, the Lender shall, at its election, be relieved of all further
obligations to advance any funds hereunder, without thereby waiving any other
rights it may have by reason of such failure or nonfulfillment.
(c) Upon the execution of this Agreement, that certain Promissory Note,
dated September 23, 1998, pursuant to which the Borrower borrowed $500,000
from the Lender and which is attached as Exhibit B hereto (the "Initial
Note"), shall be deemed for purposes of this Agreement to be a Loan made
pursuant to this Agreement and any reference to "Loan", "Promissory Note",
"Closing Amount" or "Borrower Obligations" shall be construed to include such
Initial Note, the amount advanced thereunder and/or the obligations of the
Borrower thereunder, as the context requires, and the amounts loaned pursuant
to the Initial Note shall be deemed to have been loaned under this Agreement
as part of the Committed Amount.
SECTION 3. PAYMENT OF LOAN; INTEREST; TRANSFER
3.1 Repayment of the Loans. The outstanding Loans and all accrued interest
thereon shall be payable forthwith upon written demand from the Lender to the
Borrower, provided that, except upon the occurrence of an Event of Default,
the Lender shall not make such demand unless and until either the Merger
Agreement, dated as of the date hereof, among Borrower, Gretag Imaging Group,
Inc. and Gretag Acquisition Corp. (the "Merger Agreement") shall have been
terminated (for whatever reason) or the Merger shall have occurred.
3.2 Interest. (a) The Borrower shall pay interest to the Lender on the
unpaid principal amount of each Closing Amount from the Closing Date with
respect to such Closing Amount until the full payment thereof, payable upon
written demand in accordance with Section 3.1, at an interest rate per annum
equal to 8.5% per annum.
(b) If all or a portion of (i) the principal amount of the Loan, (ii) any
interest payable thereon or (iii) any other amount payable hereunder shall not
be paid when due (whether at the stated maturity, by acceleration or
otherwise), such overdue amount shall bear interest from the date such amount
is due until such amount is paid in full, at an interest rate per annum equal
to the lesser of (a) 1.5 times the interest rate then payable to the Borrower
in accordance with Section 3.2(a) with respect to the amount so unpaid and (b)
the maximum amount permitted by law.
3.3 Terms of Payment. (a) The Borrower shall cause to be paid all sums with
respect to the Loan, whether on account of principal, interest, fees or
otherwise, to the account of the Lender specified in subsection 11.11 or as
otherwise specified in writing by the Lender from time to time.
(b) All payments to be made by the Borrower hereunder, whether on account of
principal, interest, fees or otherwise, shall be made in U.S. Dollars prior to
11:00 A.M., New York time, on the due date thereof.
(c) The Borrower shall make all payments hereunder regardless of any right
of set-off, defense or counterclaim, including, without limitation, any
defense or counterclaim based on (i) any law, rule or policy which is now or
hereafter promulgated by any Governmental Authority and which may adversely
affect the Borrower's obligation to make, or the right of the Lender to
receive, such payments, and (ii) any other similar events impeding, preventing
or delaying the parties hereto or any other Person from performing their
respective obligations hereunder or under any other contract or agreement.
(d) Any amounts paid by or on behalf of the Borrower to the Lender under
this Agreement shall be applied as follows: first to the payment in full of
all obligations then due under this Agreement other than those in respect of
principal of and interest on the Loans, second to the payment in full of
accrued and unpaid interest on the Loans, and third to the payment of
principal of the Loans in inverse order of the Closing Dates thereof.
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3.4 Computation of Interest and Fees. (a) Interest shall be calculated on
the basis of a 360-day year for the actual days elapsed.
(b) Each determination of an interest rate by the Lender pursuant to any
provision of this Agreement shall be conclusive and binding on the Borrower in
the absence of manifest error.
3.5 Indemnity. The Borrower agrees to indemnify the Lender and its
successors and assigns and to hold the Lender and its successors and assigns
harmless from any loss or expense which the Lender or its successors and
assigns may sustain or incur as a consequence of (a) failure of the Borrower
to borrow the amount specified in the Closing Notice after the Borrower has
delivered the Closing Notice, or (b) any prepayment by the Borrower of
principal of or interest on the Loan, or any fee or other amount due hereunder
upon acceleration after an Event of Default or pursuant to any other provision
of this Loan Agreement.
3.6 Optional Prepayment. The Borrower may prepay the Loan in whole or in
part at any time, without penalty but with interest to the date of prepayment.
3.7 Termination of Committed Amount. Upon any prepayment hereunder the
Committed Amount shall be terminated forthwith.
SECTION 4. PLEDGE OF COLLATERAL
4.1 Pledge of Collateral. As security for the complete and punctual
satisfaction by the Borrower of the Borrower Obligations, the Borrower hereby
pledges, assigns, hypothecates, transfers and delivers to the Lender all of
the outstanding shares of capital stock (the "O-Sub Shares") of Onyx Graphics
Corporation ("O-Sub") and any proceeds therefrom and all other or additional
stock or securities or property paid or distributed in respect of such shares
by way of (i) dividend or other distribution, (ii) stock split, spin off,
split-up, reclassification, combination of shares or other corporate
rearrangement and (iii) any consolidation, merger, exchange of stock,
conveyance of assets, liquidation or other corporate reorganization (together
with the O-Sub Shares, the "Collateral") and grants to the Lender a first lien
on, and security interest in, the Collateral, provided, that if an Event of
Default occurs, Lender exercises its remedies as set forth in Section 8.2 and
Lender becomes the owner of the O-Sub Shares, the account receivable on O-
Sub's balance sheet from Borrower shall be canceled up to an aggregate amount
of $1,500,000; provided, that in no event shall the net equity on O-Sub's
balance sheet be less than $1,100,000.
4.2 Delivery of Collateral. All certificates or instruments representing or
evidencing the Collateral shall be delivered to and held by the Lender as
secured party or its designee until such time as the Borrower Obligations have
been satisfied in full.
4.3 Further Assurances. The Borrower agrees that at any time, and from time
to time, the Borrower will promptly execute and deliver all further
instruments and documents, and take all other action that may be necessary or
desirable or that the Lender may request, in order to perfect and protect any
security interest granted or purported to be granted hereby or to enable the
Lender to exercise its rights and remedies hereunder.
4.4 Voting Rights; Dividends, etc. (a) So long as no Event of Default shall
have occurred and be continuing, the Borrower shall be entitled to exercise
any and all voting and other consensual rights pertaining to the Collateral
for any purpose not inconsistent with the terms of this Agreement or any
Promissory Note issued hereunder.
(b) So long as no Event of Default shall have occurred and be continuing,
the Borrower shall be entitled to receive and retain any and all cash
dividends paid in respect of the Collateral.
(c) Upon the occurrence and during the continuance of an Event of Default
(i) all rights of the Borrower to exercise the voting and other consensual
rights and to receive and retain dividends which it would otherwise be
entitled to receive and retain pursuant to Section 4.4(a) and (b),
respectively, shall cease, and all such rights shall thereupon become vested
in the Lender who shall thereupon have the sole right to exercise such voting
and other
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consensual rights and to receive and retain dividends and interest paid in
respect of the Collateral, and (ii) all dividends which are received by the
Borrower contrary to the provisions of the preceding clause (i) shall be
received in trust for the benefit of the Lender and shall be segregated from
other funds of the Borrower and forthwith paid over to the Lender as
Collateral in the same form as so received (with any necessary endorsement).
4.5 Covenants of the Borrower. Until the Borrower Obligations have been
satisfied in full, the Borrower will not sell, assign, transfer, convey, or
otherwise dispose of, or grant any option with respect to, the Collateral or
create or permit to exist any Lien upon or with respect to the Collateral
except to the Lender, its affiliates or any Person approved by the Lender or
pursuant to the Asset and Subsidiary Stock Option Agreement, dated as of the
date hereof, between the Borrower and Gretag Imaging Group, Inc. (the "Option
Agreement").
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE BORROWER
To induce the Lender to enter into this Agreement and to make the Loan, the
Borrower hereby represents and warrants to the Lender as of the date hereof,
each Closing Date and the Stock Option Closing Date that:
5.1 Corporate Status and Licensing. The Borrower and each of its
Subsidiaries is a corporation duly organized and validly existing under the
laws of the jurisdiction of incorporation or organization. The Borrower and
each of its Subsidiaries has the corporate power and authority to own its
property and to transact the business in which it is engaged or presently
proposes to engage, and is duly qualified or licensed as a foreign corporation
in good standing in each jurisdiction in which the failure so to qualify or be
licensed would have a material adverse effect on the Borrower or O-Sub.
5.2 Corporate Power and Authority; Enforceable Obligations. The Borrower has
all necessary power to execute, deliver and perform the terms and provisions
of this Agreement, and the transactions contemplated hereby, and has taken all
necessary internal action to authorize the execution, delivery and performance
of this Agreement. This Agreement has been duly executed and delivered on
behalf of the Borrower and constitutes a legal, valid and binding obligation
of the Borrower enforceable in accordance with its terms. The Borrower has
furnished to the Lender complete and correct copies of its constitutive
documents, and such constitutive documents are in full force and effect and
have not been modified or amended.
5.3 Compliance with Law and Other Instruments. Neither the Borrower nor any
of its Subsidiaries is in default under any agreement that is material to O-
Sub or Borrower to which it is a party, and neither the execution, delivery or
performance of this Agreement, nor the consummation of the transactions
contemplated hereby, nor compliance with the terms and provisions hereof, will
contravene any provision of law, statute, rule or regulation to which the
Borrower is subject, or any judgment, decree, franchise, order or permit
applicable to the Borrower, or will conflict or will be inconsistent with or
will result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default under, or result in the creation or
imposition of (or the obligation to create or impose) any Lien upon any of the
property or assets of the Borrower or any of its Subsidiaries pursuant to, the
terms of any indenture, mortgage, deed of trust, agreement or other instrument
to which the Borrower or any such Subsidiary is a party or bound or to which
they may be subject, or violate any provision of the constitutive documents of
the Borrower or any such Subsidiary.
5.4 Litigation. Except as set forth on Schedule 5.4 hereto, there are no
actions, suits or proceedings pending or, to the best of the Borrower's
knowledge, threatened, against or affecting the Borrower or any of its
Subsidiaries before any court, tribunal or before any governmental or
administrative body or agency.
5.5 Consents. No consent of any other party (including, without limitation,
creditors of the Borrower) and no order, permission, consent, approval,
license, authorization, registration or validation of, or notice to or filing
with, or exemption by, any Governmental Authority is required to authorize, or
is required in connection with, the execution, delivery and performance by the
Borrower of this Agreement, or the taking of any action contemplated hereby,
including, without limitation, the pledge by the Borrower of the Collateral,
the issuance
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and delivery of the Stock Option Shares pursuant to Section 10 or the validity
or enforceability of this Agreement or, if any of the foregoing are required,
they have been obtained and are in full force and effect and certified copies
of which have been delivered to the Lender and to counsel to the Lender.
5.6 Financial Information. Except as set forth on Schedule 5.6, the audited
financial statements of the Borrower and its Subsidiaries as of December 31,
1996 are, and, when filed with the SEC, the audited financials contained in
the Pending Reports (the "Financial Statements") will be, including in each
case the related schedules and notes, complete and correct in all material
respects and fairly present the financial condition of the Borrower and its
Subsidiaries as of the date[s] thereof and the results of their operations for
the periods therein stated and have been prepared in accordance with generally
accepted accounting principles in the jurisdiction in which the Financial
Statements were prepared, consistently applied throughout the periods
involved.
5.7 Taxes, Assessments and Fees. Each of the Borrower and its Subsidiaries
has filed or caused to be filed all U.S. federal income tax returns and all
other material returns required to be filed, and have paid all taxes shown to
be due and payable on said returns or on any assessments made against such
Person or any of their respective properties, and all other taxes,
assessments, fees or other charges imposed on such Person or any of their
respective properties by any Governmental Authority; and no material tax liens
or material liens with respect to any assessments, fees or other charges have
been filed and, to the knowledge of such Person, no claims are being asserted
with respect to any such taxes, assessments, fees or other charges.
5.8 Capitalization. Schedule 5.8 hereto contains the complete and correct
description of the capitalization of the Borrower and O-Sub, including a list
of all Persons owning the outstanding capital stock, stock options and
instruments exchangeable or convertible into or exercisable for any capital
stock of O-Sub, together with the quantities thereof held by each such Person.
The O-Sub Shares are duly authorized, valid, issued, fully-paid and non-
assessable.
5.9 Accuracy of Information. Neither this Agreement, nor any certificate or
written statement of factual information furnished to the Lender by or on
behalf of the Borrower in connection herewith, contains or will contain as of
their respective dates any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements taken as a
whole contained herein and therein not misleading.
5.10 Absence of Default. No Default or Event of Default has occurred and is
continuing.
5.11 Obligations Pari Passu. The Borrower Obligations rank at least pari
passu in right of payment with all its other indebtedness except that amounts
owing under the SVB Facility, including additional amounts borrowed thereunder
in accordance herewith and any accrued interest thereon, shall be prior in
right of payment to the payment obligations of the Borrower hereunder.
5.12 Withholding Tax. There is no U.S. tax, levy, impost, deduction, charge
or withholding imposed, levied or made on or by virtue of the execution or
delivery of this Agreement.
5.13 Title to Properties. Subject to subsection 4.2, the Borrower and its
Subsidiaries have good title to all of their respective properties and assets
referred to in the Financial Statements (except properties and assets disposed
of since the relevant date in the ordinary course of business).
5.14 Material Adverse Change. Except as described in Schedule 5.14, since
December 31, 1996, there has been no occurrence or development resulting, or
likely to result, in a material adverse effect on the Borrower or its
Subsidiaries.
5.15 Title to Collateral; First Priority Lien. The Borrower is the legal and
beneficial owner of the Collateral free and clear of any Lien except for the
Lien created by this Agreement and by the Option Agreement. The pledge of the
Collateral pursuant to this Agreement creates a valid and perfected first
priority security interest in the Collateral, securing the payment of the
Borrower Obligations.
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5.16 Authorized Stock. The Borrower has taken all necessary corporate and
other action to authorize and reserve for issuance and to permit it to issue
and deliver, and, has reserved for issuance, such number of shares of Borrower
Common Stock necessary for delivering the Stock Option Shares upon the
exercise of the Stock Option. The authorized capital stock of the Company is
sufficient to permit the issuance of enough shares to consummate the exercise
of the Stock Option pursuant to Section 10. The Stock Option Shares, upon
issuance, will be duly and validly issued, fully paid and nonassessable, will
be delivered free and clear of any and all Liens and will not give rise to any
preemptive rights on the part of any Person. Upon issuance of the Stock Option
Shares, the holder of such Stock Option Shares shall have the same rights
(including, without limitation, voting rights) as the existing holders of
Borrower Common Stock.
SECTION 6. CONDITIONS PRECEDENT
The agreement of the Lender to disburse any Closing Amount is subject to the
satisfaction or waiver by the Lender, immediately prior to or concurrently
with the Closing Date with respect to such Closing Amount, of the following
conditions precedent:
6.1 Borrower Approval. All necessary internal approval on the part of the
Borrower and all necessary or appropriate permits, approvals, authorizations,
consents and waivers from creditors of the Borrower shall have been received
in connection with the execution of this Agreement, and the consummation of
the transactions contemplated hereby (including, without limitation, any
necessary powers-of-attorney).
6.2 Documentation. The Lender shall have received this Agreement and the
Promissory Note(s), executed and delivered by a duly authorized officer of the
Borrower. Each of this Agreement and the Promissory Note(s) shall be in form
and substance satisfactory to the Lender, shall be in full force and effect
and shall be in accordance with the requirements of all applicable law.
6.3 Changes, Etc. Except as described in Schedule 5.14, since December 31,
1996, there shall have been no occurrence or development resulting, or likely
to result, in a material adverse effect on the Borrower or its Subsidiaries
(it being expressly understood that the transactions contemplated by this
Agreement shall not be deemed to have a material adverse effect on Borrower or
its Subsidiaries), and the Borrower shall have delivered to the Lender an
Officer's Certificate, dated as of the Closing Date, certifying that the
condition set forth in this subsection has been fulfilled.
6.4 Corporate Proceedings of the Borrower. The Lender shall have received
evidence, in form and substance satisfactory to the Lender, that all necessary
corporate and other approval on the part of the Borrower was taken with
respect to (a) the execution, delivery and performance of this Agreement, and
(b) the transactions contemplated hereunder, certified by an authorized
officer of the Borrower as of a date not earlier than ten days prior to the
Closing Date, which certificate shall be in form and substance satisfactory to
the Lender and shall state that the evidence thereby certified have not been
amended, modified, revoked or rescinded; provided that in the case of a
Closing Date occurring as of the date hereof, the notice period specified in
clause (b) of this subsection shall be waived by the Lender.
