SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to __________
Commission file number 0-22292
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CORNERSTONE IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0104275
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)
1710 Fortune Drive, San Jose, CA 95131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 435-8900
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
------
[Cover page 1 of 2 pages]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [__]
The aggregate market value of voting stock held by non-affiliates
of the Registrant as of February 28, 1997, was to the best of the
Company's knowledge approximately $55,000,000 million (based upon the
February 28, 1997 closing price for shares of the Registrant's Common
Stock as reported by the Nasdaq National Market). Shares of Common
Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
On February 28, 1997, approximately 7,500,000 shares of the
Registrant's Common Stock, $0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Stockholders to be held on June 4, 1997 are incorporated by
reference into Part III.
[Cover page 2 of 2 pages]
PART I
This Annual report on Form 10-K 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 under the
caption "Risk Factors" as well as the following: the emergence of the
document image processing market, potential fluctuations in quarterly
results, competition, new products and technological change,
general economic conditions and dependence on capital spending of
customers, a lengthy sales cycle and dependence on system sales,
international sources of supply, limited sources of supply and reliance
upon third- party manufacturers and distributors, and dependence upon
key personnel.
Item 1. Business
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 DIP 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 1995, the
Company began 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 store
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 DIP 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.
On an average per employee or "per seat" basis, Cornerstone
believes labor costs of a DIP system user exceed DIP system costs,
thereby making user productivity a critical DIP system purchasing
consideration. The Company's display products increase user productivity
by optimizing document display legibility and delivering sub second
image display speeds.
ImageAccel products incorporate a proprietary "scale-to-gray"
image enhancement algorithm that significantly improves the legibility
of small characters typically found in business documents.
ImageAccel is currently supported by over 60 independent
application software developers, establishing its application programming
interface as a de facto DIP standard.
Software tools allow integrators and software developers
to save both time and money by offering stable, supported libraries
of software code to drive DIP peripherals rather than having to
develop such software themselves. Most of these tools are based on
Cornerstone's ISIS (Image & Scanner Interface Specification), an
industry standard interface for scanners.
ISIS provides a key component of InputAccel, an open,
high-throughput, standard integration platform and set of software
modules that automate the conversion and indexing of paper
documents into electronically stored images. InputAccel's
integration platform with ISIS is a foundation linking various
technologies into an upgradeable system that provides system
management, control, and reporting functions. The integration
platform is an open platform that can incorporate/utilize input
software from Cornerstone as well as products from third
parties, including application vendors, scanner manufacturers, and
other providers.
The Company's products are used by a diverse set of
customers in a wide variety of document imaging applications,
such as insurance claim processing, credit and loan application
processing and the storage of personnel records and technical manuals.
Most often, DIP systems are used by large, service-oriented companies
and government agencies for which document management or
transaction processing is critical. Cornerstone distributes its products
primarily through distributors, systems integrators, and OEMs. A
significant portion of the Company's sales are made through systems
integrators and distributors and the Company relies on certain key
domestic and Asian suppliers for important components. There can be
no assurance that the loss of a major system integrator,
distributor, or key supplier, or a change in exchange rates would not
have a material adverse effect on the Company's business or results of
operations over the short term, thereby causing fluctuations in
its quarterly results.
Technology and Products
Cornerstone offers a range of color and grayscale display
subsystems and controllers designed primarily for visually demanding
applications such as document image processing. A Cornerstone
subsystem consists of a controller, proprietary software and a
large screen, high resolution monitor. All subsystems are
based on Cornerstone's ImageAccel architecture and offer:
- High resolution (up to 3,000,000 displayable pixels)
- Image enhancement using scale-to-gray
- Document image decompression
- Acceleration for Microsoft Windows and IBM OS/2
Presentation Manager operating environments
- Driver software that optimizes performance
- High screen refresh rates that minimize flicker
- Full page or larger monitors
The Company believes that for DIP system users, document
legibility and image display speed are two key components of
productivity. The Company's technology strategy for its display
products is focused on maximizing legibility and image display
speed, while providing graphics functionality found on general
purpose products. The Company is currently delivering its fourth
generation of document image display controllers, with each
generation providing improved legibility, speed and functionality. The
Company's product designs address two sets of functionality necessary
for document image processing display subsystems: Display and general
purpose graphics functions and document image processing functions
The ImageAccel integrated circuit, introduced in 1992, has
powered the entire family of Cornerstone display controllers, providing
a common software interface, functionality, and scale-to-gray
image enhancement across the entire product line. ImageAccel 2.0,
introduced in February 1995, integrated display and DIP functionality
and includes the following capabilities:
- Scale-to-gray engine with image decompression and
rotation functions
- A high speed BitBLT (bit block transfer) engine
optimized for Windows and OS/2 Presentation Manager
- Integrated PCI, ISA and MCA host bus interface
- Clear color image rendering hardware for the
accurate display of 24 bit photo-realistic images using
8 bit display hardware.
