SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/Mark One/
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number: 0-22292
CORNERSTONE IMAGING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0104275
State or other jurisdiction of
incorporation or organization IRS Employee ID No.
1710 FORTUNE DRIVE, SAN JOSE, CALIFORNIA 95131
Address of principal executive offices Zip code
Registrant's telephone number, including area code: 408-435-8900
- -------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to
such filing requirements for the past 90 days.
/x/Yes / /No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes / /No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of June 30, 1996: 7,493,898
<PAGE>
CORNERSTONE IMAGING, INC.
INDEX
Part I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Balance Sheets at June 30,
1996 and December 31, 1995 3
Consolidated Statements of Income for the
three and six month periods ended
June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for
the six month periods ended June 30,
1996 and 1995 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 2 Changes in Securities 11
Item 3 Defaults Upon Senior Securities 11
Item 4 Submission of Matters to a Vote of
Security Holders 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 11
Signature Page 12
Exhibit Index 13
Exhibits
Statement of Computation of Earnings per Share
Financial Data Schedule (Exhibit-27)
<PAGE>
Part I - Financial Information Item 1 - Financial Statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1996 December 31,1995
(unaudited)
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,835 $ 4,671
Marketable securities 1,196 5,770
Accounts receivable, net of allowance
for doubtful accounts of $643 in 1996
and $698 in 1995 15,916 17,885
Inventories 16,757 14,075
Deferred income taxes and other
current assets 5,321 5,387
------- -------
Total current assets 42,025 47,788
Property and equipment, net 3,066 3,356
Other assets 1,391 1,412
------- -------
$46,482 $52,556
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,174 $ 8,825
Accrued compensation 251 1,109
Accrued liabilities 3,186 3,291
------- -------
Total current liabilities 9,611 13,225
------- -------
Stockholders' equity:
Common stock 75 73
Paid-in capital 30,505 30,067
Retained earnings 6,291 9,191
------- -------
Total stockholders' equity 36,871 39,331
------- -------
$46,482 $52,556
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
CORNERSTONE IMAGING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net revenues $22,569 $20,201 $40,401 $37,924
Cost of revenues 15,704 12,667 28,158 23,511
------- ------- ------- -------
Gross profit 6,865 7,534 12,243 14,413
Sales and marketing 3,963 2,743 7,575 5,232
Research and development 2,120 1,683 4,761 3,497
General and administrative 1,366 871 2,721 1,665
Restructuring charge 1,404
------- ------- ------- -------
Operating income (loss) (584) 2,237 (4,218) 4,019
Interest income 31 180 88 328
------- ------- ------- -------
Income (loss) before benefit
(provision) for income
taxes (553) 2,417 (4,130) 4,347
Benefit (provision) for
income taxes 166 (845) 1,230 (1,511)
------- ------- ------- -------
Net income (loss) $ (387) $ 1,572 $(2,900) $ 2,836
======= ======= ======= =======
Net income (loss) per share $(0.05) $ 0.21 $(0.39) $ 0.38
======= ======= ======= =======
Shares used in per share
calculation 7,438 7,411 7,431 7,405
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
CORNERSTONE IMAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION> Six Months Ended June 30,
-------------------------
1996 1995
---- -----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,900) $ 2,836
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 995 504
Changes in assets and liabilities:
Accounts receivable 1,969 (2,159)
Inventories (2,682) (2,994)
Other current assets 66 397
Other assets 21
Accounts payable (2,651) 3,114
Accrued liabilities (963) 438
-------- -------
Net provided by (used in) operating
activities (6,145) 2,136
Cash flows from investing activities:
Purchases of marketable securities (4,595) (8,818)
Maturities of marketable securities 9,169 7,983
Property and equipment additions (1,379) (1,104)
Proceeds from sale of property and equipment 674
-------- --------
Net cash provided by (used in)
investing activities 3,869 (1,939)
Cash flows from financing activities:
Net proceeds from issuance of common stock 440 350
------- --------
Net cash provided by financing activities 440 350
-------- --------
Net increase (decrease) in cash and cash
equivalents (1,836) 547
Cash and cash equivalents at beginning of period 4,671 3,110
-------- --------
Cash and cash equivalents at end of period $ 2,835 $ 3,657
======== ========
Unrealized holding loss on marketable
securities, net $ 68
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
CORNERSTONE IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Unaudited Financial Information:
The accompanying interim unaudited consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. The December 31, 1995 balance sheet data was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principals. The
unaudited financial statements for the three and six month periods ended
June 30, 1996 and 1995 include, in the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary to
present fairly the financial information set herein. The results of
operations for the interim periods are not necessarily indicative of the
results to be expected for an entire year.