6.5 Borrower Incumbency Certificate. The Lender shall have received a
certificate of the Borrower, as to the incumbency and signature of the
officers of the Borrower executing this Agreement, satisfactory in form and
substance to the Lender, executed by an authorized officer of the Borrower.
6.6 Representations and Warranties. Each of the representations and
warranties made by the Borrower in or pursuant to this Agreement shall be true
and correct in all material respects on and as of the Closing Date as if made
on and as of the Closing Date.
6.7 Performance; No Default. The Borrower shall have performed and complied
in all respects with all agreements and conditions contained in this Agreement
required to be performed or complied with by it prior to
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or at the Closing, and at the Closing, and after giving effect to the
consummation of the transactions contemplated hereby, no condition or event
shall exist which constitutes a Default or Event of Default under this
Agreement.
6.8 Governmental Approvals. Each order, permission, consent, approval,
license, authorization, or validation of, or notice to or filing with, or
exemption by, any Governmental Authority which is required to authorize, or is
required in connection with, the execution, delivery and performance by the
Borrower or the Lender of this Agreement or the taking of any action
contemplated hereby shall have been made or obtained, and each such order,
permission, consent, approval, license, authorization, registration,
validation, notice, filing and exemption shall be in full force and effect.
6.9 Legal Opinions. The Lender shall have received executed opinions,
addressed to the Lender and dated the Closing Date, from Venture Law Group
covering such matters incident to the transactions contemplated by this Loan
Agreement as the Lender may reasonably require.
6.10 Compliance Certificate. The Borrower shall have delivered to the Lender
an Officer's Certificate, dated the Closing Date, certifying that the
conditions specified in this Section 6 have been fulfilled.
6.11 Security Arrangements. The Lender shall have a duly perfected first
priority security interest in the Collateral.
6.12 Option Agreement. The Option Agreement shall not have been terminated.
6.13 Additional Matters. All proceedings in connection with the documents
contemplated hereby and all documents, instruments and other legal matters in
connection with the transactions contemplated by this Agreement shall be
satisfactory in form and substance to the Lender and to counsel to the Lender,
and the Lender and counsel to the Lender shall have received counterpart
originals or certified or other types of copies of all such documents and
legal opinions in respect of any aspect or consequence of the transactions
contemplated hereby as it shall reasonably request.
SECTION 7. COVENANTS
The Borrower covenants that, from the date hereof and for so long as any
amount of principal of or interest on the Loans is outstanding and owing to
the Lender hereunder, or any other sum is outstanding and owing to the Lender
hereunder:
7.1 Senior Obligations. The Borrower shall ensure that the Borrower
Obligations under this Agreement at all times rank at least pari passu with
all other present and future indebtedness of the Borrower except that amounts
owing under the Borrower's credit facility (the "SVB Facility") with Silicon
Valley Bank, including additional amounts borrowed thereunder and accrued
interest thereon in accordance herewith, shall be prior in right of payment to
the payment obligations of the Borrower hereunder. The Borrower shall not
effect any additional borrowing under the SVB Facility if the aggregate amount
of principal and accrued interest owing under the SVB Facility, after giving
effect to such borrowing, plus the aggregate amount of principal and accrued
interest owing hereunder, would exceed $6,000,000. To the extent it is deemed
to be necessary, the Lender and Silicon Valley Bank will negotiate in good
faith a debt and subordination agreement mutually satisfactory to the Lender
and Silicon Valley Bank in each party's sole discretion.
7.2 Limitation of Liens. The Borrower shall not create or permit to subsist
any Lien upon the whole or any part of the O-Sub Shares or proceeds thereof
(except Liens created by this Agreement or the Option Agreement).
7.3 Use of Proceeds. Unless otherwise agreed to by Lender in writing,
Borrower hereby covenants that if the Settlement Deposit is advanced to the
Borrower pursuant to this Agreement on any Closing Date, such Settlement
Deposit shall be used solely to make the necessary deposit of $850,000 in
escrow in connection with the execution and delivery of a memorandum of
understanding relating to the Settlement. If requested by the
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Lender, Lender shall pay on behalf of Borrower the Settlement Deposit directly
to the escrow account established for the purposes of such deposit. The
Borrower shall use all other proceeds of the Loan solely to meet such of its
current payment obligations in the ordinary course of business which cannot be
met from other funds available to the Borrower.
7.4 Constitutive Documents; Preservation of Existence, Etc.; Conduct of
Business. The Borrower shall not permit any provision of the constitutive
documents of it or any of its Subsidiaries to be amended without the written
consent of the Lender if such amendment would directly or indirectly prevent
the Borrower from performing, or materially adversely affect its ability to
perform, its obligations under this Agreement. The Borrower shall at all times
preserve and keep in full force and effect, and cause each of its Subsidiaries
to preserve and keep in full force and effect, its existence as a company and
its rights and franchises. The Borrower shall, and shall cause each of its
Subsidiaries to, comply with all contractual obligations binding on it or its
property and Applicable Law.
7.5 Compliance with Applicable Law. The Borrower shall, and shall cause each
of its Subsidiaries to, timely comply with all Applicable Law and shall, and
shall cause each of its Subsidiaries to, procure, maintain and comply with all
permits, licenses and other authorizations required for the conduct of its
business except where the failure to do so would have only a de minimis effect
on the Borrower and its Subsidiaries, taken as a whole.
7.6 Notices. The Borrower will promptly give notice to the Lender of:
(a) the occurrence of any Default or Event of Default; and
(b) any (i) default or event of default under any contractual obligation
of the Borrower or any of its Subsidiaries or (ii) litigation,
investigation or proceeding which may exist at any time involving the
Borrower or any of its Subsidiaries.
7.7 Further Assurances. The Borrower, at its own cost, expense and
liability, shall cause to be promptly and duly taken, executed, acknowledged
and delivered all such further acts, documents and assurances as may from time
to time be necessary in order to protect the Lender's rights under this
Agreement, including, without limitation, the exercise of the Stock Option,
and otherwise as may reasonably be requested by the Lender in order to carry
out the intent and purposes of this Agreement and the transactions
contemplated hereby.
7.8 Sale; Merger. Except pursuant to the Merger Agreement or the Option
Agreement, neither the Borrower nor any of its Subsidiaries shall enter into
any merger or consolidation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or lease, convey, sell, assign,
transfer or otherwise dispose of, in a single transaction or a series of
related transactions, a material portion of its property, business or assets,
or make any material change in its present method of conducting business.
7.9 Appointment as Attorney-in-Fact. Borrower hereby irrevocably constitutes
and appoints Lender and any officer or agent thereof, with full power of
substitution, as Borrower's attorney-in-fact, with full irrevocable power and
authority in the place and stead of Borrower and in the name of Borrower or
otherwise, from time to time in the Lender's discretion, to execute and
deliver any and all bills of sale, assignments or other instruments which the
Lender may deem necessary or advisable to effectuate any sale, transfer,
assignment or delivery in exercise of any or all of the remedies hereunder
whether pursuant to power of sale or otherwise, and to take any other action
to accomplish the purposes of this Agreement, including, without limitation,
to ask, demand, collect, sue for, recover, compound, receive and give
acquittance and receipt for moneys due and to become due under or in
connection with the Collateral, to receive, endorse, and collect any drafts or
other instruments, documents and chattel paper in connection therewith, to
file any claims or take any action or institute any proceedings which the
Lender may deem to be necessary or desirable for the collection thereof,
Borrower hereby ratifying and confirming all that such attorney or any
substitute shall lawfully do by virtue hereof. This power of attorney is a
power coupled with an interest and shall be irrevocable. Nevertheless, if so
requested by the Lender or any purchaser, Borrower shall ratify and confirm
any such sale, assignment, transfer or delivery by executing and
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delivering to the Lender or such purchaser all bills of sale, assignments,
releases and other proper instruments to effect such ratification and
confirmation as may be designated in any such request.
7.10 Maintenance of Shares. Prior to the Stock Option Closing Date, the
Borrower shall not, and shall cause its Subsidiaries not to, take any action
that could reasonably be expected to result in the representations and
warranties of the Borrower set forth in subsection 5.16 in this Agreement
becoming untrue.
SECTION 8. EVENTS OF DEFAULT
8.1 Events of Default. If one or more of the following events shall have
occurred (whatever the reason for such event and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) Non-payment. The Borrower fails to pay any principal of or any
interest on the Loan or any other amount payable by the Borrower under this
Agreement, as and when the same shall become due and payable, whether at
stated maturity, by mandatory prepayment, by acceleration or otherwise; and
such default, if due to any technical or administrative error, is not
remedied within five days;
(b) Breach of Other Obligations. Any of the representations and
warranties of Borrower hereunder proves to have been incorrect in any
material respect or the Borrower defaults in performance or observance of,
or compliance with, any of its other obligations set out in this Agreement,
or any Promissory Note, which default is incapable of remedy or, if such
default is in the reasonable opinion of the Lender capable of remedy, is
not in the reasonable opinion of the Lender remedied within 30 days after
notice of such default shall have been given to the Borrower by the Lender,
or any representation or warranty referred to in section 5 hereof proves to
have been incorrect or untrue in any material respect when made or deemed
made;
(c) Involuntary Bankruptcy. Any decree or order by a court of competent
jurisdiction shall have been entered (and such decree or order shall have
continued undischarged or undismissed and unstayed for a period of at least
60 days) (i) adjudging the Borrower bankrupt or insolvent, (ii)
constituting an order for relief with respect to the Borrower in any
involuntary bankruptcy or insolvency case, (iii) approving as properly
filed a petition seeking reorganization of, or an arrangement or adjustment
with respect to, the Borrower under any applicable bankruptcy or insolvency
law, or (iv) appointing a receiver, custodian, liquidator or trustee or
assignee in the bankruptcy, liquidation, reorganization or insolvency of
the Borrower or of any of its properties; or
(d) Voluntary Bankruptcy. The Borrower or any of its Subsidiaries
initiates or consents to proceedings relating to it under any bankruptcy,
reorganization, insolvency, moratorium, intervention law or law with
similar effect, or under any other law for the relief of, or relating to,
debtors, or makes or enters into a conveyance, assignment, arrangement, or
composition with or for the benefit of its creditors or appoints or applies
for the appointment of an administrator, receiver, trustee, intervenor, or
assignee for the benefit of creditors (or other similar official) to take
possession or control or a substantial part of all of its undertaking or
assets, or takes any proceeding under any law for a readjustment or
deferment of its indebtedness or any part of it;
(x) the Lender may by notice to the Borrower declare the Commitment to be
terminated forthwith; whereupon the Commitment shall immediately terminate; or
(y) the Lender may by notice to the Borrower, declare the outstanding
principal amount of the Loan (with accrued interest thereon) and all other
amounts owing under this Agreement to be due and payable forthwith, whereupon
the same shall immediately become due and payable.
8.2 Remedies on Default, Etc. Subject to subsection 8.3, (a) if an Event of
Default shall occur and be continuing, the Lender may exercise, in addition to
all other rights and remedies granted to it in this Agreement,
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all rights and remedies of a secured party under the applicable Uniform
Commercial Code or any other applicable law. Without limiting the generality
of the foregoing, to the extent permitted by applicable law, the Lender,
without demand of performance or other demand, presentment, protest,
advertisement or notice of any kind (except any notice required by law
referred to below) to or upon the Borrower or any other Person (all and each
of which demands, defenses, advertisements and notices are hereby waived), may
in such circumstances forthwith collect, receive, appropriate and realize upon
the Collateral, or any part thereof, and/or may forthwith sell, lease, assign,
give option or options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in
one or more parcels at public or private sale or sales, at any exchange,
broker's board or office of the Lender or elsewhere upon such terms and
conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. The Lender shall have the right upon any such public sale or sales, and,
to the extent permitted by law, upon any such private sale or sales, to
purchase the whole or any part of the Collateral so sold, free of any right or
equity of redemption in the Borrower, which right or equity is hereby waived
or released. The Lender shall apply the net proceeds of any action taken by it
pursuant to this Section, after deducting all reasonable costs and expenses of
every kind incurred in connection therewith or incidental to the care or
safekeeping of any of the Collateral or in any way relating to the Collateral
or the rights of the Lender hereunder, including, without limitation,
reasonable attorneys' fees and disbursements, to the payment in whole or in
part of the Borrower Obligations, first, to the payment of any Borrower
Obligations other than principal or interest, second, to the payment of all
interest accrued on the Loans, and third, to the payment of the outstanding
principal of the Loans, in inverse order of the dates on which such Loans were
advanced, and only after such application and after the payment by the Lender
of any other amount required by any provision of law, including, without
limitation, Section 9-504(1)(c) of the Code, need the Lender account for the
surplus, if any, to the Lender. To the extent permitted by applicable law, the
Borrower waives all claims, damages and demands it may acquire against the
Lender arising out of the exercise by them of any rights hereunder, except to
the extent arising as a result of the gross negligence or willful misconduct
of the Lender. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable
and proper if given at least 10 days before such sale or other disposition.
(b) Upon the occurrence of any Event of Default, the Lender's remedies shall
be, to the fullest extent of the law, cumulative, and no right, power or
remedy conferred by this Agreement upon the Lender shall be exclusive of any
right, power or remedy referred to herein or therein or now or hereafter
available at law, in equity, by statute or otherwise. In case of a default in
the payment of any principal of or interest on the Loan, the Borrower shall
pay to the Lender such further amount as shall be sufficient to cover all
losses, expenses, liabilities or costs actually sustained or incurred by the
Lender as a result of such Event of Default. No course of dealing and no delay
on the part of the Lender in exercising any right shall operate as a waiver
thereof or otherwise prejudice the Lender's rights, powers or remedies.
(c) Notwithstanding any provision of this Agreement to the contrary, this
Agreement, and the pledge of the Collateral hereunder, in no way limit, modify
or amend the rights of the Borrower pursuant to the Option Agreement,
including, without limitation, the right of the Borrower to exercise the
Inkjet Option or the Subsidiary Stock Option at such price determined
thereunder.
8.3 Exercise of Remedies. In the event that the Merger Agreement has been
terminated, prior to exercising any remedies hereunder the Lender shall seek
repayment of outstanding amounts hereunder through the exercise of either the
Inkjet Option or the Subsidiary Stock Option and shall not exercise such
remedies unless and until (a) the Lender is unable to exercise either such
option by reason of any temporary restraining order, preliminary or permanent
injunction or other similar prohibition being in effect, or by reason of any
statute, rule, regulation or order having been enacted or entered which would
make such exercise illegal or of which such exercise would constitute a
violation; or (b) the Lender has otherwise been unable to exercise one or the
other of such options in accordance with the Option Agreement by the date
designated for closing thereunder in the absence of breach on the part of the
Lender thereunder.
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SECTION 9. TAXES
9.1 Excluded Taxes. Any and all payments by the Borrower under this
Agreement (including, without limitation, all payments of principal, interest,
premium and fees) shall be made free and clear of, and without deduction or
withholding for or on account of, any and all present or future taxes, levies,
imposts, deductions, charges, fees, duties or withholdings, now or hereafter
imposed, levied, collected, withheld or assessed by the United States (or any
political subdivision or taxing authority of the United States), or any
related surcharge, penalties, interest or expenses (all such taxes, levies,
imposts and charges and all such deductions, withholdings, penalties, interest
and liabilities being "Excluded Taxes"), unless such deduction or withholding
is required by applicable law.
9.2 Additional Amounts; Indemnified Taxes. If any deduction or withholding
of Excluded Taxes is required by law to be made from or in respect of any sum
payable hereunder or in respect of the Loan (or if the Borrower is required by
law to make, or otherwise makes, any direct payment to any Governmental
Authority on account of Excluded Taxes):
(a) the Borrower shall pay to the Lender such additional amount as may be
necessary so that after all required deductions and withholdings (including
deductions and withholdings applicable to additional sums payable under
this section) the Lender receives on the due date thereof an amount equal
to the sum it would have received had no such deductions or withholdings
been made;
(b) the Borrower shall make such deductions or withholdings (or direct
payment);
(c) the Borrower shall pay the full amount deducted or withheld to the
relevant Governmental Authority before penalties attach thereto or interest
accrues thereon (but if any such penalties or interest accrues, the
Borrower shall pay such amounts when due to the appropriate Governmental
Authority); and
(d) the Borrower shall furnish, promptly after the date of such
withholding or deduction (or direct payment), to the Lender, in respect of
which such deductions (or payments) are made, an original certificate of
the official receipt issued by such Authority confirming the payment to
such Authority of all amounts required to be deducted or paid;
provided that no such additional amounts shall be payable for or on account of
net income taxes imposed on the Lender by reason of the receipt of payments
under this Agreement (Excluded Taxes, other than such net income taxes, known
herein as "Indemnified Taxes"); provided further however that Section 9.2(a)
shall not apply in the case of any assignment of a Loan or any portion thereof
after the date hereof by the Lender to any assignee that is not entitled to a
zero rate of withholding with respect to interest pursuant to an applicable
tax treaty or other provision of law.