ImageAccel 3.0, was introduced in November 1996, and added the
following capabilities:
- Support for JBIG, an image compression algorithm
enabling smaller file sizes
- A Netscape plug-in viewing of scanned documents
on the internet
- Smart Image, to intelligently adjust brightness
and contrast.
Display products for document image processing and other
visually demanding environments must have significant software content
due to:
- Demand for high performance in increasingly
complex graphical user interface environments
- Requirement for very high speed decompression
and scaling of document images
- Requirement to enhance scanned images
Document imaging application software typically runs on
users' personal computers under Microsoft Windows or OS/2. The Company
works closely with Microsoft and IBM in order to most effectively
exploit the capabilities of their respective graphical user interfaces.
Cornerstone has been shipping grayscale subsystems since 1987
and color subsystems since 1992. Color products presently represent a
significant majority of display revenues and are expected to
continue to increase as a percentage of total display revenues.
Market Applications
The Company's products are used by a diverse set of
customers in a wide variety of document imaging and related
applications. In an increasingly competitive business environment,
many organizations are turning to document image processing as a
means of improving quality and productivity. Most often, DIP systems
are used by large, service-oriented companies and government
agencies for which management is critical. The leading industry
segments for DIP systems are financial and non-financial services,
manufacturing, health care, and government. DIP systems enable users
to manage the flow of documents more efficiently and to provide
improved service through faster and more accurate retrieval of documents
by multiple users.
Sales and Marketing
The Company's sales and marketing activities include
participation in industry trade shows and seminars and advertising in
major trade publications. Through these and other activities, the
Company generates display subsystem sales leads for its distributors
and resellers. The Company delivers its display products to end
users primarily through arrangements with distributors and system
integrators. Software tools are typically sold to DIP software
and hardware suppliers. InputAccel software is typically sold
through system integrators and value added resellers.
Distributors
In the United States, the Company sells a majority of its
display products through distributors of computer products, which in
turn resell them to value added resellers, system integrators and
end users. During 1996, one U.S. distributor represented in excess
of 10% of the Company's net sales. The Company believes that in the
event of the loss of one of its major distributors, over time, the
distributor could be replaced by other distributors and such loss would
not have a long term effect on the Company. The Company has
international distributors in all major countries in Europe, Asia,
and Latin America.
Systems Integrators and Value-Added Resellers
The Company's subsystems are used in connection with a
complex DIP system that includes important elements supplied by other
vendors. As a result, purchasers of DIP systems, as well as
InputAccel, typically rely on system integrators to oversee the
acquisition and installation of key hardware and software components
of the overall DIP system. Accordingly, a significant portion of the
Company's display subsystem and InputAccel sales to end users are made
through system integrators and value-added resellers.
OEMs
Software tools are sold or licensed to such hardware and
software suppliers as Fujitsu, Kodak, Caere and Lotus.
In 1996, international sales represented approximately 29% of
the Company's revenues and the Company expects that international sales
will continue to account for a significant portion of its revenues in
future. The Company intends to continue to expand its operations
outside of the United States and enter additional international
markets, which will require significant management attention and
financial resources. International sales are subject to inherent risks,
including unexpected changes in regulatory requirements, tariffs and
other barriers, fluctuating exchange rates, difficulties in
staffing and managing foreign operations and the possibility of greater
difficulty in accounts receivable collection. To date, the Company has
avoided the risk of fluctuating exchange rates associated with
international sales by generally selling its products in United States
currency, but there can be no assurance that the Company will be able
to continue to do so in the future. There can be no assurance that
these or other factors will not have a material adverse effect on
the Company's future international sales and, consequently, on the
Company's business, operating results and financial condition. The
Company currently purchases the color display monitors it
incorporates into its color display subsystems from a Japanese
manufacturer. Although the Company's importation of such monitors
is not currently affected by tariffs on Japanese electronic goods,
there can be no assurance that trading policies adopted by the United
States or Japan will not decrease the availability of products
imported from Japan such as the monitors purchased by the Company, and
as a result increase the Company's cost of obtaining such monitors. In
addition, there can be no assurance that such trading policies will
not adversely impact the Company's ability to market its
products internationally. In purchasing components and monitors from
international sources, the Company is susceptible to foreign currency
fluctuations, which could materially increase its cost of acquiring
such components and monitors and have a material adverse effect on the
Company's business, operating results, and financial condition.