2. Inventories (in thousands):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
(unaudited)
-------------- ------------------
<S> <C> <C>
Raw materials $ 2,121 $ 2,318
Work in process 1,398 2,123
Finished goods 13,238 9,634
------- -------
$16,757 $14,075
</TABLE>
3. Line of Credit:
The Company has a line of credit facility with a bank which expires on
July 1, 1997. The agreement provides for borrowings up to the lesser of
$15 million or 75% of eligible receivables. Borrowings under the agreement
bear interest at the bank's prime rate plus 0.25% (8.5% at June 30, 1996)
and are collateralized by accounts receivable, equipment, and inventory of
the Company. The agreement requires that the Company provide financial
information to the lender, obtain approval of the lender for any payment of
dividends or material disposition of the collateral except in the ordinary
course of business and meet certain financial ratios, quarterly operating
results and minimum tangible net worth amount. At June 30, 1996, there
were no borrowings outstanding.
4. Restructuring Charge:
In the first quarter of 1996, the Company recorded a $1.4 million
restructuring charge primarily related to its decision to cancel its
PrintAccel product line. This amount included $1.1 million for prepaid
royalties, committed payments for exclusivity rights, engineering services,
and a $270,000 write-down of PrintAccel inventory. As of June 30, 1996,
the Company had completed making such committed payments and terminated all
sales and marketing efforts related to the PrintAccel product line. The
Company continues to maintain inventory reserves equal to the cost of the
PrintAccel inventory not yet disposed of.
5. Income Taxes:
The Company's benefit for income taxes reflects the Company's
estimated 1996 annualized effective tax rate of 30%.
<PAGE>
6. Stock Options:
In May 1996, the Company's Board of Directors approved the grant of
new stock options in cancellation of previously granted options with
exercise prices greater than the current fair value of the Company's common
stock. The newly granted options will be exercisable at the fair value of
the Company's common stock at the date of grant and will vest over periods
up to four years based in part on the original vesting commencement date.
<PAGE>
CORNERSTONE IMAGING, INC.
- ---------------------------------------------------------------------------
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to
those discussed below and in the section captioned Risk Factors in the
Company's most recent Annual Report on Form 10-K.
- ---------------------------------------------------------------------------
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS:
The Company develops, markets, and services hardware and software products
for document image processing (DIP) display subsystems and input subsystems
and software tools. Substantially all of the Company's current revenues
are derived from display products based on its ImageAccel technology. In
ImageAccel, key DIP functionality is embedded in a Cornerstone-designed
integrated circuit. In 1994, the Company acquired Pixel Translations,
Inc., a provider of DIP software toolkits. In July 1995, the Company
acquired Pegasus Disk Technologies, Inc., a supplier of software products
used in DIP to manage data stored on optical disk drives.
Substantially all of the Company's revenues in recent years have been
attributable to sales of DIP display subsystems. These products, together
with existing and planned software products, are expected to account for
substantially all of the Company's future revenues. Although demand for
DIP systems (including the Company's products) has grown in recent years,
the DIP market is still a relatively small and emerging market and there
can be no assurance that the market for DIP systems will continue to grow.