9.3 Other Taxes. The Borrower shall pay any and all present or future stamp,
value added, transfer, capital, documentary, and excise taxes and other
similar charges or levies, including interest and penalties with respect
thereto, by reason of the preparation, execution, issuance, delivery,
amendment, supplement, waiver, modification or enforcement of this Agreement
or any document contemplated hereby ("Other Taxes").
SECTION 10. STOCK OPTION
10.1 Grant of Stock Option. (a) Subject to the terms and conditions set
forth herein, the Borrower hereby grants to Purchaser an irrevocable option
(the "Stock Option") to purchase such number of shares of the Borrower's
common stock, par value $0.001 per share ("Borrower Common Stock") determined
pursuant to Section 10.1(b).
(b) The number of shares (the "Stock Option Shares") of Borrower Common
Stock to be sold to the Purchaser upon exercise of the Stock Option shall be
the number of shares such that (a) the ratio of (i) the number of Stock Option
Shares to (ii) the sum of the number of Stock Option Shares and 10,226,744, is
equal to
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(b) the ratio of (i) the Stock Option Consideration to (ii) the sum of the
Stock Option Consideration plus $13,314,248.50.
(c) In the event of any change in Borrower Common Stock by reason of a stock
dividend, split-up, merger, recapitalization, combination, exchange of shares,
or similar transaction, the type and number of the Stock Option Shares shall
be adjusted appropriately, and proper provision shall be made in the
agreements governing such transaction, so that the Lender shall receive upon
exercising the Stock Option the number and class of shares that Lender would
have received in respect of Borrower Common Stock if the exercise of the Stock
Option had been consummated immediately prior to such event or the record date
therefor, as applicable.
10.2 Exercise of Stock Option. (a) Lender may exercise the Stock Option, at
any time by providing to the Company a written notice (the date of which being
herein referred to as the "Stock Option Notice Date") to that effect
specifying the amount of consideration (the "Stock Option Consideration") to
be paid, which shall not exceed the greater of $5,000,000 and the Outstanding
Note Obligations, and a date not earlier than two Business Days from the Stock
Option Notice Date for the closing of the purchase of the Stock Option Shares.
The parties hereto agree and acknowledge that upon exercise of the Stock
Option and payment of the Stock Option Consideration, such Stock Option
Consideration shall be deemed to be additional purchase price for the equity
of the Company.
(b) The Lender shall pay the Stock Option Consideration by the cancellation
of, in the following order, in an aggregate amount up to the Stock Option
Consideration: first, any obligations of the Borrower other than those in
respect of principal of and interest on any outstanding Loans, second any
accrued interest on any outstanding Loans through the date of such
cancellation and third any outstanding principal under the Loans (cancelled in
inverse order of the Closing Dates thereof) (together the "Outstanding Note
Obligations"), the balance, if any, of such Stock Option Consideration to be
paid in cash.
10.3 Stock Option Closing. (a) The closing of the purchase of the Stock
Option Shares (the "Stock Option Closing") shall take place at 10:00 a.m., New
York City time at the offices of Debevoise & Plimpton, 875 Third Avenue, New
York, New York 10022 on the date specified by Lender in the Stock Option
Notice (or such other date upon which the parties hereto may mutually agree)
(the "Stock Option Closing Date").
(b) At the Stock Option Closing:
(1) the Borrower shall issue and deliver or cause to be delivered to the
Lender or its designee the Stock Option Shares in the form of a stock
certificate or certificates therefor in good form for delivery and free and
clear of all Liens, registered in the name of the Lender or its designee;
and
(2) the Lender shall (A) deliver or cause to be delivered to the Borrower
such instruments, in form and substance reasonably satisfactory to the
Borrower, as are necessary or appropriate in the reasonable judgment of the
Borrower to effect the cancellation of the Outstanding Note Obligations in
an aggregate amount up to the Stock Option Consideration and (B) deliver or
cause to be delivered the excess of the Stock Option Amount over such
Outstanding Note Obligations, if any, in immediately available funds by
wire transfer to the account of the Borrower specified in subsection 11.11.
(c) Certificates for the Stock Option Shares delivered at the Stock Option
Closing shall have typed or printed thereon a restrictive legend which shall
read substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE SOLD ONLY IF SO
REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
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SECTION 11. MISCELLANEOUS
11.1 Amendments and Waivers. Neither this Agreement nor any terms hereof may
be amended, supplemented, modified or waived other than pursuant to a written
instrument executed by the Lender. The Lender may, from time to time, (a)
enter into with the Borrower written amendments, supplements or modifications
hereto for the purpose of adding any provisions to this Agreement or changing
in any manner the rights of the Lender or of the Borrower hereunder or (b)
waive by an instrument, on such terms and conditions as the Lender may specify
in such instrument, any of the requirements of this Agreement or any Default
or Event of Default and its consequences. In the case of any waiver, the
Borrower and the Lender shall be restored to their former positions and rights
hereunder, and any Default or Event of Default waived shall be deemed to be
cured and not continuing; no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereon.
11.2 Notices. Any notice required to be given hereunder shall be sufficient
if in writing, and sent by facsimile transmission (with a confirmatory copy
sent by overnight courier), by courier service (with proof of service), hand
delivery or certified or registered mail (return receipt requested and first-
class postage prepaid), addressed as follows:
<TABLE>
<S> <C>
If to the Borrower: Raster Graphics,
If to Lender: Gretag Imaging Group, Inc. Inc.
c/o Gretag Imaging, Inc. 3025 Orchard Parkway
2070 Westover Road San Jose, CA 95134
Chicopee, MA 01022
Telephone: (413) 593-6900 Telephone: (408) 232-4000
Facsimile: (413) 788-0940 Facsimile: (408) 232-4100
Attention: William Recker Attention: Rakesh Kumar
With a copy to:
Gretag Imaging Holding AG
Althardstrasse 70
CH-8105 Regensdorf Switzerland
Telephone: (011-411) 842-2092
Facsimile: (011-411) 842-2411
Attention: Dr. Eduard Brunner
With a copy to: With a copy to:
Debevoise & Plimpton Venture Law Group
875 Third Avenue 2800 Sand Hill Road
New York, New York 10022 Menlo Park, CA 94025
Telephone: (212) 909-6000 Telephone: (650) 854-4488
Facsimile: (212) 909-6836 Facsimile: (650) 854-1121
Attention: Edmund S. Ruffin, Jr.,
Attention: Christopher Smeall, Esq. Esq.
</TABLE>
or to such other address as any party shall specify by written notice so
given, and such notice shall be deemed to have been delivered as of the date
so telecommunicated, personally delivered or mailed.
11.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in
exercising, on the part of the Lender, any right, remedy, power or privilege
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, remedy, power
or privilege. The rights, remedies, powers and privileges herein provided are
cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.
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11.4 Survival of Representations and Warranties. All representations and
warranties made hereunder, and in any document, certificate or statement
delivered pursuant hereto or in connection herewith shall survive the
execution and delivery of this Agreement and the making of the Loan or the
exercise of the Stock Option hereunder; provided the representations and
warranties shall not survive the first anniversary of the Stock Option Closing
Date.
11.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or
reimburse the Lender for all its costs and expenses incurred in connection
with the enforcement or preservation of any rights under this Agreement and
any such other documents, including, without limitation, the reasonable fees
and disbursements of counsel and (b) to pay, indemnify, and hold the Lender
harmless from and against any and all other liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever with respect to the execution,
delivery, enforcement, performance and administration of this Agreement and
any such other documents (all the foregoing in this clause (b), collectively,
the "Indemnified Liabilities"), provided that the Borrower shall have no
obligation hereunder to the Lender with respect to the Indemnified Liabilities
arising from the gross negligence or willful misconduct of the Lender. The
agreements in this subsection shall survive repayment of the Loan and all
other direct amounts payable hereunder.
11.6 Successors and Assigns; Assignments. This Agreement shall be binding
upon and inure to the benefit of the Borrower and the Lender and their
respective successors and assigns. The Lender may assign or transfer any of
its rights or obligations under this Agreement to an affiliate; the Borrower
may not assign or transfer any of its rights or obligations under this
Agreement without the prior written consent of the Lender.
11.7 Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11.8 Integration. This Agreement, the Promissory Notes, if issued, the
Option Agreement and the Merger Agreement represent the complete and
integrated agreement of the Borrower and the Lender with respect to the
subject matter hereof, and there are no promises, undertakings,
representations or warranties by the Lender relative to subject matter hereof
not expressly set forth or referred to herein.
11.9 CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY NEW YORK
STATE OR FEDERAL COURT SITTING IN THE CITY OF NEW YORK IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND THE BORROWER
HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF
SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE
COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. THE BORROWER
HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO, ANY DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF
SUCH ACTION OR PROCEEDING IN ANY SUCH COURT AND ANY RIGHT OF JURISDICTION ON
ACCOUNT OF THE PLACE OF RESIDENCE OR DOMICILE OF THE BORROWER.
11.10 Right to Set-Off. Any deposits or other sums at any time credited or
due from Borrower may be applied to, or set off against, the Lender's
obligations to the Borrower under this Agreement, at any time after the
occurrence and during the continuance of any Event of Default.
C-16
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11.11 Payments. All payments to be made under this Agreement shall be made
in U.S. Dollars, by wire transfer of immediately available funds, to:
If to the Borrower:
Account No. 0103161970
Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
If to the Lender:
Account No. 26881373
Bank of Boston
1350 Main Street
Springfield, MA 01103
Each party shall promptly notify the other in the manner provided herein of
any change in their respective payment information set forth in this section,
provided that such change shall not be effective until the fifth Business Day
following receipt by the other party.
11.12 No Partnership; Etc. Nothing contained in this Agreement shall be
deemed or construed to create a partnership, tenancy-in-common, joint tenancy
or joint venture between the Lender and the Borrower or any other Person. The
Lender shall not be in any way responsible or liable for the debts, losses,
obligations or duties of the Borrower or any other Person with respect to this
Agreement or otherwise.
11.13 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof, this being in addition to any
other remedy to which they are entitled at law or in equity.
11.14 GOVERNING LAW. THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
CONFLICTS OF LAWS RULE OF SUCH STATE.
11.15 WAIVERS OF JURY TRIAL. THE BORROWER AND THE LENDER HEREBY IRREVOCABLY
AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.
11.16 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof
each signed by less than all, but together signed by all, of the parties
hereto.
C-17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
RASTER GRAPHICS, INC.
By:/s/ Rakesh Kumar
---------------------------------
Name:Rakesh Kumar
Title:President
GRETAG IMAGING GROUP, INC.
By: /s/ E. Brunner
---------------------------------
Name: Dr. Eduard M. Brunner
Title: Treasurer
C-18
<PAGE>
ANNEX D
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT dated as of October 6, 1998, among GRETAG IMAGING
GROUP, INC., a Delaware corporation ("Purchaser"), GRETAG ACQUISITION CORP., a
Delaware corporation and wholly owned subsidiary of Purchaser ("Merger Sub")
and the individuals and other parties listed on Schedule A attached hereto
(each, a "Stockholder" and, collectively, the "Stockholders").
WHEREAS Purchaser, Merger Sub and Raster Graphics, Inc., a Delaware
corporation (the "Company"), propose to enter into an Agreement and Plan of
Merger dated as of the date hereof (as the same may be amended or
supplemented, the "Merger Agreement") providing for the merger of Merger Sub
with and into the Company (the "Merger") pursuant to which each share of
common stock, par value $0.001 per share, of the Company (the "Common Stock")
will be converted into the right to receive cash in the amount of $1.2968 per
share, without interest (the "Merger Consideration");
WHEREAS each Stockholder owns the number of shares of Common Stock set forth
opposite his or its name on Schedule A attached hereto (such shares of Common
Stock, together with any other shares of capital stock of the Company acquired
by such Stockholders after the date hereof and during the term of this
Agreement (including, without limitation through the exercise of any stock
options, warrants or similar instruments), being collectively referred to
herein as the "Subject Shares");
WHEREAS, as an essential condition and inducement to their willingness to
enter into the Merger Agreement, Purchaser and Merger Sub have requested that
each Stockholder enter into this Agreement, and each Stockholder has agreed to
do so; and
WHEREAS, capitalized terms used herein without definition shall have the
respective meanings specified therefor in the Merger Agreement.
NOW, THEREFORE, to induce Purchaser and Merger Sub to enter into, and in
consideration of their entering into, the Merger Agreement, and in
consideration of the premises and the representations, warranties and
agreements contained herein, the parties agree as follows:
1. Representations and Warranties of each Stockholder. Each Stockholder
hereby, severally and not jointly, represents and warrants to Purchaser and
Merger Sub as of the date hereof in respect of himself or itself as follows:
(a) Authority. The Stockholder has all requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly and validly authorized, executed and
delivered by the Stockholder and constitutes the valid and binding
obligation of the Stockholder enforceable against such Stockholder in
accordance with its terms. Neither the execution and delivery by the
Stockholder of this Agreement nor the consummation by the Stockholder of
the transactions contemplated hereby will violate or conflict in any
material respect with, result in a breach of any material provision of or
constitute a default under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust or any material license,
franchise, permit, lease, contract, agreement or other instrument,
commitment or obligation to which the Stockholder is a party or by which
the Stockholder is bound. No trust of which such Stockholder is a trustee
requires the consent of any beneficiary to the execution and delivery of
this Agreement or to the consummation of the transactions contemplated
hereby.
(b) The Subject Shares. The Stockholder is the record and beneficial
owner of, or is trustee of a trust that is the record holder of, and whose
beneficiaries are the beneficial owners of, and has good and marketable
title to, the Subject Shares set forth opposite his or its name on Schedule
A attached hereto, free and clear of any claims, liens, encumbrances and
security interests whatsoever. The Stockholder does not own, of record or
beneficially, any shares of capital stock of the Company other than the
Subject Shares set
D-1
<PAGE>
forth opposite his or its name on Schedule A attached hereto. The
Stockholder has the sole right to vote such Subject Shares, and none of
such Subject Shares is subject to any voting trust or other agreement,
arrangement or restriction with respect to the voting of such Subject
Shares, except as contemplated by this Agreement.
2. Representation and Warranty of Purchaser and Merger Sub. Purchaser and
Merger Sub each hereby represents and warrants to each Stockholder that it has
all requisite power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly authorized, executed and delivered by each of Purchaser and Merger
Sub and constitutes the valid and binding obligation of each of Purchaser and
Merger Sub enforceable against each of Purchaser and Merger Sub in accordance
with its terms. Neither the execution and delivery by each of Purchaser and
Merger Sub of this Agreement nor the consummation by each of Purchaser and
Merger Sub of the transactions contemplated hereby will: (a) violate or
conflict in any material respect with, result in a breach of any material
provision of, constitute a default (or an event which, with notice or lapse of
time or both, would constitute a default) under, result in the termination or
in a right of termination of, accelerate the performance required by or
benefit obtainable under, result in the vesting, triggering or acceleration of
any payment or other obligations pursuant to, or result in there being
declared void, voidable, subject to withdrawal, or without further binding
effect, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust or any material license, franchise, permit,
lease, contract, agreement or other instrument, commitment or obligation to
which each of Purchaser and Merger Sub is a party, by which each of Purchaser
and Merger Sub or any of its properties is bound, or under which each of
Purchaser and Merger Sub or any of its properties is entitled to a benefit;
(b) other than the filings required under the HSR Act or any Exchange Act
filings, require any consent, approval or authorization of, or declaration,
filing or registration with, any Governmental Entity; or (c) violate in any
material respect any Laws applicable to each of Purchaser and Merger Sub.
3. Covenants of Each Stockholder. Until the termination of this Agreement in
accordance with Section 7, each Stockholder severally and not jointly agrees
as follows:
(a) At any meeting of Stockholders of the Company called to vote upon the
Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval (including
by written consent) with respect to the Merger and the Merger Agreement is
sought, the Stockholder shall vote (or cause to be voted) the Subject
Shares in favor of the Merger, the adoption by the Company of the Merger
Agreement (as it may be amended from time to time, provided that such
amendment is not materially adverse to such Stockholder) and the approval
of the terms thereof and each of the other transactions contemplated by the
Merger Agreement. Any vote cast in accordance with this Section 3(a) or in
accordance with Section 3(b) shall be cast in such manner as will insure
that such vote is duly counted for purposes of determining whether a quorum
is present and for purposes of determining the result of such vote.
(b) (i) At any meeting of Stockholders of the Company or at any
adjournment thereof or in any other circumstances upon which the
Stockholder's vote, consent or other approval is sought, the Stockholder
shall vote (or cause to be voted) the Subject Shares against (A) any
Acquisition Proposal as such term is defined in Section 7.1(a) of the
Merger Agreement or (B) any amendment of the Company's certificate of
incorporation or by-laws or other proposal or transaction involving the
Company, which amendment or other proposal or transaction would be
reasonably likely to impede, frustrate, prevent or nullify the Merger, the
Merger Agreement (as it may be amended from time to time, provided such
amendment is not materially adverse to such Stockholder), or any of the
other transactions contemplated by the Merger Agreement or change in any
manner the voting rights of the Common Stock. The Stockholder further
agrees not to enter into any agreement inconsistent with the foregoing.