Research and Development
The Company believes that its future success in the DIP
market will depend in large part on its ability to enhance its current
product line, develop new products, maintain technological
competitiveness and satisfy an evolving range of customer
requirements. The Company's research and development group is
responsible for exploring new directions and applications of core
technologies, incorporating new technologies into products and
maintaining strong research relationships outside the Company. The
Company seeks to leverage its direct investment in research and
development by supporting efforts by independent software and
hardware vendors to develop products complementary to its
products. During 1996, 1995 1994 research and development
expenses were $9.6 million, $7.8 million and $5.3 million,
respectively. As of December 31, 1996, the Company's research and
development group consisted of 73, 68 and 53 full-time employees,
respectively with the majority in software development . The Company
intends to continue to make substantial investments in product and
technology research and development and to continue to participate
actively in the development of industry standards.
Patents and Other Proprietary Rights
The Company does not currently have any patents and relies
on a combination of trade secret, copyright, and trademark laws,
nondisclosure and other contractual agreements and technical
measures to protect its proprietary rights in its products. There can
be no assurance that it will develop proprietary products or
technologies that are patentable, that any issued patent will provide it
with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have an adverse
effect on the Company's ability to do business. Furthermore, there
can be no assurance that others will not independently develop
similar products, duplicate the Company's products or, if patents are
issued to the Company, design around the patents issued to the Company.
There can be no assurance that the steps taken by the Company will
prevent misappropriation of its technology, and such protections
may not preclude competitors from developing products with features
similar to the Company's products. In addition, effective copyright and
trade secret protection may be unavailable or limited in certain foreign
countries. The Company believes that its products and trademarks do not
infringe upon the proprietary rights of third parties. There can be
no assurance, however, that third parties will not assert infringement
claims against the Company in the future or that such claims will not
require the Company to enter into royalty arrangements or result
in costly litigation. Because the DIP industry is characterized by
rapid technological change, the Company believes that factors such
as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition
and reliable product maintenance are more important to
establishing and maintaining a technology leadership position than
the various legal protections of its technology.
Service and Technical Support
An important element in the Company's strategy is to provide
comprehensive service and support of its products. The Company
believes that responsive technical support and customer service
are essential customer requirements and provides extensive support for
its products by telephone, fax and electronic bulletin boards. The
Company provides resellers and distributors with product support
and training programs. The Company's display products have a
limited warranty of three to five years. For an additional charge,
the Company offers enhanced service programs. The Company has not
experienced any significant maintenance problems or unusual
warranty expenses to date.
Manufacturing and Suppliers
All manufacturing and assembly and some product shipping
operations are performed for Cornerstone by third parties. Monitors
are received and shipped by the Company as complete assemblies.
Controllers are assembled and tested by third parties that
specialize in the manufacture of printed circuit board assemblies. The
Company currently sources all major components directly and consigns
them to its assembly subcontractors. The Company currently has sole
source suppliers for its color and grayscale monitors and some
important components used in its products, including integrated
circuits. Business disruptions or financial difficulties of a
sole-source supplier could adversely affect the Company by increasing
the cost of goods sold or reducing the availability of such monitors
or components. To date, the Company has generally been able to
obtain adequate supplies of these components and monitors, however, the
Company has had difficulty in obtaining components from certain sole
sourced suppliers. To address this issue, the Company has, in the
past, entered into significant purchase commitments, agreed to
accelerated or prepaid payment terms, purchased and consigned suppliers'
inventory, and may take similar or additional actions in the future.
