SECURITIES AND 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 MARCH 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15[D] OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission number: 0-22292
CORNERSTONE IMAGING, INC.
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[Exact name of registrant as specified in its charter]
DELAWARE 77-0104275
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State or other jurisdiction of incorporation IRS Employer ID No
or organization
1710 Fortune Drive, San Jose, California 95131
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Address of principal executive offices Zip code
Registrant's telephone number, including area code: 408-435-8900
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Former name, former address and former fiscal year, if changed since last report
Indicated by check mark whether the registrant [1] has filed all reports requir
ed 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 CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of March 31, 1997: 7,479,506
CORNERSTONE IMAGING, INC.
Index
Part I FINANCIAL INFORMATION Page
--------------------- ----
Item 1 Financial Statements
Consolidated Balance Sheets at
March 31, 1997 and December 31,
1996 3
Consolidated Statements of
Income for the three month periods
ended March 31, 1997 and 1996 4
Consolidated Statements of Cash
Flows for the three month periods
ended March 31, 1997 and 1996 5
Notes to the Financial Statements 6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Part II OTHER INFORMATION
-----------------
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of
Securities Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Signature Page 15
Exhibit Index
Exhibits
Statement of Computation of Earnings per Share
Financial Data Schedule
Part I - Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
CORNERSTONE IMAGING, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, 1997 December 31, 1996
-------------- -----------------
<S> (unaudited)
ASSETS
Current assets: <C> <C>
Cash and cash equivalents $22,010 $18,486
Accounts receivable 12,698 17,181
Inventories 10,738 10,710
Deferred income taxes and other
current assets 5,961 4,513
------- -------
Total current assets 51,407 50,890
------- -------
Property and equipment, net 2,844 2,859
Other assets 594 1,094
------- -------
$54,845 $54,843
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,965 $10,093
Deferred revenue 839 761
Accrued liabilities 6,711 4,971
------- -------
Total current liabilities 15,515 15,825
------- -------
Stockholders' equity:
Common stock 76 76
Paid in capital 30,171 30,914
Retained earnings 9,083 8,028
------- -------
Stockholders' equity 39,330 39,018
------- -------
$54,845 $54,843
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Net revenues $26,014 $17,832
Cost of revenues 16,962 12,454
------- -------
Gross profit 9,052 5,378
Sales and marketing 4,380 3,612
Research and development 2,400 2,641
General and administrative 1,361 1,355
Restructuring charge 1,404
------- -------
Operating income (loss) 911 (3,634)
Foreign exchange gains and interest
income 686 88
------- -------
Income (loss) before benefit
(provision) for income taxes 1,597 (3,546)
Benefit (provision) for income taxes (542) 1,065
------- -------
Net income (loss) $ 1,055 $(2,481)
======= =======
Net income (loss) per share $ 0.14 $(0.33)
======= =======
Shares used in per share calculation 7,595 7,423
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION> Three months ended March 31,
----------------------------
1997 1996
<S> ---- ----
Cash flows from operating activities: <C> <C>
Net income (loss) $ 1,055 $(2,481)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 450 473
Restructuring charges 629
(Increase) decrease in assets and liabi-
lities:
Accounts receivable 4,483 6,091
Inventories (28) (3,963)
Deferred income taxes and other assets (948) 320
Accounts payable (2,128) (1,667)
Accrued liabilities and deferred
revenue 1,818 (1,417)
------- -------
Net cash provided by (used in)
operating activities 4,702 (2,015)
------- -------
Cash flows from investing activities:
Purchases of marketable securities (3,500)
Maturities of marketable securities 3,500
Property and equipment additions (435) (1,023)
Proceeds from sale of fixed assets 674
------- -------
Net cash used in investing activities (435) (349)
Cash flows from financing activities:
Net proceeds from issuance of common
stock 83
Repurchase of common stock (743)
------- -------
Net cash provided by financing
activities (743) 83
------- -------
Net increase (decrease) in cash and
cash equivalents 3,524 (2,281)
Cash and cash equivalents at beginning
of period 18,486 4,671
------- -------
Cash and cash equivalents at end of
period $22,010 $ 2,390
</TABLE> ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
CORNERSTONE IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Unaudited Financial Information:
The accompanying interim unaudited consolidated condensed financial statements
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. The December 31, 1996 balance sheet data was
derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The unau-
dited financial statements for the three month periods ended March 31, 1997
and 1996 include, in the opinion of management, all adjustments, con
Recent Pronouncements:
During February 1997, the Financial Accounting Standards Board issued
Statement 128, Earnings Per Share (SFAS 128), which specifies the computation
, presentation and disclosure requirements for earnings per share. SFAS 128
will become effective for the Company's fourth quarter of 1997. The impact
of adopting SFAS 128 on the Company's financial statements has not yet been
determined.