(ii) At any meeting of Stockholders of the Company or at any adjournment
thereof or in any other circumstances upon which the Stockholder's vote,
consent or other approval is sought, the Stockholder shall vote (or cause
to be voted) the Subject Shares (A) in favor of any proposal approving any
of the transactions
D-2
<PAGE>
contemplated by the Asset and Subsidiary Stock Option Agreement (the
"Option Agreement"), dated the date hereof, between the Company and
Purchaser, and (B) against any proposal or transactions that would be
reasonably likely to impede, frustrate, prevent or nullify the Option
Agreement or any transactions contemplated thereby.
(c) The Stockholder shall not, prior to the earliest of (i) the Effective
Time and (ii) the termination of the Merger Agreement in accordance with
its terms, (x) sell, transfer, give, pledge, assign or otherwise dispose of
(including by gift) (collectively, "Transfer"), consent to any Transfer of,
any or all of such Stockholder's Subject Shares or any interest therein or
enter into any contract, option or other arrangement (including any profit
sharing arrangement) with respect to the Transfer of, the Subject Shares to
any person other than pursuant to the terms of the Merger or (y) enter into
any voting arrangement, whether by proxy, voting agreement or otherwise, in
connection with, directly or indirectly, any Acquisition Proposal and
agrees not to commit or agree to take any of the foregoing actions.
(d) In the event that Purchaser, Merger Sub or any affiliate thereof
commences a tender offer for all or any portion of the Common Stock at a
purchase price per share equal to or greater than the Merger Consideration,
such Stockholder shall validly tender such Stockholder's Subject Shares and
shall not withdraw Subject Shares so tendered.
(e) Until after the Merger is consummated or the Merger Agreement is
terminated, the Stockholder shall use reasonable efforts to take, or cause
to be taken, all actions, and to do, or cause to be done, and to assist and
cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by the
Merger Agreement (as it may be amended from time to time, provided such
amendment is not materially adverse to such Stockholder).
(f) Such Stockholder, and any beneficiary of a revocable trust for which
such Stockholder serves as trustee, shall not take any action to revoke or
terminate such trust or take any other action which would restrict, limit
or frustrate in any way the transactions contemplated by this Agreement.
Each such beneficiary hereby acknowledges and agrees to be bound by the
terms of this Agreement applicable to it.
4. Further Assurances. Each Stockholder will, from time to time, execute and
deliver, or cause to be executed and delivered, such additional or further
consents, documents and other instruments as Purchaser may reasonably request
for the purpose of effectively carrying out the transactions contemplated by
this Agreement.
5. Certain Events. Each Stockholder agrees that this Agreement and the
obligations hereunder shall attach to such Stockholder's Subject Shares and
shall be binding upon any person or entity to which legal or beneficial
ownership of such Subject Shares shall pass, whether by operation of law or
otherwise, including without limitation such Stockholder's heirs, guardians,
administrators or successors. In the event of any stock split, stock dividend,
merger, reorganization, recapitalization or other change in the capital
structure of the Company affecting the Company Common Stock, or the
acquisition of additional shares of Company Common Stock or other voting
securities of the Company by any Stockholder, the number of Subject Shares
listed in Schedule A beside the name of such Stockholder shall be adjusted
appropriately and this Agreement and the obligations hereunder shall attach to
any additional shares of Company Common Stock or other voting securities of
the Company issued to or acquired by such Stockholder.
6. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties without the
prior written consent of the other parties, except that Merger Sub or
Purchaser (or both of them) may assign, as contemplated by Section 10.3 of the
Merger Agreement, in its sole discretion, any and all of its rights, interests
and obligations hereunder to any affiliate, provided that Merger Sub or
Purchaser will remain liable for its obligations hereunder in the event of any
assignment pursuant to this Section 6. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
D-3
<PAGE>
7. Termination. This Agreement, and all rights and obligations of the
parties hereunder, shall terminate upon the date upon which the Merger
Agreement is terminated in accordance with its terms, provided that if the
Merger Agreement has been terminated for any reason, Sections 3(b)(ii), 4, 5,
6, 7, 8, 9, 10 and 11 shall survive for one year following such termination.
8. Grant of Irrevocable Proxy; Appointment of Proxy. (a) Each Stockholder
hereby irrevocably grants to, and appoints, Purchaser and William Recker in
his capacity as an officer of Purchaser, and any individual who shall
hereafter succeed to such office of Purchaser, and each of them individually,
such Stockholder's proxy and attorney-in-fact (with full power of
substitution), for and in the name, place and stead of such Stockholder, to
vote such Stockholder's Subject Shares, or grant a consent or approval in
respect of such Subject Shares (i) in connection with any of the matters set
forth in Sections 3(a) and 3(b), and (ii) against any transaction or proposal
that would be reasonably likely to result in a breach of any covenant,
representation or warranty or any other obligation or agreement of the Company
under or with respect to the Merger Agreement (as it may be amended from time
to time, provided such amendment is not materially adverse to such
Stockholder), the Option Agreement, the Merger or any of the transactions
contemplated by the Merger Agreement or the Option Agreement.
(b) Such Stockholder represents that any proxies heretofore given in
respect of such Stockholder's Subject Shares are not irrevocable, and that
any such proxies are hereby revoked.
(c) Such Stockholder hereby affirms that the irrevocable proxy set forth
in this Section 8 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the
performance of the duties of the Stockholder under this Agreement. Such
Stockholder hereby further affirms that the irrevocable proxy is coupled
with an interest and may under no circumstances be revoked. Such
Stockholder hereby ratifies and confirms all that such irrevocable proxy
may lawfully do or cause to be done by virtue hereof. Such irrevocable
proxy is executed and intended to be irrevocable in accordance with the
provisions of Section 212(e) of the DGCL.
9. General Provisions.
(a) Amendments. This Agreement may not be amended except by an instrument
in writing signed by each of the parties hereto.
(b) Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given if hand delivered or sent by overnight
courier (providing proof of delivery) to Purchaser or Merger Sub in
accordance with Section 10.2 of the Merger Agreement and to the
Stockholders at their respective addresses set forth on Schedule A attached
hereto (or at such other address for a party as shall be specified by like
notice).
(c) Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section to this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include", "includes"
or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".
(d) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more of the counterparts have been
signed by each of the parties and delivered to the other party, it being
understood that each party need not sign the same counterpart.
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to
the subject matter hereof and (ii) is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
D-4
<PAGE>
(f) Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware regardless of the laws
that might otherwise govern under applicable principles of conflicts of law
thereof.
(g) Voidability. If prior to the execution hereof, the Board of Directors
of the Company shall not have duly and validly authorized and approved this
Agreement, the Merger Agreement and the transactions contemplated hereby
and thereby, so that the execution and delivery hereof by Purchaser or
Merger Sub would trigger the provisions of Section 203 of the DGCL, then
this Agreement shall be void and unenforceable until such time as such
authorization and approval shall have been duly and validly obtained.
10. Stockholder Capacity. No person executing this Agreement who is or
becomes during the term hereof a director or officer of the Company makes any
agreement or understanding herein in his capacity as such director or officer.
Each Stockholder signs solely in his capacity as the record holder and
beneficial owner of, or the trustee of a trust whose beneficiaries are the
beneficial owners of, such Stockholder's Subject Shares and nothing herein
shall limit or affect any actions taken by a Stockholder in his capacity as an
officer or director of the Company.
11. Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in a Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity.
In addition, each of the parties hereto (a) consents to submit such party to
the personal jurisdiction of any Federal court located in the State of
Delaware or any Delaware state court in the event any dispute arises out of
this Agreement or any of the transactions contemplated hereby, (b) agrees that
such party will not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court, (c) agrees that such
party will not bring any action relating to this Agreement or the transactions
contemplated hereby in any court other than a Federal court sitting in the
state of Delaware or a Delaware state court and (d) waives any right to trial
by jury with respect to any claim or proceeding related to or arising out of
this Agreement or any of the transactions contemplated hereby.
12. Public Announcements. Each Stockholder will consult with Purchaser
before issuing, and provide Purchaser with the opportunity to review and
comment upon, any press release or other public statements with respect to the
transactions contemplated by this Agreement and the Merger Agreement, and
shall not issue any such press release or make any such public statement prior
to such consultation, except as may be required by applicable law, court
process or by obligations pursuant to any listing agreement with any national
securities exchange (including, but not limited to, NASDAQ).
13. Legends. Each Stockholder will, promptly after executing and delivering
this Agreement, deliver to the Company (or its transfer agent, if so directed
by the Company) the certificates representing the Subject Shares, which
certificates (or replacements thereof) shall be returned to such Stockholder
in accordance with Section 7.11 of the Merger Agreement with the following
restrictive legend placed thereon:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
STOCKHOLDERS AGREEMENT DATED AS OF OCTOBER 6, 1998, AND, PURSUANT TO THE
TERMS THEREOF, MAY NOT BE SOLD, TRANSFERRED, GIVEN, PLEDGED, ASSIGNED OR
OTHERWISE DISPOSED OF, AND ARE SUBJECT TO FURTHER RESTRICTIONS REGARDING,
AMONG OTHER THINGS, VOTING RIGHTS AND CERTAIN INDIRECT TRANSFERS AS SET
FORTH IN SUCH STOCKHOLDERS AGREEMENT"
D-5
<PAGE>
IN WITNESS WHEREOF, Purchaser, the Merger Sub and the Stockholders have
caused this Agreement to be duly executed and delivered as of the date first
written above.
GRETAG IMAGING GROUP, INC.
By: /s/ E. Brunner
___________________________________
___________________________________
Name: Dr. Eduard M. Brunner
Title: Treasurer
GRETAG ACQUISITION CORP.
By: /s/ E. Brunner
___________________________________
Name: Dr. Eduard M. Brunner
Title: Treasurer
RAKESH KUMAR
/s/ Rakesh Kumar
_____________________________________
MARC WILLARD
/s/ Marc Willard
_____________________________________
NORWEST EQUITY PARTNERS IV
By: /s/ Promod Haque
___________________________________
Name: Promod Haque
Title: Partner
MERRILL PICKARD ANDERSON
& EYRE IV, L.P.
By: /s/ S.L. Merrill
___________________________________
Name: Steven L. Merrill
Title: General Partner
D-6
<PAGE>
ANNEX E
[LETTERHEAD OF HAMBRECHT & QUIST LLC]
October 6, 1998
Confidential
The Board of Directors
Raster Graphics Inc.
3025 Orchard Parkway
San Jose, CA 95134
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock (the "Common
Stock") of Raster Graphics Inc. (the "Company") of the consideration to be
received by such stockholders in connection with the proposed acquisition of
the Company by Gretag Imaging AG ("Acquirer") (the "Proposed Transaction")
pursuant to the Agreement and Plan of Merger to be dated as of October 6,
1998, among Acquirer, Gretag Acquisition Corp. ("Merger Sub"), a wholly owned
subsidiary, and the Company (the "Agreement").
We understand that the terms of the Agreement provide, among other things,
that (i) Merger Sub will effect a combination with the Company by way of a
merger of Merger Sub with and into the Company (the "Merger") which Merger may
be preceded by a tender offer (the "Offer") to purchase all the outstanding
shares of common stock upon the terms and subject to the conditions set forth
in the Agreement; and (ii) the Merger Sub will subsequently be merged (the
"Merger") with and into the Company in a transaction that will provide the
holders of common stock, (other than Acquirer, Merger Sub, and the Company or
their respective subsidiaries) with $1.2968 per share in cash ("Merger
Consideration"). We understand that concurrently with the execution of the
Agreement, the Acquirer and the Company are entering into (a) an Asset and
Subsidiary Stock Option Agreement relating to Acquirer's purchase, under
certain conditions, of certain assets of the Company and/or the shares of
Onyx, a wholly owned subsidiary of the Company (the "Option Agreement"); and
(b) a Loan and Pledge Agreement pursuant to which Acquirer has agreed to loan
certain funds to the Company (the "Loan Agreement"). The transactions
contemplated by the Agreement, the Option Agreement, and the Loan Agreement
constitute the Proposed Transaction.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, strategic
transactions, corporate restructurings, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. We have acted as a financial
advisor to the Board of Directors of the Company in connection with the
Proposed Transaction, and we will receive a fee for our services, which
include the rendering of this opinion.
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<PAGE>
In the past, we have provided investment banking and other financial
advisory services to the Company and have received fees for rendering these
services. Hambrecht & Quist was the lead manager of the Company's Initial
Public Offering of common stock in August 1996. In the ordinary course of
business, Hambrecht & Quist has acted as a market maker and broker in the
publicly traded securities of the Company and has received customary
compensation in connection therewith, and has also provided research coverage
for the Company. In the ordinary course of business, Hambrecht & Quist has
actively traded in the equity and derivative securities of the Company for its
own account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities.
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
Acquirer for recent years and interim periods to date and certain other
relevant financial and operating data of made available to us from
published sources;
(ii) reviewed the publicly available consolidated financial statements of
the Company for recent years and interim periods to date and certain other
relevant financial and operating data of the Company made available to us
from published sources and from the internal records of the Company;
(iii) reviewed certain internal financial and operating information,
including certain projections, relating to the Company prepared by the
management of the Company;
(iv) discussed the business, financial condition and prospects of the
Company, including the Company's liquidity needs, with certain of its
officers;
(v) reviewed the recent reported prices and trading activity for the
common stocks of the Company and compared such information and certain
financial information for the Company with similar information for certain
other companies engaged in businesses we consider comparable;
(vi) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(vii) reviewed the Agreement, the Option Agreement, and the Loan
Agreement; and
(viii) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning the Company considered in
connection with our review of the Proposed Transaction, and we have not
assumed any responsibility for independent verification of such information.
We have not prepared any independent valuation or appraisal of any of the
assets or liabilities of the Company, nor have we conducted a physical
inspection of the properties and facilities of either company. With respect to
the financial forecasts and projections made available to us and used in our
analysis, we have assumed that they reflect the best currently available
estimates and judgments of the expected future financial performance of the
Company. For purposes of this opinion, we have assumed that neither Acquirer
nor the Company is a party to any pending transactions, including external
financings, recapitalizations or material merger discussions, other than the
Proposed Transaction and those activities undertaken in the ordinary course of
conducting their respective businesses. Our opinion is necessarily based upon
market, economic, financial and other conditions as they exist and can be
evaluated as of the date of this letter and any change in such conditions
would require a reevaluation of this opinion. We have not been requested to,
and do not express any opinion relating to the financial terms of the Option
Agreement or the Loan Agreement.
E-2
<PAGE>
It is understood that this letter is for the information of the Board of
Directors in connection with their evaluation of the Proposed Transaction and
may not be used for any other purpose without our prior written consent;
provided, however, that this letter may be reproduced in full in any proxy
statement or solicitation/recommendation statement, as the case may be, in
connection with the Proposed Transaction. This letter does not constitute a
recommendation to any stockholder as to how such stockholder should vote on
the Proposed Transaction or whether such stockholder should accept an Offer,
as the case may be.
Based upon and subject to the foregoing, and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof,
Merger Consideration is fair to the stockholders of the Company from a
financial point of view.
Very truly yours,
Hambrecht & Quist LLC
By /s/ P. B. Cleveland
___________________
Paul B. Cleveland
Managing Director
E-3
<PAGE>
ANNEX F
DELAWARE CODE ANNOTATED
TITLE 8. CORPORATIONS
CHAPTER l. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
Section 262-Appraisal Rights
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to (S) 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the words
"stock" and "share" mean and include what is ordinarily meant by those words
and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S) 251, (S) 252, (S) 254, (S) 257, (S) 258, (S) 263
or (S) 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsections (f) or (g) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
F-1
<PAGE>
(3) In the event all of the stock of a Subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the Subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
F-2
<PAGE>
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of
F-3
<PAGE>
this section, or if such stockholder shall deliver to the surviving or
resulting corporation a written withdrawal of his demand for an appraisal and
an acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
F-4
<PAGE>
ANNEX G
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Raster Graphics, Inc.