If the Company were unable to obtain a sufficient supply of
required monitors and components, it could experience significant
delays in manufacturing its products, resulting in lost orders or
customers. While controllers and monitors are sold separately,
customers generally require both for their display subsystem. As a
result, lack of availability of the controller or monitor could
adversely affect the sale of both. Although the Company has
attempted to mitigate these risks by identifying alternative sources of
monitors and components, there can be no assurance that
continuing difficulties with certain suppliers or a change in suppliers
would not result in significant delays in obtaining adequate supplies of
monitors and components or adversely affect the quality of such supply
and as a consequence have a material adverse effect on the Company's
business, operating results or financial condition.
Competition
The document image processing market is highly competitive.
The Company believes the principal competitive factors in the
display subsystem market are image legibility, image display
speed, reliability, quality, customer service and support, support of
industry standards, reputation and price. In addition, support of the
company's integration platform by independent software vendors and
ease of product implementation will be important competitive factors for
InputAccel, the Company's data capture product. The Company believes
that it currently competes favorably with respect to these factors.
The Company has a number of current and potential competitors,
many of which have significantly greater financial, technical, marketing
and other resources than does the Company. The Company expects
additional competition from other established and emerging companies if
the DIP market continues to develop and expand. Increased competition
could result in additional price reductions, reduced margins and
loss of market share, which could materially adversely affect the
Company. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or
that competitive pressures faced by the Company will not materially
adversely affect its business, operating results and financial condition.
Employees
As of December 31, 1996, the Company had 243 employees. The
Company employs 35 people in finance and administrative functions, 104
in marketing and sales, 31 in operations and 73 in engineering and
product development. In addition, the Company hires temporary employees
on an as needed basis to meet production requirements. None of the
employees is represented by a labor union or is subject to a collective
bargaining agreement. The Company believes that its employee relations
are good.
Executive Officers
The executive officers of the Company are as follows:
Name Age Position
- -------------- ----- ------------------------------------------
Thomas T. van Overbeek 47 President, Chief Executive Officer and Director
John Finegan 47 Chief Financial Officer and Secretary
Kenneth E. Westrick 39 Sr. Vice President & GM, Display Division
Kimra Hawley 40 Sr. Vice President & GM, Software Division
George Yule, Jr. 57 Vice President, Operations
Johannes Schmidt 33 Chief Technical Officer
James Mannos 52 Vice President, Engineering
Robert Hooven 43 Vice President, Worldwide Sales
Thomas T. van Overbeek joined Cornerstone as President in
1988. Mr. van Overbeek was also elected to the Board of Directors in
1988. He was elected Chief Executive Officer in July 1990. Prior to
joining Cornerstone, Mr. van Overbeek held various positions from March
1984 to May 1988 at Western Digital Corporation-Paradise Systems,
most recently as President of Paradise Systems. Paradise Systems is a
manufacturer of video products for personal computers.
John Finegan joined the Company in July 1989 and was elected
Vice President of Finance and Administration in July 1990. Mr. Finegan
was elected Secretary in June 1993. From September 1988 until joining
Cornerstone, Mr. Finegan was a self-employed financial consultant. From
March 1984 to September 1988, he was Vice President of Finance at Faraday
Electronics-Western Digital. Western Digital manufactures peripheral
products for personal computers. Mr. Finegan holds a B.S. in
Engineering from Tufts University and a M.B.A. from the University of
Massachusetts.
Kenneth E. Westrick joined the Company in April 1988 as
Director of Sales, a position he held until January 1990. In February
1990 Mr. Westrick became Managing Director of Cornerstone's European
operations. Mr. Westrick was elected Vice President of Worldwide Sales
in April 1993. In March of 1995, he became General Manager of the
Display Division and in November 1996 was appointed Senior Vice
President and General Manager for the Display Division. He received
his B.A. in Economics from Northwestern University and his M.B.A. from
Stanford University.
Kimra Hawley joined Cornerstone in February 1992 as the
Product Marketing Manager and was promoted to Vice President of Input
Subsystems and Software Tools in November 1994 and in November 1996
was appointed Senior Vice President and General Manager for the
Software Division. From 1989 to 1992, Ms. Hawley-Foster was a
principal with MarketBound Associates, a marketing consulting firm and
from 1983 to 1989 a Product Marketing Manager with Amdahl
Corporation. Ms. Hawley-Foster received a B.S. in Psychology
from Pittsburgh State University.