If the DIP market fails to grow or grows more slowly than the Company
currently anticipates, its business, operating results and financial
condition would be materially and adversely affected.
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors such as the timing of new
product introductions, product mix, references from DIP systems
integrators, changes in pricing policies by the Company, its competitors or
suppliers, market acceptance of current and new versions of the Company's
products, the timing of significant orders, seasonality and relatively long
sales cycles. In addition, a substantial portion of the Company's revenues
in each quarter results from orders booked and shipped in that quarter.
The Company's expenses are based, in part, on its expected future revenues.
As a result, if revenue levels are below expectations, operating results
will likely be adversely affected and net income or loss may be
disproportionately affected because only a small portion of the Company's
expenses vary with its revenues. There can be no assurance that the
Company's revenues will grow in future periods, that they will grow at
historic rates, or that the Company will remain profitable on a quarterly
basis. As a result, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not
be relied upon as indications of future performance. Due to all of the
foregoing factors, it is likely that in some future quarters, the Company's
operating results will be below the expectations of public market analysts
and investors. In such an event, the price of the Company's common stock
would likely be materially adversely affected.
The Company currently sells both color and grayscale subsystems. Color
subsystems are higher priced but lower gross margin products than grayscale
subsystems. Over the near term, the Company expects the sale of color
subsystems to represent an increasing percentage of total revenues. There
can be no assurance that the Company's current gross margins will not
decline in future periods. In addition, a significant portion of the
Company's sales are made through systems integrators and distributors and
the Company relies on certain key suppliers for important components and
monitors. There can be no assurance that the loss of a major system
integrator, distributor, or key supplier would
<PAGE>
not have a material adverse effect on the Company's business or results of
operations over the short term, thereby causing significant fluctuations in
its quarterly results.
The DIP industry is characterized by rapid technological change, including
emergence of faster microprocessors, frequent new product introductions,
and evolving industry standards. The introduction of products embodying
new technology and the emergence of new industry standards can create
downward price pressure and render existing products obsolete and
unmarketable. The Company's recent price decreases were due, in part, to
changing technology that led to increased competition. The Company's
future success will depend upon its ability to address the increasingly
sophisticated needs of its customers by enhancing its current products and
by developing and introducing on a timely basis new products that keep pace
with technological developments and emerging industry standards. There can
be no assurance that the Company will be successful in developing and
marketing product enhancements or new products that respond to
technological change or evolving industry standards, that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction, and sale of these products, or that its new
products and product enhancements will adequately meet the requirements of
the marketplace and achieve market acceptance. If the Company is unable,
for technological or any other reason, to develop, introduce, and sell its
products in a timely manner, the Company's business, operating results, and
financial condition will be materially and adversely affected.
Net Revenues
The Company's net revenues increased 11.8% to $22.6 million in the second
quarter of 1996 from $20.2 million in the second quarter of 1995. For the
six months ended June 30, 1996, net revenues increased 6.5% to $40.4
million over revenues of $37.9 million in the first six months of 1995.
The growth is primarily attributable to the continued growth in the
document image processing (DIP) market and increased software sales.
Gross Profit
Gross profit decreased 8.9% to $6.9 million in the second quarter of 1996
from $7.5 million in the second quarter of 1995. For the six months ended
June 30, 1996, gross profit decreased 15.1% to $12.2 million from gross
margin of $14.4 million for the first six months of 1995. The gross margin
was 30.4% and 37.3% for the second quarter of 1996 and 1995, respectively,
and was 30.3% and 38.0% for the six months ended June 30, 1996 and 1995,
respectively. In March 1996, the Company announced a significant reduction
in the price for most of the Company's display products, which was the
principle reason for the decline in the Company's gross profit and gross
margin. Management expects gross margins full year in 1996 to remain
relatively consistent with the first half of 1996. There can be no
assurance, however, that that the Companys gross profit and gross margins
will not continue to decline in the second half of 1996 and future periods.