We have audited the accompanying consolidated balance sheets of Raster
Graphics, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Raster Graphics, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
Raster Graphics, Inc. will continue as a going concern. As more fully
disclosed in Note 2 to the financial statements, the Company incurred
significant operating losses in 1997 and has experienced a significant decline
in working capital. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty
/s/ Ernst & Young
_____________________
ERNST & YOUNG LLP
San Jose, California
September 25, 1998
G-1
<PAGE>
RASTER GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ -------------
(Restated)(1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 3,727 $ 2,963
Short term investments............................ 1,600 13,100
Accounts receivable, net of allowance for doubtful
accounts of $4,668 in 1997 and $606 in 1996...... 8,050 10,070
Inventories....................................... 6,640 6,705
Prepaid expenses.................................. 523 506
------- -------
Total current assets............................ 20,540 33,344
Property and equipment, net....................... 4,443 2,547
Deposits and other assets......................... 575 585
Intangible assets related to acquisitions......... -- 102
------- -------
Total assets.................................... $25,558 $36,578
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 8,711 $ 4,953
Accrued payroll and related expenses.............. 1,000 1,089
Accrued warranty.................................. 670 331
Other accrued liabilities......................... 5,122 1,635
Deferred revenues................................. 1,361 1,162
Current portion of long-term borrowing............ 225 303
------- -------
Total current liabilities....................... 17,089 9,473
Long-term borrowing............................... 164 178
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Authorized shares -- 2,000,000
Issued and outstanding shares--none............. -- --
Common stock, $0.001 par value:
Authorized shares -- 50,000,000
Issued and outstanding shares 9,587,748 in 1997
and 9,192,289 in 1996.......................... 10 10
Additional paid-in capital........................ 43,279 42,746
Accumulated deficit............................... (34,382) (15,417)
Cumulative translation adjustment................. (315) --
Deferred compensation............................. (287) (392)
Note receivable from stockholder.................. -- (20)
------- -------
Total stockholders' equity...................... 8,305 26,927
------- -------
Total liabilities and stockholders' equity...... $25,558 $36,578
======= =======
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass. (See note 5.)
See accompanying notes to consolidated financial statements.
G-2
<PAGE>
RASTER GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1997 1996 1995
-------- ------------- ---------
(Restated)(1) (Restated)(1)
<S> <C> <C> <C>
Net revenues............................ $ 48,928 $42,629 $28,870
Cost of revenues........................ 42,754 25,343 18,691
-------- ------- -------
Gross profit............................ 6,174 17,286 10,179
Operating expenses:
Research and development.............. 5,763 4,516 3,373
Sales and marketing................... 9,870 7,302 4,464
General and administrative............ 3,855 1,887 925
Allowance for doubtful accounts....... 4,394 403 509
Merger related expenses............... 139 -- --
Write-off acquired goodwill........... 1,211 -- --
Acquired in-process research and
development.......................... -- -- 889
-------- ------- -------
Total operating expenses............ 25,232 14,108 10,160
-------- ------- -------
Operating income (loss)................. (19,058) 3,178 19
Interest income, net.................... 403 309 49
-------- ------- -------
Income (loss) before provision for
income taxes........................... (18,655) 3,487 68
Provision for income taxes.............. 310 425 82
-------- ------- -------
Net income (loss)....................... $(18,965) $ 3,062 $ (14)
======== ======= =======
Net income (loss) per share--basic...... $ (2.01) $ 0.40 $ --
======== ======= =======
Weighted average number of shares and
equivalents outstanding--basic......... 9,426 7,562 6,025
-------- ------- -------
Net income (loss) per share--diluted.... $ (2.01) $ 0.35 $ --
======== ======= =======
Weighted average number of shares and
equivalents outstanding--diluted....... 9,426 8,642 6,025
======== ======= =======
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass. (See Note 5).
See accompanying notes to consolidated financial statements.
G-3
<PAGE>
RASTER GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
------------------ ---------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
---------- ------ --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995 (Restated)(1)..... 4,853,988 $ 5 420,852 $ 1 $22,433 $(18,465)
Issuance of convertible
preferred stock, net of
issuance costs......... 595,368 1 -- -- 1,476 --
Issuance of convertible
preferred stock for
Onyx Acquisition....... 443,360 -- -- -- 1,098 --
Issuance of common stock
under stock option plan
and upon exercise of
warrants............... -- -- 144,231 -- 260 --
Net income
(Restated)(1).......... -- -- -- -- -- (14)
---------- ---- --------- --- ------- --------
Balance at December 31,
1995 (Restated)(1)..... 5,892,716 6 565,083 1 25,267 (18,479)
Conversion of preferred
stock.................. (5,892,716) (6) 5,892,716 6 -- --
Proceeds from IPO, net
of offering expenses of
$2,716................. -- -- 2,450,000 3 16,880 --
Issuance of common stock
under stock option
plans and upon exercise
of warrants............ -- -- 284,490 -- 181 --
Unearned compensation
related to stock
options................ -- -- -- -- 418 --
Amortization of unearned
compensation........... -- -- -- -- -- --
Note receivable from
stockholder............ -- -- -- -- -- --
Net income
(Restated)(1).......... -- -- -- -- -- 3,062
---------- ---- --------- --- ------- --------
Balance at December 31,
1996 (Restated)(1)..... -- -- 9,192,289 10 42,746 (15,417)
Issuance of common stock
under employee stock
purchase plan.......... -- -- 59,261 -- 291 --
Issuance of common stock
under stock option
plans.................. -- -- 336,198 -- 242 --
Amortization of unearned
compensation........... -- -- -- -- -- --
Repayment of note
receivable from
stockholder............ -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- --
Net loss................ -- -- -- -- -- (18,965)
---------- ---- --------- --- ------- --------
Balance at December 31,
1997................... -- $-- 9,587,748 $10 $43,279 $(34,382)
========== ==== ========= === ======= ========
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass (see Note 5).
G-4
<PAGE>
<TABLE>
<CAPTION>
Notes
Cumulative Receivable Total
Translation Deferred From Stockholders'
Adjustment Compensation Stockholders Equity
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995
(Restated)(1)............. $ -- $ -- $-- $ 3,974
Issuance of convertible
preferred stock, net of
issuance costs............ -- -- -- 1,477
Issuance of convertible
preferred stock for Onyx
Acquisition............... -- -- -- 1,098
Issuance of common stock
under stock option plan
and upon exercise of
warrants.................. -- -- -- 260
Net income (Restated)(1)... -- -- -- (14)
----- ----- ---- --------
Balance at December 31,
1995 (Restated)(1)........ -- -- -- 6,795
Conversion of preferred
stock..................... -- -- -- --
Proceeds from IPO, net of
offering expenses of
$2,716.................... -- -- -- 16,883
Issuance of common stock
under stock option plans
and upon exercise of
warrants.................. -- -- -- 181
Unearned compensation
related to stock options.. -- (418) -- --
Amortization of unearned
compensation.............. -- 26 -- 26
Note receivable from
stockholder............... -- -- (20) (20)
Net income (Restated)(1)... -- -- -- 3,062
----- ----- ---- --------
Balance at December 31,
1996 (Restated)(1)........ -- (392) (20) 26,927
Issuance of common stock
under employee stock
purchase plan............. -- -- -- 291
Issuance of common stock
under stock option plans.. -- -- -- 242
Amortization of unearned
compensation.............. -- 105 -- 105
Repayment of note
receivable from
stockholder............... -- -- 20 20
Foreign currency
translation adjustment.... (315) -- -- (315)
Net loss................... -- -- -- (18,965)
----- ----- ---- --------
Balance at December 31,
1997...................... $(315) $(287) $-- $ 8,305
===== ===== ==== ========
</TABLE>
- --------
(1) Restated for pooling of interest with ColourPass (see Note 5).
See accompanying notes to consolidated financial statements.
G-5
<PAGE>
RASTER GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------
December 31, December 31, December 31,
1997 1996 1995
------------ ------------- -------------
(Restated)(1) (Restated)(1)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................... $(18,965) $ 3,062 $ (14)
Adjustments to reconcile net (loss)
income to net cash used in operating
activities:
Depreciation....................... 1,139 1,018 697
Amortization....................... 102 156 196
Acquired in-process research and
development....................... -- -- 889
Amortization of deferred
compensation...................... 105 26 --
Changes in operating assets and
liabilities:
Accounts receivable................ 2,757 (4,100) (2,185)
Non-cash inventory write down...... 9,244 (390) 295
Inventories........................ (8,318) (2,938) (1,689)
Prepaid expenses and other assets.. 100 (817) 274
Accounts payable................... 1,682 2,437 1,298
Accrued payroll and related
expenses.......................... (89) 506 123
Other accrued liabilities.......... 3,731 709 429
Deferred revenue from related
parties........................... -- -- (152)
Deferred revenues.................. 199 48 (760)
-------- -------- -------
Net cash used in operating
activities.......................... (8,313) (283) (599)
INVESTING ACTIVITIES
Capital expenditures................. (2,746) (1,871) (1,121)
Datagraph acquisition, net of cash
acquired............................ 235 -- 55
Purchases of short term investments.. (485) (32,055) --
Proceeds from sale of short term
investments......................... 11,985 18,955 --
-------- -------- -------
Net cash provided by (used in)
investing activities................ 8,989 (14,971) (1,066)
FINANCING ACTIVITIES
Proceeds from notes payable.......... -- -- 418
Repayment of term loan............... (148) (378) (473)
Repayment of note from stockholder... 20 -- --
Proceeds from Initial Public
Offering............................ -- 16,884 --
Proceeds from exercise of common
stock options....................... 533 161 196
Proceeds from issuance of convertible
preferred stock..................... -- -- 1,467
-------- -------- -------
Net cash provided by financing
activities.......................... 405 16,667 1,608
-------- -------- -------
Effect of exchange rate changes on
cash and cash equivalent............ (317) -- --
-------- -------- -------
Net increase (decrease) in cash and
cash equivalents.................... 764 1,413 (57)
Cash and cash equivalents at
beginning of year................... 2,963 1,550 1,607
-------- -------- -------
Cash and cash equivalents at end of
year................................ $ 3,727 $ 2,963 $ 1,550
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest............... $ 64 $ 73 $ 57
Cash paid for taxes.................. $ 72 $ 85 $ 28
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass (see Note 5.)
See accompanying notes to consolidated financial statements.
G-6
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Previously Reported Financial Results
On February 26, 1998 the Company announced its financial results for the
year ended December 31, 1997. The Company reported revenue of $54.7 million,
gross profit of $19.5 million, operating expenses of $20.6 million and a net
loss of $1.2 million for fiscal 1997. On April 1, 1998 the Company announced
that it would revise its 1997 financial results.
In March 1998, after consultation with its independent accountants, the
Board of Directors of the Company performed a review of the Company's
accounting and business practices. By mid-April the Board of Directors became
aware of pervasive errors and irregularities that ultimately affect the dollar
amount and timing of reported revenues in 1997. The Board of Directors
instructed that an analysis be conducted on these matters.
The irregularities took numerous forms and were primarily the result of a
lack of compliance with the Company's procedures and controls. The Company has
concluded that the earnings process for a significant number of printer sales
were not complete at the time of shipment. Further, the Company has determined
that arrangements with a number of resellers resulted in significant
concessions or allowances that were not accounted for when the revenue was
originally reported as earned.
In addition, the Company has determined that its allowances for doubtful
accounts receivable balances and excess and obsolete inventory, and the
realizable value of inventory and the goodwill recorded on the acquisition of
Datagraph have been incorrectly estimated.
As a result, for the year ended December 31, 1997 the Company reversed
recorded revenues of $5.8 million, recorded additional cost of revenue of $7.6
million, and additional operating expenses of $4.6 million. In addition, the
Company has restated its previously reported results for each interim period
in the nine months ended September 30, 1997.
The Company has also restated the net assets purchased on the acquisition of
Datagraph, a distributor of LFDP systems in France. The original figures were
based on an estimate, which has since been revised to reflect actual values.
In particular, an intangible asset of $1,420,000 was initially recorded and
was revised to $1,211,000. This intangible asset was written off in the fourth
quarter of 1997 following a revision to the Company's sales forecasts.
Datagraph recently commenced bankruptcy proceedings.
2. Organization and Summary of Significant Accounting Policies
Organization
Raster Graphics, Inc. (the Company) was incorporated on July 27, 1987. The
Company operates in a single segment consisting of the design, manufacture and
marketing of large format digital printing systems and related software and
consumables.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Onyx Graphics Corporation, Raster Graphics
GmbH, a German corporation, Raster Graphics Limited, a company incorporated in
England and Wales and Datagraph, a French corporation. The functional
currencies of the subsidiaries have been determined to be the local
currencies. Consequently, assets and liabilities of operations outside the
United States are translated into U.S. dollars using period-end exchange
rates, and revenues and expenses are translated at the average monthly
exchange rates. Gains and losses from this translation process are credited or
charged to stockholders' equity. All material inter-company accounts and
transactions have been eliminated.
G-7
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These consolidated financial statements have been restated to include the
amounts of ColourPass, which was merged with the Company's wholly owned
subsidiary, Raster Graphics Systems Ltd., effected March 18, 1997, for
relevant periods prior to the merger (see Note 5). All periods presented have
been restated to reflect the merger which has been accounted for as a pooling
of interests.
As a result of the Company's significant operating losses and the cost of
acquiring and funding its recent acquisitions, the Company's working capital
has been substantially reduced. The Company ended fiscal 1997 with a working
capital of $3.5 million and cash, cash equivalents and short-term investments
of $5.3 million compared with $23.9 million of working capital and $16.1
million of cash, cash equivalents, and short-term investments at the end of
fiscal 1996. The Company's accumulated deficit was $34.4 million at December
31, 1997. The Company's available working capital is not sufficient to
maintain the Company's activities.
Operating results for the quarters ended March 31, 1998, and June 30, 1998,
based upon trended analysis, indicate that Company revenues have decreased and
expenses have increased. In order to return to profitability, the Company must
take active measures to reverse this trend. There can be no assurances that
this trend will be reversed or that the Company will return to profitability.
The Company has entered into an Agreement and Plan of Merger with Gretag
Imaging Group, Inc. ("Gretag") for the acquisition of the Company for
approximately $1.30 per share (the "Merger"). The Company has also entered
into a Loan and Pledge Agreement and Asset and Subsidiary Stock Option
Agreement and certain of its stockholders have entered into a Stockholders
Agreement with Gretag. Pursuant to the Loan and Pledge Agreement, Gretag is
providing the Company a loan facility secured by 100% of the issued stock of
Onyx, a wholly owned subsidiary of the Company. The Company may draw down
amounts together with accrued interest of up to $5,000,000. The first
installment of $500,000 was received by the Company on September 23, 1998. In
addition, Gretag has the option to purchase up to $5,000,000 of the Company's
Common Stock in exchange for forgiving the loan and paying the balance in
cash. Pursuant to the Asset and Subsidiary Stock Option Agreement, (i) if the
Agreement and Plan of Merger is terminated, Gretag has the option to acquire
Onyx for $5,000,000 less the amount drawn down under the loan facility, or
(ii) if the Company's stockholders do not vote in favor of the Merger, if the
Company accepts a superior offer to sell the Company or upon certain other
events, Gretag has the option to acquire the Company's inkjet technology for
$6,000,000 less the amount drawn down under the loan facility. Pursuant to the
terms of the Stockholders Agreement, stockholders of the Company holding
approximately 20% of the Company's outstanding Common Stock have agreed to
vote in favor of the Merger and against any other proposal to acquire the
Company. The Merger and the Agreement and Plan of Merger requires stockholder
approval and consummation of the Merger is conditioned upon settlement of the
class action lawsuits against the Company. (See Note 12 for a description of
amounts payable on a change in control.)
The Company's future capital requirements, however, depend on numerous
factors, including, without limitation, the success of marketing, sales, and
distribution efforts; the success of its research and development programs;
the costs involved in preparing, filing, prosecuting, defending, and enforcing
intellectual property rights; competition; competing technology and market
developments; and the effectiveness of product commercialization activities
and arrangements.
There can be no assurance that the Company will obtain further additional
financing or product revenue necessary to continue operations. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
G-8
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
In particular, the Company has recorded accounts receivable of $8,050,000,
net of an allowance for doubtful accounts of $4,668,000. The allowance for
doubtful accounts is based among other things, upon management's estimate as
to the credit worthiness of its customers and their willingness to pay.
Management has undertaken efforts to collect amounts owed by its customers and
to reduce the accounts receivable balance to more desired levels over the near
term. No estimate can be made of a range of amounts of loss that are
reasonably possible, should Management's efforts not be successful.
Management also determined that the Company's inventory is in excess of its
current requirements and has written down inventory by $10.4 million to
reflect net realizable value and also excess and obsolete inventory.
Management is in the process of developing a plan to reduce the Company's
inventory to more desired levels over the near term. No estimate can be made
of a range of amounts of loss that are reasonably possible should the plan not
be successful.
Furthermore, management has estimated the expected cost of performing work
under printer warranties, which is based in part on the number of units sold,
the likelihood of operating problems occurring and the cost of repair and has
included in cost of revenues of approximately $653,000 for the expected costs.
No estimate can be made of the range of amounts of loss that are reasonably
possible should the warranty work not be successful.
Cash Equivalents and Investments
For financial statement purposes, the Company considers all highly liquid
debt instruments with original maturities of ninety days or less and with
insignificant interest rate risk to be cash equivalents.
The Company classifies all of its investments as "available-for-sale" in
accordance with the provisions of Financial Accounting Standards Board
Statement No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, the Company states its investments at estimated fair
value, with material unrealized gains and losses reported in stockholder's
equity. The cost of securities sold is based on the specific identification
method. Such securities are anticipated to be used for current operations and
are therefore classified as current assets, even though maturities may extend
beyond one year.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or fair
market value. During 1997, the Company recorded a write-down of inventory of
$9.3 million.