George Yule, Jr. joined Cornerstone in February 1993 and
was elected Vice President of Operations in April 1993. From February
1989 to October 1992 he was employed at Logitech, Inc., a manufacturer of
computer mice and handheld scanners, in various capacities, most
recently as Vice President of Operations. For the four years
prior to joining Logitech, he was a Senior Commodity Manager
responsible for procurement at Sun Microsystems, Inc., an engineering
workstation manufacturer. Mr. Yule holds a B.S.E.E. from Worcester
Polytechnic Institute and a M.B.A. from Stanford University.
Johannes Schmidt joined Cornerstone in June 1994 when the
company he founded, Pixel Translations, was acquired by
Cornerstone. In 1995, Mr. Schmidt assumed the role of Vice President
of Software Development and in November 1996 was appointed Chief
Technical Officer. Mr. Schmidt founded Pixel Translations in 1990
and served as President and CEO. From 1986 to 1990, Mr. Schmidt served
as Manager of Applications Development at Calera Recognition, Inc., an
OCR company. Mr. Schmidt holds a B.S. in Engineering and
Applied Science from the California Institute of Technology.
James Mannos joined the Company in November 1995 as Vice
President of Engineering. Prior to joining the Company, Mr. Mannos
was Vice President of Engineering for Abekas Video Systems, a
manufacturer of high-end digital video processing equipment, and
Vice President/General Manager of the Microsystems Group for Sony
Corporation. Mr. Mannos holds a B.S. and M.S. in Electrical Engineering
and Computer Science from Massachusetts Institute of Technology and a
Ph.D. from University of California at Berkeley. Mr. Mannos also
earned NASA and Massachusetts Institute of Technology endowed
fellowships.
Robert Hooven joined the Company in 1989 as Sales Director
for the Eastern Region, a position he held until 1992. In April 1992,
Mr. Hooven became Managing Director of Cornerstone's European operations.
Mr. Hooven was elected Vice President of Sales in December 1995. Mr.
Hooven holds a B.S. in Business from Norwich University.
Risk Factors
Substantially all of the Company's revenues and net income
in recent years have been attributable to sales of DIP display and
software products and these products are currently expected to account
for substantially all of the Company's future revenues and net income.
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 or grow at historical rates. 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
seasonality, the timing of new product introductions, product mix,
changes in pricing policies by the Company, its competitors or
suppliers, market acceptance of new and enhanced versions of the
Company's products, the timing of significant orders 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 are likely to be adversely affected
and net income may be disproportionately affected because only a
small portion of the Company's expenses vary with its revenues. In
recent periods, the Company has experienced significant
seasonality. Revenues and net income have been stronger in the fourth
quarter and weaker in the first quarter. In 1996, 31% of the
Company's revenues were recognized in the Company's quarter ending
December 31, 1996, and first quarter 1996 revenues were lower than
fourth quarter 1995 revenues. The Company expects this trend to
continue in 1997. The Company had been profitable in recent quarters,
but had losses of $ 2.5 million and $387,000 in the quarters ended March
31, 1996 and June 30, 1996 and for the year ended December 31,
1996. Although the company was profitable in the third and fourth
quarters of 1996, there can be no assurance that the Company's revenues
will achieve historical revenue growth in future periods, or that the
Company will remain profitable on a quarterly basis or regain
profitability. 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 on as indications of
future performance. Due to all of the forgoing factors, it is likely
that in some future quarters, the Company's operating results will
be below expectations of public market analysts and investors. In
such an event, the price of the Company's stock would likely be
materially adversely affected.
In addition, a significant portion of the Company's
sales are made thorough systems integrators and distributors and the
Company relies on certain key suppliers for important components.
There can be no assurance that the loss of a major system integrator,
distributor, or key supplier would not have a material adverse effect
on the Company's business or results of operations over the short
term, thereby causing 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 future success will depend on 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 the 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.
The Company's future success is directly dependent upon the
capital expenditure budgets of the Company's customers and the
continued demand by such customers for DIP systems. Certain industries
to which the Company sells its products, such as the financial
services industry, are highly cyclical. In addition, many domestic
and foreign governmental agencies have experienced budget deficits that
have also led to significant reductions in capital expenditures in
certain areas. The Company's operations may in the future be subject
to substantial period-to-period fluctuations as a consequence of such
industry patterns, domestic and foreign economic conditions and other
factors affecting capital spending. There can be no assurance that such
factors will not have a material adverse affect on the Company's
business, operating results and financial condition.