Sales and Marketing
Sales and marketing expenses increased 44.5% to $4.0 million in the second
quarter of 1996 from $2.7 million in the second quarter of 1995, and for
the six month period ended June 30, 1996, increased 44.8% to $7.6 million
over $5.2 million for the first six months of 1995. The increase in 1996
is primarily attributable to an increase in staffing associated with an
expansion of the Companys sales and marketing organizations to support the
sales of new software products. The Company expects that sales and
marketing expenses will continue to increase in the future, as the Company
continues to expand sales and marketing programs related to these new
software products.
Research and Development
Research and development expenses increased 26.0% to $2.1 million in the
second quarter of 1996 from $1.7 million in the second quarter of 1995 and
for the six month period ended June 30, 1996, increased 36.1% to $4.7
million over $3.5 million for the first six months of 1995. The increases
are primarily due to staffing increases and purchased technology to support
the development of new software products. The Company believes that
continued investment in research and development is critical to its future
growth and will continue
<PAGE>
to commit substantial resources to this area. As a result, quarterly
research and development expenses are expected to continue to increase over
the balance of 1996.
General and Administrative
General and administrative expenses increased 56.8% to $1.4 million in the
second quarter of 1996 from $871,000 in the second quarter of 1995 and for
the six month period ended June 30, 1996, increased 63.4% to $2.7 million
from $1.7 million for the first six months
of 1995. General and administrative expenses have increased as a
percentage of revenues from 4.3% in the second quarter of 1995 to 7.6% in
the second quarter of 1996.
Restructuring Charge
In the first quarter of 1996, the Company recorded a one-time $1.4 million
restructuring charge related to its decision to cancel its PrintAccel
product line. This amount includes $1.1 million for prepaid royalties,
committed payments for exclusivity rights, engineering services, and a
$270,000 write-down of PrintAccel inventory.
Interest Income
Interest income decreased 82.7% to $31,000 in the second quarter of 1996
from $180,000 in the second quarter of 1995 and for the six month period
ended June 30, 1996 decreased 73.2% to $88,000 from $328,000 for the first
six months of 1995. The decline is the result of reduced investment
levels.
Benefit (Provision) for Income Taxes
The Companys effective income tax rate as a percentage of pretax income
was 30% and 35% for the second quarter of 1996 and 1995, respectively, and
29.8% and 34.8% for the six month period ended June 30, 1996 and 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash and marketable securities of
approximately $4 million, a decrease from $10.4 million at December 31,
1995, and working capital totaling $32.3 million, an increase of $2.3
million since December 31, 1995. Net cash used in operating activities was
$6.1 million in the first six months of 1996 compared to net cash provided
by operating activities of $2.1 million for the first six months of 1995.
Reduced sales volume, when compared to the fourth quarter in 1995, resulted
in an increase in inventory of $2.7 million and a decrease in accounts
receivable of $2.0 million during the second quarter.
Additions to property and equipment were $1.4 million and $1.1 million for
the first six months of 1996 and 1995, respectively. Net cash provided by
investing activities was $3.9 million for the first six months of 1996,
compared to net cash used of $1.9 million in the first six months of 1995.
Cash provided by investing activities is related primarily to maturities of
short-term investments.
The Company believes that its cash on hand and short-term investments,
together with cash flows from operations and the existing line of credit,
will be sufficient to meet the Companys liquidity and capital requirements
for the next 12 months. The Company may, however, seek additional equity
or debt financing to fund further expansion. The timing and amount of such
capital requirements cannot be precisely determined at this time and will
depend on a number of factors, including demand for the Companys products,
product mix changes and competitive factors. There can be no assurance
that additional financial would be available or that, if available, such
financing would be available on terms favorable to the Company.