Property and Equipment
Property and equipment is stated at cost and depreciated, using the
straight-line method, over the shorter of the estimated useful life (one to
five years) or, if applicable, the term of the related lease.
G-9
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenue from product sales is recognized upon the later of shipment,
acceptance of the product by the customer, or when payment from the customer
is assured. In particular, where the Company has made arrangements with
customers, such as resellers, that have resulted in contingencies or
allowances after the product has shipped, revenue is recognized once the
contingency has been removed and cash collection is assured.
Further, where a customer has obtained financing through a third party
broker, revenue is not recognized until the finance agreement is in place and
the product has been accepted by the customer.
Revenue under maintenance contracts is recognized ratably over the term of
the related contract, generally twelve months.
The Company estimates and maintains a reserve for product returns.
Advertising Costs
Advertising costs are expensed when incurred and amounted to $161,000,
$190,000 and $77,000 for the years ended December 31, 1997, 1996, and 1995
respectively.
Net Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported earnings per
share. All earnings per share amounts for all periods presented have been
restated to conform to the Statement 128 requirements.
Pro forma net income (loss) per share for the years ended December 31, 1995
and 1996 have been computed as described above and also gives effect, even if
antidilutive, to common equivalent shares from preferred stock that
automatically converted upon the closing of the Company's initial public
offering (using the as-if-converted method).
Impact of Recently Issued Accounting Standards
In October 1997 and March 1998 the Accounting Standards Executive Committee
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition" and
SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition", respectively, which will be effective for the Company's
transactions entered into after December 31, 1997. The Company is assessing
the impact of the implementation of SOP 97-2 and SOP 98-4 on reported revenue
and earnings.
In June 1997, the Financial Accounting Standards Board issued Statement
Number 130, "Reporting of Comprehensive Income". This Statement requires that
all items that are to be required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
Statement is effective for fiscal years beginning after December 15, 1997 and
will be adopted by the Company for the year ended December 31, 1998. The
Company is assessing the impact of this Statement on its financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
Number 131, "Disclosures About Segments of an Enterprise and Related
Information. This Statement replaces Statement Number 14 and changes
G-10
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the way public companies report segment information. This Statement is
effective for fiscal years beginning after December 15, 1997 and will be
adopted by the Company for the year ended December 31, 1998. The Company is
assessing the impact of this Statement on its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
Number 133, "Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. This Statement is effective for fiscal years beginning after June
30, 1999 and will be adopted by the Company for the year ended December 31,
2000. The Company is assessing the impact of this Statement on its financial
statements.
2. Concentrations
Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of investments in cash equivalents, short
term investments and receivables from customers. The Company invests in money
market funds, commercial paper and state and municipal bonds of high credit
quality institutions. The Company is exposed to credit risks in the event of
default by these institutions to the extent of the amount recorded on the
balance sheet. The Company maintains reserves for potential credit losses.
A significant number of the Company's customers and suppliers are based in
Asia and Latin America. The financial instability in these regions may have an
adverse impact on the financial position of customers and suppliers in the
region which could impact the Company's future revenues and operations,
including the ability of customers to pay the Company. Should the current
volatility in Asia and Latin America continue, either the Company or the
Company's customers may be unable to sell its products in the region. The
inability to generate revenue in this region, or the inability to collect
amounts due, would have a material adverse impact on the Company's business,
financial condition and results of operations.
Dependence on Major Subcontractors and Suppliers
The Company relies on subcontractors and suppliers to manufacture,
subassemble, and perform first-stage testing of DCS printer components. The
Company relies on single suppliers for the PiezoPrint 1000 printer and for
certain critical components for the PiezoPrint 5000 and DCS printers. The
Company also relies on single suppliers for certain consumables to support its
line of printers. The loss of certain subcontractors or suppliers or the
failure of subcontractors or suppliers to meet the Company's price, quality,
quantity, and delivery requirements would have a material adverse effect on
the Company's business, financial condition, and results of operations.
Dependence on Limited Products
The majority of the Company's sales are derived from two principal product
lines, the DCS and PiezoPrint printing systems, printers and related
consumables, and the Company anticipates that it will derive the bulk of its
future revenues from sales of these products. If the Company is unable to
generate sufficient sales of these product lines due to competitive factors,
manufacturing difficulties, or other reasons, it may be unable to continue its
business.
Major Customers
One customer accounted for 10.9% of net revenues for 1995. No customer
accounted for more than 10% of net revenue during 1997 or 1996.
G-11
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Financial Instruments
Available-For-Sale Securities
As of December 31, 1997, the Company has $1.6 million of investments in
state and municipal bonds. These state and municipal bonds bear interest at a
rate which automatically resets to the prevailing market interest rate at
approximately 35-day intervals. As of December 31, 1997, substantially all the
available-for-sale securities have principal maturity dates of over ten years.
The gross unrealized gains and gross unrealized losses at December 31, 1997
were immaterial to the Company and, therefore, no amounts were recorded to
stockholders' equity. There were no sales of available for sale securities
during fiscal 1996.
Derivative Financial Instruments
During the period covered by the financial statements, the Company has not
used any derivative instrument for trading purposes.
Although the majority of the Company's transactions are denominated in U.S.
dollars, its operations have resulted in some foreign currency exchange rate
fluctuation exposure. The Company utilized foreign currency forward exchange
contracts to manage some of its foreign currency firm purchase commitments.
At December 31, 1997, the Company held a foreign currency forward contract
which matured in January 1998 to buy 25.6 million Japanese yen for $200,000.
The fair value of the yen underlying this instrument at December 31, 1997, was
$196,000.
Valuation of Financial Instruments
The fair values for cash equivalents and short term investments represent
the quoted market prices at the balance sheet dates. The fair values for
foreign currency forward contracts represent the difference between the
contracted forward rate and the quoted fair value of the underlying yen at the
balance sheet date.
4. Balance Sheet Components
Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ -------------
(Restated)(1)
<S> <C> <C>
Raw materials..................................... $ 2,934 $ 956
Work in progress.................................. 958 1,708
Finished goods.................................... 2,748 4,041
------- ------
$ 6,640 $6,705
======= ======
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass (see Note 5)
G-12
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ -------------
(Restated)(1)
<S> <C> <C>
Machinery and equipment........................... $8,518 $5,615
Furniture and fixtures............................ 517 400
Leasehold improvements............................ 728 543
------ ------
9,763 6,558
Accumulated depreciation.......................... 5,320 4,011
------ ------
$4,443 $2,547
====== ======
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass (see Note 5)
Property and equipment includes approximately $213,000 of equipment under
capital leases as of December 31, 1997. The related depreciation expense
totaled approximately $9,000 for the year ended December 31, 1997. The Company
did not have any property and equipment under capital leases as of
December 31, 1996.
Intangible Assets
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996
-------------
(Restated)(1)
<S> <C>
Assembled work force........................................... $ 80
Trademarks and tradenames...................................... 54
Developed technology........................................... 280
Distributor relationships...................................... 40
Goodwill....................................................... --
----
454
Accumulated amortization....................................... 352
----
Net intangible assets.......................................... $102
====
</TABLE>
- --------
(1) Restated for the pooling of interest with ColourPass (see Note 5)
At December 31, 1997 all intangible assets were either fully amortized or
written off.
The Company has adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
As a result of the existence of certain impairment indicators, the Company
had determined that the value of certain assets are impaired and has recorded
impairment write-downs of $1.2 million in relation to certain intangible
assets (see Note 5), which have been expensed in fiscal 1997. Those impairment
indicators include a significant operating loss in 1997.
The original life of the goodwill was five years.
G-13
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Business Combinations
On September 30, 1997, Raster Graphics acquired Datagraph, a French-based
distributor of large-format digital imaging systems. In exchange for the
outstanding stock of Datagraph, the Company agreed to pay approximately
$1,100,000 in a series of payments through September 30, 1998. The acquisition
was accounted for as a purchase with the results of operations of the acquired
business being included in the consolidated results of operations for the
period subsequent to the acquisition date. An initial purchase price
allocation was performed on the acquisition of Datagraph based an estimated
balance sheet which resulted in goodwill of $1,420,000. On the receipt of the
final balance sheet figures the purchase price allocation was revised as
follows (in thousands):
<TABLE>
<S> <C>
Cash................................................................. $ 170
Accounts Receivable.................................................. 517
Inventory............................................................ 729
Prepayments.......................................................... 21
Property and Equipment............................................... 298
Deposits and Other assets............................................ 76
Goodwill............................................................. 1,211
Accounts Payable..................................................... (1,212)
Other accrued liabilities............................................ (523)
------
Total Purchase price................................................. $1,287
</TABLE>
The change in allocation was recorded during the three months ended December
31, 1997.
As the Company intended to transition Datagraph's sales model it was
determined that the value of Datagraph's customer lists and other intangibles
were not material and all of the excess of purchase price over tangible assets
was allocated to goodwill. The operating results of Datagraph prior to the
acquisition are not material in relation to the Company. Datagraph recently
commenced bankruptcy proceedings.
On March 18, 1997, the Company completed a merger with ColourPass, a
business in the United Kingdom, in which ColourPass was merged with Raster
Graphics System Limited, a wholly owned subsidiary of the Company. On the
effective date of the merger, the Company issued 220,426 shares of common
stock to the owners of ColourPass. The combination was accounted for as a
pooling of interests. Accordingly, the consolidated statements of operations
for the years ended December 31, 1996 and 1995, the balance sheet as of
December 31, 1996, and all related footnotes presented herein have been
restated to include the accounts of Raster Graphics, Inc. and ColourPass.
The table below sets forth the composition of combined revenues and net
income (loss) for the periods indicated (in thousands). Merger related
expenses of $139,000 incurred in the first quarter of 1997 were included in
the Raster Graphics, Inc. and ColourPass net income (loss).
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ -------------
(Restated)(1)
<S> <C> <C>
Revenues
Raster Graphics, Inc............................ $39,395 $26,045
ColourPass...................................... 3,234 2,825
------- -------
Combined...................................... $42,629 $28,870
======= =======
Net income (loss)
Raster Graphics, Inc............................ $ 3,298 $ 77
ColourPass...................................... (236) (91)
------- -------
Combined...................................... $ 3,062 $ (14)
======= =======
</TABLE>
G-14
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 10, 1995, the Company acquired Onyx Graphics Corporation ("Onyx")
for 443,359 shares of convertible preferred stock of the Company, the
cancellation of a note due from Onyx and for the assumption of options to
acquire Onyx common stock. The consideration, including acquisition costs,
totaled $1.5 million. The Company expensed $750,000 of acquired in-process
research and development and wrote off $139,000 for redundant PostScript
licenses in the September 1995 quarter. The acquisition has been accounted for
as a purchase with the results of operations of the acquired business being
included in the consolidated results of operations for the period subsequent
to the acquisition date.
6. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except earnings per share):
<TABLE>
<CAPTION>
Years ended December
31,
------------------------
1997 1996 1995
--------- ------ ------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share
net income (loss)................................ $(18,965) $3,062 $ (14)
========= ====== ======
Denominator for basic earnings per share
Weighted average common shares.................... 9,426 4,007 441
Convertible preferred stock (pro forma 1996 and
1995)............................................ -- 3,555 5,584
--------- ------ ------
Shares used in computing basic earnings per share
(pro forma 1996 and 1995)........................ 9,426 7,562 6,025
========= ====== ======
Basic earnings per share (pro forma 1996 and
1995)............................................ $ (2.01) $ 0.40 $ --
========= ====== ======
Denominator for diluted earnings per share
Weighted average common shares.................... 9,426 4,007 441
Convertible preferred stock (pro forma 1995)...... -- 3,555 5,584
Stock options and warrants........................ -- 1,080 --
--------- ------ ------
Shares used in computing diluted earnings per
share (pro forma 1995)........................... 9,426 8,642 6,025
========= ====== ======
Diluted earnings per share (pro forma 1995)....... $ (2.01) $ 0.35 $ --
========= ====== ======
</TABLE>
Options to purchase 1,735,714 shares and 10,400 shares issuable on the
conversion of warrants were outstanding at December 31, 1997 and 1,112,350
options to purchase shares and 10,400 shares issuable on the conversion of
warrants were outstanding at December 31, 1995 and were excluded from the
computation of diluted net loss per share because the effect would have been
anti-dilutive.
7. Borrowings
The Company's long-term debt includes two notes payable. The first note
issued on August 29, 1994 has a principal balance of $13,000 at December 31,
1997 with interest being charged at 1.0% above the lenders prime rate. An
additional note issued on June 5, 1995 has a principal balance of $115,000 at
December 31, 1997 with interest being charged at a rate of 0.5% above the
lenders prime rate. Such prime rate was 8.5% at December 31, 1997.
In December 1997 the Company's bank line of credit agreement was amended.
The facility was increased to $10 million and extended one year to expire on
December 13, 1998 and the line of credit is governed by a borrowing base of
eligible accounts receivable and is secured by the Company's assets. Interest
is charged at the lender's prime rate plus 0.25 percentage points.
G-15
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In July 1998 the Company's bank line of credit agreement was further
amended. The facility was decreased to $4.1 million, extended to December 31,
1998 and the interest rate was revised to the Lender's prime rate plus 2.0
percentage points. At December 31, 1997, no amounts were outstanding under the
line of credit. The bank line of credit was terminated November 17, 1998.
These notes are secured by the tangible assets of the Company. The notes
include various financial covenants which make reference to the Company's
profitability and liquidity. If the Company fails to satisfy these covenants,
all outstanding amounts of the principal and unpaid interest immediately
become due and payable. Currently, the Company is not in compliance with these
Bank covenants.
In addition, the Company's wholly owned subsidiary, Datagraph, has various
notes payable which have a total outstanding balance of $56,000 at December
31, 1997. Datagraph has recently commenced bankruptcy proceedings, and all of
the outstanding balances have been classified as being due within one year.
Future principal maturities on the notes payable at December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................... $184
</TABLE>
8. Commitments
The Company leases its principal facilities under operating lease
arrangements. Future minimum annual rental payments are as follows for the
years ended December 31 (in thousands):
<TABLE>
<S> <C>
1998.................................................................. $ 993
1999.................................................................. 967
2000.................................................................. 909
2001.................................................................. 690
2002.................................................................. 78
------
$3,637
======
</TABLE>
Rent expense for the fiscal years ended 1997, 1996, and 1995 was
approximately $895,000, $614,000, and $539,000, respectively.
The Company leases some equipment under capital leases. Future minimum
lease payments under capital leases are as follows for years ended December
31:
<TABLE>
<CAPTION>
Capital
Leases
--------------
(In Thousands)
<S> <C>
1998.......................................................... $ 69
1999.......................................................... 68
2000.......................................................... 68
2001.......................................................... 60
2002.......................................................... 9
----
Total minimum lease and principal payments.................... 274
Amount representing interest.................................. (69)
----
Present value of future payments.............................. 205
Current portion of capital lease obligations.................. 41
----
Noncurrent portion of capital lease obligations............... $164
====
</TABLE>
G-16
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has purchase commitments of approximately $2.1 million to
suppliers at December 31, 1997, including non-cancelable purchase orders
totaling $1 million for products in excess of current requirements which have
been expensed to cost of revenues in 1997.
9. Stockholders' Equity
In August 1996, the Board of Directors and stockholders approved a one-for-
five reverse split of the Company's common and preferred stock and
reincorporation of the Company into the State of Delaware. All shares and per
share amounts in the accompanying consolidated financial statements have been
adjusted retroactively.
Initial Public Offering
In August 1996, the Company completed its initial public offering and issued
2,450,000 shares of its common stock to the public at a price of $8.00 per
share. The Company received approximately $16.9 million of cash, net of
underwriting discounts, commissions, and other offering costs incurred to
date. Upon completion of the offering, all outstanding shares of Preferred
Stock and 70,412 warrants were converted into shares of Common Stock on a one-
for-one basis.
Upon completion of the offering, the Board of Directors was authorized to
issue 2,000,000 shares of undesignated preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences, and number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders.
Stockholder Rights Plan
On February 3, 1998 the Board of Directors approved a Stockholder Rights
Plan where the Board declared a dividend of one right for each share of common
stock outstanding. Each right will entitle stockholders to buy one one-
thousandth of a share of the company's Series A participating Preferred Stock
at an exercise price of $30 and under certain circumstances will entitle
stockholders, other than a potential acquirer, to purchase at the then current
exercise price, that number of shares of Raster Graphics' common stock having
a market value at that time of twice the exercise price. The Rights will
separate from the common stock and become exercisable following the tenth day
after a person or group acquires beneficial ownership of 15% or more of the
Company's common stock or announces a tender or exchange offer, the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's common stock (the Distribution Date). The Rights expire
on the earliest of (a) January 29, 2008, (b) exchange or redemption of the
Rights or (c) consummation of a merger or consolidation or sale of assets
resulting in expiration of the Rights. The Rights will not have any voting
rights.