Sales of the Company's products depend, in significant
part, upon the decision of a prospective customer to purchase a
DIP system, which includes products supplied by vendors other than the
Company. As a result, sales of the Company's products are subject to a
variety of factors outside of the Company's control, including the
pricing decisions of other DIP subsystem vendors and the availability
and suitability of other DIP products. In addition, the decision
to purchase a DIP system generally involves a significant commitment
of capital, with the attendant delays frequently associated with
significant capital expenditures. For these and other reasons, the
sales cycle associated with the purchase of a DIP system, and
consequently purchases of the Company's products, typically is
lengthy and subject to a number of significant risks over which the
Company has little or no control.
In 1996, international sales represented
approximately 29% of the Company's revenues and the Company expects
that international sales will continue to account for a significant
portion of its revenues in future periods. The Company intends to
continue to expand its operations outside of the United States
and enter additional international markets, which will require
significant management attention and financial resources. International
sales are subject to inherent risks, including unexpected changes in
regulatory requirements, tariffs and other barriers, fluctuating
exchange rates, difficulties in staffing and managing foreign
operations and the possibility of greater difficulty in accounts
receivable collection. To date, the Company has avoided the risk
of fluctuating exchange rates associated with international sales
by generally selling its products in United States currency, but
there can be no assurance that the Company will be able to continue to
do so in the future. There can be no assurance that these or
other factors will not have a material adverse effect on the
Company's future international sales and, consequently, on the
Company's business, operating results and financial condition. The
Company currently purchases the color display monitors it incorporates
into its color display subsystems from a Japanese manufacturer.
Although the Company's importation of such monitors is not currently
affected by tariffs on Japanese electronic goods, there can be no
assurance that trading policies adopted by the United States or Japan
will not decrease the availability of products imported from Japan
such as the monitors purchased by the Company, and as a result
increase the Company's cost of obtaining such monitors. In addition,
there can be no assurance that such trading policies will not
adversely impact the Company's ability to market its products
internationally. In purchasing components and monitors from
international resources, the Company is susceptible to foreign
currency fluctuations, which could materially increase its cost of
acquiring such components and monitors and have a material adverse
effect on the Company's business, operating results, and financial
condition.
The Company currently has sole sources for some important
components used in its products, including integrated circuits.
The Company also currently has sole sources for the video monitors
used in its subsystems. Business disruptions or financial
difficulties of a sole- source supplier could adversely affect the
Company by increasing the cost of goods sold or reducing the
availability of such components. To date, the Company has been able
to obtain adequate supplies of these components and monitors, however,
the Company has had difficulty in obtaining components from certain
sole sourced suppliers. To address this issue, the Company has, in the
past, prepaid for products and has purchased and consigned
certain suppliers necessary inventory, and the Company may take
similar or additional actions in the future. If the Company were unable
to obtain a sufficient supply of required components and monitors, the
Company could experience significant delays in manufacturing its
products, which could result in lost orders or customers. While
controllers and monitors are sold separately, customers generally
require both for their DIP subsystem. As a result, lack of availability
of the controller or monitor could adversely affect the sale of
both. Although the Company has attempted to mitigate these risks
by identifying alternative sources of sole-sourced components and
monitors, there can be no assurance that continuing difficulties with
certain suppliers or a change in suppliers would not result in
significant delays in obtaining adequate supplies of components
and monitors or adversely affect the quality of such supply and as a
consequence have a material adverse effect on the Company's business,
operating results or financial condition.
The Company's future success depends in significant
part upon the continued service of its key technical and senior
management personnel, none of whom are bound by an employment
agreement. The Company's future success also depends on its
continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for such personnel is
intense and there can be no assurance that the Company will retain
its key managerial and technical employees or that it will be
successful in attracting, assimilating or retaining other highly
qualified technical and managerial personnel in the future.
Item 2. Properties
The Company's principal administrative, sales, marketing
and research and development facility is located in a building with
approximately 86,000 square feet of available space in San Jose,
California. This facility is leased through 1998. All Company
functions, except warehousing of finished product and certain
sales activities, are headquartered at its San Jose facilities.