<TABLE>
<CAPTION>
2. INVENTORIES:
(in thousands)
March 31, 1997 December 31, 1996
(unaudited)
-------------- -----------------
<S> <C> <C>
Raw Materials $ 1,321 $ 1,645
Work in process 1,038 1,455
Finished goods 8,379 7,610
------- -------
$10,738 $10,710
======= =======
</TABLE>
3. LINE OF CREDIT:
The Company has a line of credit facility with a bank which expires 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% 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
4. DIVESTITURE:
On February 4, 1997, the Company entered into an agreement to sell the assets
of its Pegasus division. Under the terms of the agreement, the Company
received 35,000 shares of Cornerstone's common stock and a note receivable
totaling approximately $200,000. The impact of this transaction on the
financial position of the Company is not significant. In addition, the
results of operations of Pegasus for the years ended December 31, 1996 and
1995 are not material in relation to the Company's consolidated financial
statements.
5. RESTRUCTURING CHARGE:
In the first quarter of 1996, the Company recorded a one-time $1.4 million res
tructuring charge related to its decision to cancel its PrintACCEL product
line. This amount includes $1.1 million for prepaid royalties, committed pay-
ments for exclusivity rights, engineering services, and a $270,000 write-down
of PrintACCEL inventory. During 1996, the Company completed making such com-
mitted payments, terminated all sales and marketing efforts, and disposed of
all inventory related to this product line.
6. INCOME TAXES:
The Company's benefit for income taxes reflect the Company's estimated 1997
annualized effective tax rate of 34%.
7. STOCK REPURCHASE:
On February 14, 1997, the Company's Board of Directors authorized the use of up
to $5 million to repurchase the Company's common stock. The repurchased
stock is expected to be held by the Company as treasury stock to be used to
meet the Company's obligations under its stock plans and for other corporate
purposes. Purchases will be made from time-to-time on the open market or in
privately negotiated transactions. The timing and volume of purchases will
be dependent upon market conditions and other factors.
8. STOCK OPTION PLAN:
On February 14, 1997, the Company's Board of Directors authorized an increase
in the number of shares reserved for issuance under the Company's 1993 Stock
Option/Stock Issuance Plan by 400,000 shares to 2,474,852 shares of common
stock for issuance under the Plan. The proposed increase is still subject to
stockholder approval.
CORNERSTONE IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS Continued
(UNAUDITED)
This Quarterly Report on Form 10-Q may contain forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in any such 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 as well as the following:
the emergence of the document image processing market, pote
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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 and related applications. In the U.S.,
the Company is a leading supplier of display subsystems, a component of a
total DIP display system. Cornerstone's ImageACCEL subsystems, the first
generation of which was introduced in 1992, consist of controllers,
proprietary software and large screen, high resolution monitors. In 1994,
the Company began providing DIP software toolkits. In November
shipments of InputACCEL, a software product designed to automate the
conversion of documents into electronic images.
Document image processing, which is often used in conjunction with other
computer applications, enables multiple users to electronically capture,
file and retrieve documents. DIP systems allow users quick access to the
actual document images, require little physical storage space and reduce the
risk of misfiling, theft and accidental loss or destruction of documents.
DIP systems can story any document image, including photographs, diagrams,
letterhead, handwriting, and other graphic formats.