Stock Option Plans
The Company has stock option plans (the "Plans") under which key employees,
consultants and Directors may be granted incentive or nonstatutory stock
options for the purchase of common stock.
The Company's 1988 stock options plan (the "1988 Stock Plan") was adopted by
the Board of Directors in 1988. 1,560,000 shares are authorized for issuance
under this plan.
The Company's 1996 Stock Plan (the "1996 Stock Plan") was adopted by the
Board of Directors and approved by the stockholders in August 1996. An
aggregate of 800,000 shares of the Company's common stock are reserved for
issuance under the 1996 Stock Plan. Upon adoption of the 1996 Stock Plan, the
Company's
G-17
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Board of Directors determined to make no further grants under the 1988 Option
Plan. The 1996 Stock Plan provides for the granting to employees (including
officers and employee directors) of "incentive stock options" within the
meaning of Section 422 of the Code, for the granting to employees and
consultants of nonstatutory stock options and for the granting to employees of
stock purchase rights. The 1996 Stock Plan is administered by the Board of
Directors (the 1996 Administrator). The 1996 Administrator determines the
terms of options and stock purchase rights granted under the 1996 Stock Plan,
including the number of shares subject to the option or right, exercise price,
term and exercisability.
The 1996 Directors' Stock Option Plan (the "Directors' Plan") was adopted by
the Board of Directors and approved by the stockholders in August 1996. An
aggregate of 150,000 shares of common stock are reserved for issuance under
the Directors' Plan. The Directors' Plan provides for the granting of
nonstatutory stock options to nonemployee directors of the Company. The
Directors' Plan is designed to work automatically without administration;
however, to the extent administration is necessary, it will be performed by
the Board of Directors. To the extent they arise, it is expected that
conflicts of interest will be addressed by abstention of the interested
director from both deliberations and voting regarding matters in which he or
she has a personal interest.
The Directors' Plan provides that each person who is or becomes a
nonemployee director of the Company shall be granted a nonstatutory stock
option to purchase 10,000 shares of common stock on the date on which the
optionee first becomes a nonemployee director of the Company. Thereafter, on
the first calendar day of the Company's fiscal year commencing in 1997, each
nonemployee director shall be granted an additional option to purchase 5,000
shares of common stock if, on such date, he or she shall have served on the
Company's Board of Directors for at least six months.
The Company's 1997 Stock Option Plan (the "1997 Stock Plan") was adopted by
the Board of Directors in December 1997. An aggregate of 400,000 shares of the
Company's common stock are reserved for issuance under the 1997 Stock Plan.
The 1997 Stock Plan provides for the granting to employees (including officers
and employee directors upon joining the Company) and consultants of
nonstatutory stock options. The 1997 Stock Plan is administered by the Board
of Directors or a Committee designated by the Board (the "1997
Administrator"). The 1997 Administrator determines the terms of options
granted under the 1997 Stock Plan, including the number of shares subject to
the option, exercise price, term and exercisability.
There are 2,910,000 shares authorized under the Plans. Under the Plans,
incentive and nonstatutory options may be granted at an exercise price of not
less than 100% and 85%, respectively, of the fair value as determined by the
Board of Directors. The options are exercisable at the discretion of the Board
of Directors and generally vest at the rate of 12.5% of the original grant,
commencing six months after the date of grant or employment, and in monthly
increments of approximately 2.08% or quarterly increments of approximately
6.25% of the total grant thereafter. Expiration dates are determined by the
Board of Directors, but in no event will they exceed ten years from the date
of grant. Unexercised options are cancelable thirty days after the date of
termination of employment.
Because of certain security laws issues applicable to the Company, no stock
option grants or exercises have been made (except for a stock grant to the
Company's Executive Vice President) since the Company was de-listed from the
NASDAQ National Market.
G-18
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the Company's stock option activity, and related information
for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of year................ 1,535,800 $3.52 1,112,350 $0.51 623,770 $0.49
Granted................. 776,050 $7.10 632,841 $7.83 513,280 $0.53
Exercised............... (336,198) $0.72 (141,245) $0.48 (19,787) $0.50
Forfeited............... (239,938) $6.29 (68,146) $0.78 (4,913) $0.50
--------- --------- ---------
Outstanding--end of
year................... 1,735,714 $5.28 1,535,800 $3.52 1,112,350 $0.51
========= ===== ========= ===== ========= =====
</TABLE>
At December 31, 1997, there were 633,311 shares of common stock available
for option grants.
The following table summarizes information about options outstanding and
exercisable by price range as of December 31, 1997:
<TABLE>
<CAPTION>
Options
Outstanding Options Exercisable
----------- --------------------
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices As of Life (Years) Price As of Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.03 15,960 7.59 $0.03 15,960 $0.03
$0.50-$0.75 478,926 5.88 $0.50 413,632 $0.50
$0.80 19,400 7.59 $0.80 19,400 $0.80
$1.25-$1.50 11,600 7.87 $1.36 7,242 $1.36
$4.00-$6.00 344,281 9.43 $5.25 56,600 $5.23
$6.88-$8.75 613,886 8.91 $7.44 155,689 $7.39
$9.50-$11.00 251,661 8.97 $9.97 54,409 $9.96
--------- -------
1,735,714 8.15 $5.28 722,932 $3.07
========= ==== ===== ======= =====
</TABLE>
Deferred Compensation
The Company recorded aggregate compensation of $418,000 during 1996. The
amount recorded represents the difference between the grant price and the
deemed fair value of the Company's common stock for shares subject to options
granted during 1996. The amortization of deferred compensation is charged to
operations and is amortized over the vesting period of the options, which is
typically four years.
Stock Purchase Plans
In 1988, the Company adopted a stock purchase plan (the "1988 Plan") for
consultants and key employees of the Company. There are 90,000 shares
authorized for issuance under this plan. Under this plan, consultants and key
employees may be granted the right to purchase shares of the Company's common
stock at not less than 100% of the fair value on the date of grant as
determined by the Board of Directors. As of December 31, 1997, 24,000 shares
have been issued under the Plan.
The Company's 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan")
was adopted by the Board of Directors and approved by the stockholders in
August 1996. Upon adoption of the 1996 Purchase Plan, the Company's Board of
Directors determined to make no further grants under the 1988 Plan. A total of
400,000 shares of common stock has been reserved for issuance under this plan.
As of December 31, 1997, 54,661 shares have been issued under this plan.
G-19
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 1996 Purchase Plan, which is intended to qualify under Section 423 of
the Code, has been implemented by a series of twelve month offering periods
with purchases commencing on or about January 1 and July 1 of each year. The
Purchase Plan is administered by the Board of Directors. Employees (including
officers and employee directors) of the Company, or of any majority owned
subsidiary designated by the Board of Directors, are eligible to participate
in the Purchase Plan if they are employed by the Company or any such
subsidiary for at least 20 hours per week and more than five months per year.
The Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 10% of an employee's compensation at
a price equal to the lower of 85% of the fair market value of the Company's
common stock at the beginning or end of the offering period. Because of
certain securities law issues applicable to the Company, no purchase was made
under the Plan on June 30, 1998, and all participants will have withdrawn from
the Plan as of September 25, 1998 without any exercise of outstanding options.
Accounting for Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock based compensation
because, as discussed below, the alternative fair value accounting provided
for under FASB Statement No. 123, "Accounting for Stock-Based Compensation",
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's options generally equals the market price of the underlying
stock on the date of the grant, no compensation expense is recognized in the
Company's financial statements.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by Statement 123, which also requires that the information
be determined as if the Company has accounted for its employee stock options
(including shares issued under the Employee Stock Purchase Plan, collectively
called options') granted subsequent to December 31, 1994 under the fair value
method of the Statement. The fair value for these options was estimated at the
date of grant using the minimum value method prior to the Company's Initial
Public Offering ("IPO") in August 1996. Subsequent to the IPO, the fair value
of the options has been estimated using the Black-Scholes option pricing
model. The following weighted-average assumptions were used in the valuation
of options:
<TABLE>
<CAPTION>
Employee Stock
Employee Stock Options Purchase Plan
----------------------- -----------------
1997 1996 1995 1997 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Risk-free interest rate............ 6.47% 6.41% 6.46% 5.41% 5.64%
Dividend yield..................... 0% 0% 0% 0% 0%
Volatility......................... 0.85 0.28 0% 0.85 0.28
Average life....................... 5 years 5 years 5 years 6 months 6 months
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The weighted average fair value of options granted during the year ended
December 31, 1997, 1996 and 1995 was $5.09, $5.67, and $0.69 per share,
respectively for options granted at an exercise price equal to fair value at
the grant date, and $2.92 and per share, for options granted at an exercise
price less than the fair value at the grant date during the year ended
December 31, 1996. The weighted average estimated fair value of employee stock
purchase rights granted during 1997 was $4.25.
G-20
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period (for employee
stock options) and the six month purchase period (for stock purchases under
the Employee Stock Purchase Plan). The Company's pro forma information at
December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
(Restated)(1) (Restated)(1)
<S> <C> <C> <C>
Pro forma net income (loss)...... $(20,237,000) $2,810,000 $(61,000)
Pro forma basic income (loss) per
share........................... $ (2.16) $ 0.37 $ (0.01)
Pro forma diluted income (loss)
per share....................... $ (2.16) $ 0.33 $ (0.01)
</TABLE>
--------
(1) Restated for the pooling of interests with ColourPass. (See Note 5.)
The effects of applying FAS 123 for either recognizing compensation expense
or providing pro forma disclosures are not likely to be representative of the
effects on reported net income (loss) for future years. As FAS 123 is
applicable only to options granted subsequent to December 31, 1994, its pro
forma effect will not be fully reflected until approximately the year 2000.
Warrants
During 1989, the Company issued warrants to purchase 10,400 shares of stock
at $12.50 per share to a financial institution in connection with an equipment
lease line. The warrants expired in 1998.
Common Stock Reserved
The Company has reserved shares of common stock for future issuance as
follows:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Stock Option Plans............................................. 2,369,025
Stock Purchase Plan............................................ 345,339
Conversion of warrants......................................... 10,400
---------
2,724,764
=========
</TABLE>
Notes Receivable From Stockholder
On February 28, 1996, the Company issued a note receivable for $20,000 to a
consultant. The note incurred interest at a rate of 5.25% per annum and was
repaid in full in January, 1997.
10. Taxes On Income
The tax provision consists of the following:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal............................. $-- $193 $40
State............................... 54 56 28
Foreign............................. 256 176 14
---- ---- ---
$310 $425 $82
==== ==== ===
</TABLE>
G-21
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The difference between the tax provision and the amount computed by applying
the federal statutory income tax rate to income before provision for income
taxes is explained below:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Expected provision (benefit) at
statutory rate.................... $(5,619) $1,220 $ 24
State taxes........................ 54 56 28
Federal alternative minimum tax.... -- 81 40
Net operating losses (utilized) not
utilized.......................... 5,875 (932) (10)
------- ------ ----
Provision for income taxes......... $ 310 $ 425 $ 82
======= ====== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components
of deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................. $ 8,553 $3,238
Tax credit carryforwards......................... 1,640 1,278
Inventory reserve................................ 673 367
Other accruals and reserves not deductible for
tax purposes.................................... 1,925 890
Other, net....................................... 565 350
------- ------
Total deferred tax assets........................ 13,356 6,123
Valuation allowance for deferred tax assets...... (13,356) (6,123)
------- ------
Net deferred tax assets.......................... $ -- $ --
======= ======
</TABLE>
The net operating loss and credit carryforwards will expire in the years
2002 through 2012, if not utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
G-22
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Export and International Sales
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1996 1995
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Revenue from unaffiliated customers
US........................................... $ 42,459 $39,071 $25,482
Europe....................................... 6,469 3,558 3,388
-------- ------- -------
Total revenue.............................. $ 48,928 $42,629 $28,870
======== ======= =======
Transfers (eliminations)
US........................................... $ (1,386) $ -- $ (648)
Europe....................................... (9,684) (1,918) --
Eliminations................................. (450) (3,660) (240)
-------- ------- -------
Total transfers............................ $(11,520) $(5,578) $ (888)
======== ======= =======
Income (Loss) from Operations
US........................................... $(17,992) $ 3,594 $ 268
Europe....................................... (586) (181) (166)
Eliminations................................. (480) (235) (83)
-------- ------- -------
Total income (loss)........................ $(19,058) $ 3,178 $ 19
======== ======= =======
Identifiable assets
US........................................... $ 26,214 $35,860 $12,641
Europe....................................... 11,341 4,314 1,452
Eliminations................................. (11,997) (3,596) (971)
-------- ------- -------
Total assets on balance sheet.............. $ 25,558 $36,578 $13,122
======== ======= =======
</TABLE>
Total export sales by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Europe............................................... $ 4,464 $ 8,386 $ 7,252
Far East............................................. 4,865 4,161 3,184
Other................................................ 3,497 5,856 2,358
------- ------- -------
$12,826 $18,403 $12,794
======= ======= =======
</TABLE>
International sales, including export sales and sales of the Company's
foreign subsidiaries, were $19.3 million, $22.0 million and $16.2 million in
1997, 1996 and 1995, respectively. International sales in 1996 and 1995 have
been restated for the merger with ColourPass (see Note 5).
12. Related Party Transactions
In March 1997, the Company issued an interest-free note receivable to the
Chief Financial Officer of $10,000. In June 1997, the Company issued an
additional note receivable to that officer of $80,000 which bore interest at
6.8% per annum and of which $5,000 was repaid in November 1997. In October
1997 the Chief Financial Officer's employment was terminated. Consulting fees
and severance expenses due to the officer as of December 31, 1997 amounted to
approximately $43,000 and were recorded as a reduction to the principal
amounts of the notes receivable. The remaining unpaid balance at December 31,
1997 of approximately $42,000 was repaid in 1998.
G-23
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1997, the Company issued an irrevocable standby letter of credit
in favor of Barclays' Bank on behalf of the Executive Vice President for an
unsecured personal line of credit in the amount of $175,000. This letter of
credit expired May 31, 1998. In August 1998 the Company entered into a mutual
release agreement with Marc Willard, an officer of the Company. In
consideration for Mr. Willard's full release relating to the Company's
acquisition of ColourPass (of which Mr. Willard was an 80% partner), the
parties agreed to a cash bonus of $70,000, a cash payment of $200,000 upon a
change in control of the Company, and a nonqualifying stock option grant of
175,000 shares at an exercise price of $0.375 per share.
In addition, the Company has agreed to make bonus payments to its Chief
Executive Officer, The Brenner Group, LLC, and general counsel to a maximum of
$575,000, on a change of control of the Company.
13. Employee Benefit Plan
The Company has adopted a salary deferral plan (the Plan) covering
substantially all employees. The Company has made no contributions to the Plan
through December 31, 1997.
14. Pending Litigation
Commencing in March 1998 several class action lawsuits have been filed in
both state and federal courts purported by on behalf of stockholders who
purchased the Company's stock during various periods in 1997 through early
1998. The complaints name as defendants the Company and its Chairman, Chief
Executive Officer and President, and certain other officers and directors. The
complaints allege, among other things, violation of federal securities laws
and that defendants made false and misleading statements in press releases,
SEC filings and/or other public statements and seek unspecified damages. The
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is a party to a number of legal claims arising in the ordinary
course of business. The Company believes the ultimate resolution of the claims
will not have a material adverse effect on its financial position, results of
operation, or cash flow.
15. Subsequent Events
Restructuring
During the first quarter of 1998, the Company implemented a plan of internal
restructuring of its operations. The plan was initiated to reduce operating
expenses and improve the Company's financial condition. The plan resulted in a
reduction in headcount of approximately 28 and included several officers of
the Company. The costs associated with this restructuring totaled
approximately $300,000.
Agreement and Plan of Merger
The Company has entered into an Agreement and Plan of Merger with Gretag
Imaging Group, Inc. ("Gretag") for the acquisition of the Company for
approximately $1.30 per share (the "Merger"). The Company has also entered
into a Loan and Pledge Agreement and Asset and Subsidiary Stock Option
Agreement and certain of its stockholders have entered into a Stockholders
Agreement with Gretag. Pursuant to the Loan and Pledge Agreement, Gretag is
providing the Company a loan facility secured by 100% of the issued stock of
Onyx, a wholly owned subsidiary of the Company. The Company may draw down
amounts together with accrued interest of up to $5,000,000. The first
installment of $500,000 was received by the Company on September 23, 1998. In
addition, Gretag has the option to purchase up to $5,000,000 of the Company's
Common
G-24
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock in exchange for forgiving the loan and paying the balance in cash.