<PAGE>
Part II - Other Information
Item 1: Legal Proceedings
In 1995, the Company was named as a defendant in three
class action lawsuits. The Company was named together with
the majority of companies who manufacture or sell computer
monitors. The complaints alleged that the Company falsely
advertised the size of the viewing area of its computer
monitors. In April 1996, the Company was dropped as a
defendant and is no longer a party to any of the three
lawsuits.
Item 2: Changes in Securities - Not Applicable
Item 3: Defaults Upon Senior Securities - Not Applicable
Item 4: Submission of Matters to a Vote of Security Holders
On May 29, 1996, the Company held its 1995 Annual Meeting of
Stockholders at the Company's headquarters in San Jose, California. At the
meeting, the stockholders were asked to: (I) elect Thomas T. van Overbeek,
James Crawford III, E. David Crockett, Margaret Fisher, Stephen J. Sheafor,
Bruce Silver and Daniel D. Tompkins as the members of the Board of
Directors for 1996; (ii) approve an amendment to the Company's 1993 Stock
Option/Stock Issuance Plan to increase the number of shares of Common Stock
for issuance thereunder by 500,000 shares to 2,074,852 shares; and (iii)
ratify the selection of Coopers & Lybrand as the Company's independent
auditors for fiscal year 1996.
As of the April 9, 1996 record date established for the annual
meeting, there were 7,426,538 shares of Common Stock issued and
outstanding, all of which were entitled to vote. Present in person or by
proxy at the meeting were stockholders representing 5,663,393 shares. Such
shares represented 76%, a quorum, of the total number of shares outstanding
and entitled to vote. All of the proposals, and all nominees to the board
of directors, were approved by the stockholders. 5,525,684 shares voted
for approval of the nominees to the board of directors, 137,709 shares
against, 0 shares abstained and there were no broker nonvotes. 2,163,996
shares voted for approval of the amendment to the Companys 1993 Stock
Option/Stock Issuance Plan, 975,688 shares voted against, 28,807 shares
abstained and there were 2,494,902 broker nonvotes, which, pursuant to
Delaware law and the Companys charter, were not treated as entitled to
vote and therefore had no effect on the options. 5,624,550 shares voted
for ratification of the selection of Coopers & Lybrand as the Companys
independent auditors, 20,565 shares voted against, 18,278 shares abstained
and there were no broker nonvotes.
Item 5: Other Information - Not Applicable
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K - Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNERSTONE IMAGING, INC.
-------------------------
Registrant
/s/ John Finegan
--------------------------
Date: August 13, 1996 John Finegan
Vice President
Finance and Administration
(Principal Financial and Accounting
Officer)
<PAGE>
EXHIBIT INDEX
Sequential
Exhibits Page Number
- -------- -----------
11.1 Statement of Computation of Earnings per Share 14
27 Financial Data Schedule 15
<PAGE>
Part II - Other Information
Exhibit 11.1
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary
Weighted average shares
outstanding 7,438 7,094 7,431 7,073
Common stock equivalent 317 332
Total shares 7,438 7,411 7,431 7,405
Net income (loss) $(387) $1,572 $(2,900) $2,836
Per share amount $(0.05) $0.21 $(0.39) $0.38
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed balance sheets at June 30, 1996, the consolidated
condensed income statements, the consolidated condensed statements of cash flow
and the related notes for the six month period then ended, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 2835
<SECURITIES> 1196
<RECEIVABLES> 16559
<ALLOWANCES> (643)
<INVENTORY> 16757
<CURRENT-ASSETS> 42025
<PP&E> 8131
<DEPRECIATION> (5065)
<TOTAL-ASSETS> 46482
<CURRENT-LIABILITIES> 9611
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 36796
<TOTAL-LIABILITY-AND-EQUITY> 46482
<SALES> 40401
<TOTAL-REVENUES> 40401
<CGS> 28158
<TOTAL-COSTS> 44619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> (4130)
<INCOME-TAX> (1230)
<INCOME-CONTINUING> (2900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2900)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