Substantially all of the Company's revenues in recent years have been
attributable to sales of display subsystems based on its ImageACCEL
technology. The ImageACCEL family of products are board level accelerators
installed in personal computers and are designed to enhance user productivity
by providing high document legibility and fast image display speeds. These
products, together with existing and planned software, are expected to
account for substantially all of the Company's future revenues.
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,
forecasting of future sales levels, timing of significant orders, seasonality,
relatively long sales cycles and color monitor lead times. In
The Company currently sells both color and grayscale display 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 continue to represent an increasing percentage of total
revenues and at some future date, perhaps all display 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 Comp
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 1996 price decreases were due, in part, to changing technology
that led to increased competition. The Company's future succes
Net Revenues
The Company's net revenues increased 46.1% in the first quarter of 1997 to
$26.0 million from $17.8 million in the first quarter of 1996. The increase
in revenue growth in 1997 compared to 1996 is due to increased input
subsystem and software tools sales and higher display unit shipments
partially offset by lower display unit prices.
Gross Profit
Gross profit increased 68.5% to $9.1 million in the first quarter of 1997
from $5.4 million in the first quarter of 1996. The gross profit margin for
the same period increased to 34.8% from 30.2%. At the end of the first
quarter of 1996, the Company announced a significant reduction in the price
for most of the Company's display products. The increase in gross profit in
1997 relates to higher unit sales and at lower prices per unit together
with continuing increases in color display subsystems sales in t
Sales and Marketing
Sales and marketing expenses increased 22.2% to $4.4 million in the first
quarter of 1997 from $3.6 million in the first quarter of 1996. Sales and
marketing expenses have decreased as a percentage of revenues from 20.3% in
the first quarter of 1996 to 16.9% in the first quarter of 1997. The
decrease in 1997 as a percentage of revenue is primarily attributable to
increased revenue levels offset by an increase in staffing associated with
an expansion of the Company's sales, marketing, and customer support
Research and Development
Research and development expenses decreased 7.7% to $2.4 million in the
first quarter of 1997 from $2.6 million in the first quarter of 1996.
Research and development expenses have decreased as a percentage of
revenues from 14.8% in the first quarter of 1996 to 9.2% in the first
quarter of 1997. The decreases are primarily due to staffing reductions
in the display engineering group related to a change in product design
processes. The Company believes that continued investment in research and
development
General and Administrative
General and administrative expenses in the first quarter of 1997 were unchanged
from the first quarter in 1996 at $1.4 million. General and administrative
expenses have decreased as a percentage of revenues from 7.6% in the first
quarter of 1996 to 5.2% in the first quarter of 1997. The decrease is
primarily attributable to increased revenue levels and cost containment
measures. The Company expects general and administrative expenses to
increase slightly in succeeding future periods. There can be no ass
Divestiture
During February 1997, the Company entered into an agreement to sell the assets
of its Pegasus division. Under the terms of the agreement, the Company
received 35,000 shares of Cornerstone's common stock and a note receivable
totaling approximately $200,000. The impact of this transaction on the
financial position of the Company is not significant. In addition, the
results of operations of Pegasus for the years ended December 31, 1996 and
1995 are not material in relation to the Company's consolidated res
Restructuring Charge
In the first quarter of 1996, the Company recorded a $1.4 million
restructuring charge related to its decision to cancel its PrintACCEL
product line. This amount includes $1.1 million for prepaid royalties and
committed payments for exclusivity rights, and engineering services, and a
$270,000 write-down of PrintACCEL inventory. During 1996, the Company had
completed making such committed payments, terminated all sales and marketing
efforts, and disposed of all inventory related to this product line.
Foreign Exchange Gains and Interest Income
Foreign exchange gains and interest income was $686,000 in the first quarter
of 1997 compared to $88,000 in the first quarter of 1996. The increase is
the result of foreign exchange gains in 1997 of approximately $500,000
related to inventory purchased from Japanese suppliers together with
increased investing levels. Such gains in 1996 were not significant. The
Company earned interest income primarily as a result of funds invested in
debt securities.