Pursuant to the Asset and Subsidiary Stock Option Agreement, (i) if the
Agreement and Plan of Merger is terminated, Gretag has the option to acquire
Onyx for $5,000,000 less the amount drawn down under the loan facility, or
(ii) if the Company's stockholders do not vote in favor of the Merger, if the
Company accepts a superior offer to sell the Company or upon certain other
events, Gretag has the option to acquire the Company's inkjet technology for
$6,000,000 less the amount drawn down under the loan facility. Pursuant to the
terms of the Stockholders Agreement, stockholders of the Company holding
approximately 20% of the Company's outstanding Common Stock have agreed to
vote in favor of the Merger and against any other proposal to acquire the
Company. The Merger and the Agreement and Plan of Merger requires stockholder
approval and consummation of the Merger is conditioned upon settlement of the
class action lawsuits against the Company. (See Notes to the Consolidated
Financial Statements for a description of amounts payable on a change in
control.)
G-25
<PAGE>
ANNEX H
FINANCIAL INFORMATION FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1997
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,971 $ 3,727
Short-term investments............................ -- 1,600
Accounts receivable, net of allowance for doubtful
accounts of $4,668 in 1997 and $4,441 in 1998.... 4,705 8,050
Inventories....................................... 4,740 6,640
Prepaid expenses.................................. 335 523
------- -------
Total current assets................................ 11,751 20,540
Property and equipment, net......................... 3,295 4,443
Deposits and other assets........................... 269 575
------- -------
Total assets........................................ $15,315 $25,558
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 5,680 $ 8,711
Accrued payroll and related expenses.............. 1,209 1,000
Accrued warranty.................................. 597 570
Other accrued liabilities......................... 4,016 5,122
Deferred revenue.................................. 2,474 1,361
Current portion of long-term debt................. 610 225
------- -------
Total current liabilities........................... 14,586 17,089
Long-term debt...................................... 134 164
Stockholders' equity:
Common stock...................................... 10 10
Additional paid-in capital........................ 43,285 43,279
Accumulated deficit............................... (42,141) (34,382)
Deferred compensation............................. (209) (287)
Cumulative translation adjustment................. (350) (315)
------- -------
Total stockholders' equity.......................... 595 8,305
------- -------
Total liabilities and stockholders' equity.......... $15,315 $25,558
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
H-1
<PAGE>
RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share date)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
------- ---------- ------- ----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net revenues.......................... $ 9,955 $ 12,790 $33,102 $35,507
Cost of revenues...................... 7,195 9,705 23,313 27,856
------- -------- ------- -------
Gross profit.......................... 2,760 3,085 9,789 7,651
------- -------- ------- -------
Operating expenses:
Research and development............ 1,327 1,524 4,679 4,269
Sales and marketing................. 2,381 2,543 7,630 7,157
General and administrative.......... 1,278 1,175 5,036 3,012
Merger expenses..................... -- -- -- 139
------- -------- ------- -------
Total operating expenses ............. 4,986 5,242 17,345 14,577
------- -------- ------- -------
Operating (loss)...................... (2,226) (2,157) (7,556) (6,926)
Other income (expense), net .......... (2) 93 2 358
------- -------- ------- -------
(Loss) before provision for income
taxes................................ (2,228) (2,064) (7,554) (6,568)
Provision for income taxes ........... 53 40 205 127
------- -------- ------- -------
Net (loss) ........................... $(2,281) $( 2,104) $(7,759) $(6,695)
======= ======== ======= =======
Net (loss) per share--basic .......... $ (0.24) $ (0.22) $ (0.81) $ (0.71)
======= ======== ======= =======
Shares used in computing net (loss)
per share--basic .................... 9,600 9,490 9,597 9,384
======= ======== ======= =======
Net (loss) per share--diluted ........ $ (0.24) $ (0.22) $ (0.81) $ (0.71)
======= ======== ======= =======
Shares used in computing net (loss)
per share--diluted .................. 9,600 9,490 9,597 9,384
======= ======== ======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
H-2
<PAGE>
RASTER GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
------- ----------
(Restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss)................................................ $(7,759) $(6,695)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Depreciation and amortization........................... 1,480 968
Amortization of deferred compensation................... 78 79
Changes in operating assets and liabilities:
Accounts receivable................................... 3,345 (2,447)
Inventories........................................... 1,900 (1,152)
Prepaid expenses and other assets..................... 494 96
Accounts payable...................................... (3,031) 374
Accrued payroll and related expenses.................. 209 (87)
Deferred revenue...................................... 1,113 108
Warranty and other accrued liabilities................ (1,173) 1,265
------- -------
Net cash (used in) operating activities................... (3,344) (7,491)
INVESTING ACTIVITIES
Capital retirements....................................... 686 --
Capital expenditures...................................... (1,018) (2,232)
Decrease in short-term investments........................ 1,600 8,419
Datagraph Acquisition, net of cash acquired............... -- (8)
------- -------
Net cash provided by investing activities................. 1,268 6,179
FINANCING ACTIVITIES
Proceeds from loan........................................ 500 --
Proceeds from line of credit.............................. -- 2,000
Repayment of note......................................... (145) (263)
Repayment of note from shareholders....................... -- 20
Proceeds from issuance of common stock.................... -- 435
------- -------
Net cash provided by financing activities................. 355 2,192
------- -------
Effect of exchange rate changes on cash................... (35) (267)
Net increase (decrease) in cash and cash equivalents...... (1,756) 613
Cash and cash equivalents at beginning of period.......... 3,727 2,963
------- -------
Cash and cash equivalents at end of period................ $ 1,971 $ 3,576
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest.................................. $ 204 $ 69
Cash paid for taxes..................................... $ 248 $ 84
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
H-3
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, 1997.
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 and nine months ended September 30, 1998, are not
necessarily indicative of the results for any other interim period or the full
fiscal year ending December 31, 1998.
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. All periods presented reflect the merger which has been
accounted for as a pooling of interests.
On February 26, 1998, the Company announced its financial results for the
year ended December 31, 1997. The Company reported revenue of $54.7 million,
gross profit of $19.5 million, operating expenses of $20.6 million and a net
loss of $1.2 million for fiscal 1997. On April 1, 1998 the Company announced
that it would revise its 1997 financial results.
In March 1998, after consultation with its independent accountants, the
Board of Directors of the Company performed a review of the Company's
accounting and business practices. By mid-April the Board of Directors became
aware of pervasive errors and irregularities that ultimately affected the
dollar amount and timing of reported revenues in 1997. The Board of Directors
instructed that an analysis be conducted on these matters.
The irregularities took numerous forms and were primarily the result of a
lack of compliance with the Company's procedures and controls. The Company has
concluded that the earnings process for a significant number of printer sales
were not complete at the time of shipment. Further, the Company has determined
that arrangements with a number of resellers resulted in significant
concessions or allowances that were not accounted for when the revenue was
originally reported as earned.
In addition, the Company determined that its allowances for doubtful
accounts receivable balances and excess and obsolete inventory, and the
realizable value of inventory and the goodwill recorded on the acquisition of
Datagraph had been incorrectly estimated.
As a result, for the year ended December 31, 1997, the Company reversed
recorded revenues of $5.8 million, recorded additional cost of revenue of $7.6
million, and additional operating expenses of $4.6 million. In addition, the
Company has restated its previously reported results for each interim period
in the nine months ended September 30, 1997. The 10-Q/A's for each interim
period were filed October 7, 1998.
The Company has also restated the net assets purchased on the acquisition of
Datagraph, a distributor of large format digital printer (LFDP) systems in
France. The original figures were based on an estimate, which has since been
revised to reflect actual values. In particular, an intangible asset of
$1,420,000 was initially recorded and was revised to $1,211,000. This
intangible asset was written off in the fourth quarter of 1997 following a
revision to the Company's sales forecasts. In addition, Datagraph has
commenced bankruptcy proceedings in the fourth quarter of 1998 and will cease
operations.
H-4
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's policy for recognizing revenue is as follows:
Revenue from product sales is recognized upon the later of shipment,
acceptance of the product by the customer, or when payment from the
customer is assured. In particular, where the Company has made arrangements
with customers, such as resellers, that have resulted in contingencies or
allowances after the product has shipped, revenue is recognized once the
contingency has been removed and cash collection is assured.
Further, where a customer has obtained financing through a third party
broker, revenue is not recognized until the finance agreement is in place
and the product has been accepted by the customer.
Revenue under maintenance contracts is recognized ratably over the term
of the related contract, generally twelve months.
The Company believes its existing capital resources will be insufficient to
satisfy its working capital requirements through the end of 1998. The Company
will need to raise additional capital to fund operations during 1998 and
beyond. The Report of Independent Auditors on the Company's financial
statements for the year ended December 31, 1997, contains an explanatory
paragraph regarding the Company's need for additional financing and indicates
substantial doubt about the Company's ability to continue as a going concern.
There can be no assurances that such capital will be available on acceptable
terms, if at all, and such terms may be dilutive to existing stockholders. The
Company has entered into a Loan and Pledge Agreement with Gretag Imaging
Group, Inc. providing for a loan facility secured by 100% of the issued stock
of Onyx Graphics Corporation (see Note 10 regarding subsequent events). The
Company's inability to secure any additional necessary funding would have a
material adverse affect on the Company's financial condition and results of
operations. The Company's actual working capital needs will depend upon
numerous factors, including the extent and timing of acceptance of the
Company's products in the market, the Company's operating results, the
progress of the Company's research and development activities, the cost of
increasing the Company's sales and marketing activities and the status of
competitive products, none of which can be predicted with certainty. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of assets and liabilities that may result from the
outcome of this uncertainty. See Note 10 regarding subsequent events.
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.
H-5
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Inventories
Inventories are stated at the lower of cost (first in, first out) or fair
market value and consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials..................................... $ 2,909 $2,934
Work-in-progress.................................. 1,741 958
Finished goods.................................... 90 2,748
------- ------
$ 4,740 $6,640
======= ======
</TABLE>
5. Net Loss Per Share
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
in thousands, except per share data
---------------------------------------
1998 1997 1998 1997
------- ---------- ------- ----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share.................... $(2,281) $(2,104) $(7,759) $(6,695)
======= ======= ======= ========
Denominator for basic earnings per
share:
Convertible preferred stock.......... 9,600 9,490 9,597 9,384
Shares used in computing basic
earnings per share.................. 9,600 9,490 9,597 9,384
------- ------- ------- --------
Basic loss per share................. $ (0.24) $ (0.22) $ (0.81) $ (0.71)
======= ======= ======= ========
Denominator for diluted loss per share:
Weighted average common shares....... 9,600 9,490 9,597 9,384
Convertible preferred stock.......... -- -- -- --
Stock options and warrants........... -- -- -- --
Shares used in computing diluted loss
per share........................... 9,600 9,490 9,597 9,384
------- ------- ------- --------
Diluted loss per share................. $ (0.24) $ (0.22) $ (0.81) $ (0.71)
======= ======= ======= ========
</TABLE>
6. Reporting of Comprehensive Income
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 annual financial
statements with the same prominence as other financial statements. Total
Comprehensive Income (loss) for the periods ending September 30, 1998, and
September 30, 1997, were ($6,962,000) and ($7,794,000) respectively.
7. Impact of Recently Issued Accounting Standards
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 included in the
annual financial statements for the Company for the year ended December 31,
1998.
H-6
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, 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 September 30,
1999, and will be adopted by the Company for the year ended December 31, 2000.
8. Pending Litigation
Commencing in March 1998, several class action lawsuits have been filed in
both state and federal courts on purported 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. In October
1998, the Company entered into a Memorandum of Understanding (MoU) with the
securities litigation plaintiffs. This MoU contains the essential terms of
settlement for the above referenced securities litigation. In consideration
for a mutually agreed release, the plaintiffs will receive $4.5 million. Of
this amount, the Company has accrued $850,000 as of March 31, 1998, and
subsequently paid such amount directly into an escrow account; the balance is
an obligation of the Company's insurance carrier. The settlement is
conditioned upon receiving final judicial approval. There can be no assurances
such approval will be obtained.
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. Restructuring
During the first quarter of 1998, the Company implemented a plan of internal
restructuring of its operations. The plan was initiated to reduce operating
expenses and improve the Company's financial condition. The plan resulted in a
reduction in headcount of approximately 28 and included several officers of
the Company. The costs associated with this restructuring totaled
approximately $300,000, and has been accrued as of March 31, 1998.
10. 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. Installments of
$500,000 each were received by the Company on September 23, October 7, October
21, and November 4, 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 stock holders 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
H-7
<PAGE>
RASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The Company also borrowed $850,000 on October 14, 1998 which was directly
placed in an escrow account for the potential settlement of the pending
securities litigation. See Note 11 regarding bonuses payable upon change of
control.
11. Related Party Transactions
The Company entered into an employment agreement with its Chief Executive
Officer on July 3, 1991, which provides for a six-month severance payment in
the event of termination of employment. On August 21, 1998, the Compensation
Committee approved the grant of a $300,000 retention bonus payable to the
Chief Executive Officer upon change of control of the Company. On August 21,
1998 the Company entered into a mutual release agreement with Marc Willard, an
officer of the Company. In consideration for Mr. Willard's full release
relating to the Company's acquisition of ColourPass (of which Mr. Willard was
an 80% partner), the parties agreed to a cash bonus of $70,000, a cash payment
of $200,000 upon the acquisition of the Company, and a stock option grant of
175,000 shares. In addition, the Company entered into a consulting agreement
on May 14, 1998, with The Brenner Group LLC pursuant to which the Company has
retained the services of its Acting Chief Financial Officer. Under the terms
of the consulting agreement, the Company is obligated to pay The Brenner Group
LLC a fee of $155 per hour and a bonus and additional fees of $85,000 up to a
maximum of $200,000 upon change of control or recapitalization which occurs
within six months of the expiration of the agreement or any extensions
thereto.
In November 1997, the Company issued an irrevocable standby letter of credit
in favor of Barclays' Bank on behalf of Mr. Willard for an unsecured personal
line of credit in the amount of $175,000. This letter of credit expired May
31, 1998.
The Company has entered into an indemnification agreement with each of its
executive officers and directors that may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or services as director or officer and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested directors on the Board of Directors, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
H-8
<PAGE>
P THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
R RASTER GRAPHICS, INC.
O 1999 ANNUAL MEETING OF STOCKHOLDERS
X
Y
The undersigned stockholder of Raster Graphics, Inc. a Delaware
corporation (the "Company") hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement, each dated February 12, 1999, and
hereby appoints Rakesh Rumar and Marc Willard, or either of them, as proxies and
attorneys-in-fact with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the 1999 Annual Meeting
of Stockholders of Raster Graphics, Inc. to be held on March 19, 1999 at 9:00
a.m., local time, at Hyatt Rickeys, 4219 El Camino Real, Palo Alto, CA 94306 and
at any adjournment(s) or postponement(s) thereof, and to vote all shares of
Common Stock that the undersigned would be entitled to vote if then and there
personally present, on the matters set forth below.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE
SIDE
<TABLE>
<S>
Proposal No. 1 - Approval of Merger
<C>
To (i) approve and adopt the Agreement and Plan of Merger between Gretag Imaging Group, Inc., a Delaware corporation ("Gretag"),
Gretag Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Gretag, and the Company Dated as of October 6,
1998, and (ii) approve the merger of Gretag Acquisition Corp. with and into the Company pursuant to which the Company will
become a wholly owned subsidiary of Gretag and each outstanding share of the Company's Common Stock (other than shares owned by
the Company. Gretag and Gretag Subsidiaries and shares as to which appraisal rights are properly perfected and not withdrawn)
will be converted into the right to receive cash in the amount of $1.2968 per share, without interest.
[_] FOR [_] AGAINST [_] ABSTAIN
Proposal No. 2 - Election of Class II Directors
[_] For all nominees listed below [_] Withhold authority for all nominees listed below
If you wish to withhold authority to any individual nominee(s), strike a line through his name or their names in the list below:
--------------------------------------------------------------------------------------------------------------------------------
Promod Haque Lucio L. Lanza
The undersigned acknowledges receipt of a copy of the Notice of Annual Meeting of Stockholders and Proxy Statement relating to
the meeting. In their discretion, upon such other matter or matters which may properly come before the meeting or any
postponement(s) or adjournment(s) thereof.
THIS PROXY WILL BE VOTED AS DIRECTED AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING OR ANY
POSTPONEMENT(S) OR ADJOURNMENT(S) THEREOF. WITH RESPECT TO THE ELECTION OF DIRECTORS, IF NO CONTRARY OBJECTION IS INDICATED, THIS
PROXY WILL BE VOTED FOR THE NOMINEES LISTED ABOVE.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD USING
THE ENCLOSED ENVELOPE. Please sign exactly as name
appears hereon. When shares held by joint tenants, both
should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full
corporate name by the President or other authorized
officer. If a partnership, please sign in partnership
name by an authorized person. THIS PROXY WILL BE VOTED
FOR THE ELECTION OF THE DIRECTORS LISTED ABOVE AND FOR
THE OTHER PROPOSALS IF NO SPECIFICATION IS MADE.
_____________________________________________________ __________________________________ Dated: ______________________, 1999
Printed name(s) exactly as shown on Stock Certificate (Signature(s))
</TABLE>