Benefit (Provision) for Income Taxes
The provision for federal and state income taxes was $542,000 in the first
quarter of 1997 compared to a benefit of $1.1 million in the first quarter
of 1996. The benefit (provision) for federal and state income taxes as a
percentage of pretax income was 34.0% and 30.0% for the first quarter of
1997 and 1996, respectively.
Recent Pronouncement
During February 1997, the Financial Accounting Standards Board issued
Statement 128, Earnings Per Share (SFAS 128), which specifies the
computation, presentation and disclosure requirements for earnings per
share. SFAS 128 will become effective for the Company's fourth quarter of
1997. The impact of adopting SFAS 128 on the Company's financial statements
has not yet been determined.
Liquidity and Capital Resources
At March 31, 1997, the Company had cash and cash equivalents of $22.0
million, an increase from $18.5 million at December 31, 1996. Working
capital totaled $35.9 million, and increase of $517,000 from December 31,
1996. At March 31, 1997, the Company had a line of credit that provides
for the issuance of commercial and standby letters of credit up to $15
million. At December 31, 1996, one such letter credit securing inventory
purchases totaling $6.5 million was outstanding under this agreement.
The agre
Net cash provided by operating activities was $4.7 million in the first
quarter of 1997 compared to net cash used of $2.0 million in the first
quarter of 1996. Substantially, all of the Company's sales are made to
distributors, system integrators, and OEMs and the Company believes that
significant levels of inventory and receivables are needed to provide ready
availability of its products to its distribution channels.
Net additions to property and equipment were $435,000 and $1.0 million for
the first quarter of 1997 and 1996, respectively. Net cash used in
investing activities was $435,000 for the first quarter of 1997, compared
to net cash used of $349,000 in the first quarter of 1996.
On February 14, 1997, the Company's Board of Directors authorized the use
of up to $5.0 million to repurchase the Company's common stock. The
repurchased stock is expected to be held by the Company as treasury stock
to be used to meet the Company's obligations under its stock plans and for
other corporate purposes. Purchases will be made from time-to-time on the
open market or in privately negotiated transactions. The timing and volume
of purchases will be dependent upon market conditions and other facto
The Company believes that its cash and cash equivalents, together with cash
flows from operations will be sufficient to meet the Company's 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 Company's products, product mix and competitive factors.
There can be no assurance that additional financing will be available at
all or that it, if available, will be obtainable on terms favorable to the
Company and would not be dilutive.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Statement of Computation of Earnings Per Share
27 Financial Data Schedule
Reports on Form 8-K - Not Applicable
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
Date: May 2, 1997 ------------------------------
John Finegan
Chief Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Sequential
Exhibits Page Number
- -------- -----------
11.1 Statement of Computation of Earnings per Share 17
27 Financial Data Schedule 18
PART II - Other Information
Exhibit 11.1
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31,
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1997 1996
---- ----
<S> <C> <C>
Primary 7,526 7,423
Weighted average shares outstanding
assuming conversion of stock options 69
------ --------
Total shares 7,595 7,423
====== ========
Net income (loss) $1,055 $(2,481)
====== ========
Per share amount $ 0.14 $ (0.33)
====== ========
</TABLE>
Exhibit 27
FINANCIAL DATA SCHEDULE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1997, THE CONSOLIDATED INCOME
STATEMENTS, THE CONSOLIDATED STATEMENTS OF CASH FLOW AND THE RELATED NOTES
FOR THE THREE MONTH PERIOD THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
Three Months Ended
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March 31, 1997
--------------
<S> <C>
Cash and cash items 22,010
Marketable securities 0
Accounts receivable 13,596
Allowance for doubtful accounts 898
Inventory 10,738
Total current assets 51,407
Property, plant and equipment 8,171
Accumulated depreciation 5,327
Total assets 54,845
Total current liabilities 15,515
Bonds, mortgages, and similar debt 0
Preferred stock-mandatory redemption 0
Preferred stock-no mandatory redemption 0
Common stock
</TABLE>