Finished products are shipped from its warehousing facility and from
contract warehouse facilities in Kansas City, Missouri, San Jose,
California and Duiven, The Netherlands. Cornerstone's European sales
activities are conducted from a leased facility near Munich, Germany and
certain other sales activities are conducted from a leased
facilities in Illinois, Massachusetts, Texas, California, Indiana
and Virginia. The Company believes that its facilities are adequate
for its current needs.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters
The following table sets forth selected unaudited financial information
for the Company for the eight quarters in the period ended December 31,
1996. This information has been prepared on the same basis as the
audited financial statements and, in the opinion of management,
contains all adjustments necessary for a fair presentation thereof.
CORNERSTONE IMAGING, INC.
CONSOLIDATED FINANCIAL INFORMATION
(unaudited - in thousands, except per share data)
Quarter Ended
----------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
1996
- -----------------------------
Net revenues $17,832 $22,569 $26,687 $29,759
Gross profit 5,378 6,865 8,385 10,072
Operating income (loss) (3,634) (584) 605 1,712
Net income (loss) (2,481) (387) 430 1,275
Net income (loss) per share (0.33) (0.05) 0.06 0.17
Stock prices:
High 18.50 10.00 8.625 11.00
Low 8.00 6.50 5.00 6.38
1995
- -----------------------------
Net revenues $17,723 $20,201 $24,465 $28,767
Gross profit 6,879 7,534 8,799 10,352
Operating income 1,782 2,237 436 3,082
Net income 1,264 1,572 1,049 2,273
Net income per share 0.17 0.21 0.14 0.30
Stock prices:
High 18.50 18.13 25.75 25.75
Low 13.00 11.50 13.00 12.00
Common stock market price
The Company's common stock is traded on The Nasdaq National Market
under the symbol CRNR. The Company's common stock began trading in
September 1993. There were approximately 180 stockholders of record at
February 28, 1997.
To date, the Company has not declared or paid any cash dividends
on its common stock. The Company does not anticipate paying
dividends on its common stock in the foreseeable future and, under
the current bank agreement, any such payment would require prior bank
approval.
Item 6. Selected Consolidated Financial Data.
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
- -------------------------------------------
Net revenues $96,847 $91,156 $70,248 $43,631 $23,151
Gross profit 30,700 33,564 27,946 16,048 9,322
Operating income (loss) (1,901) 7,537 7,446 5,708 1,129
Net income (loss) (1,163) 6,158 4,816 3,814 862
Net income (loss) share (.15) 0.81 0.66 0.61 0.15
Shares used in per share calculations 7,548 7,586 7,316 6,206 5,573
Consolidated Balance Sheets Data:
- -------------------------------------------
Working capital $35,065 $34,563 $27,125 $13,919 $3,236
Total assets 54,843 52,556 37,035 28,857 9,405
Long term obligations 253 259
Mandatorily redeemable preferred stock 8,934
Stockholders' equity (deficit) 39,018 39,331 29,697 21,046 (5,398)
</TABLE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The following table sets forth, for the periods indicated,
certain financial data from the Company's consolidated
statements of operations as a percentage of revenues.
Year ended December 31,
------------------------
1996 1995 1994
------- ------ ------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 68.3 63.2 60.2
------- ------ ------
Gross profit 31.7 36.8 39.8
------- ------ ------
Sales and marketing 16.9 13.0 12.4
Research and development 9.9 8.5 7.6
General and administrative 5.5 4.4 5.0
Restructuring charge 1.4 - -
Non-recurring charge; purchased
in-process technology - 2.6 4.2
------- ------ ------
Operating income (loss) (2.0) 8.3 10.6
Interest income 0.3 0.5 0.8
------- ------ ------
Pretax income (loss) (1.7) 8.8 11.4
Provision (benefit) for income tax (0.5) 2.0 4.5
------- ------ ------
Net income (loss) (1.2)% 6.8% 6.9%
======= ====== ======
Revenues
The Company's revenues increased by 6.1% in 1996 to $96.8 million from
$91.2 million in 1995 and by 29.9% in 1995 from $70.2 million in 1994.
The slower revenue growth compared to 1995 was primarily attributable
to a lower display prices and lower display unit shipments in the
first quarter of 1996 offset by increased sales of input
subsystems and software tools sales.
Gross Profit
Gross profit decreased by 8.6% to $30.7 million in 1996 from $33.6
million in 1995 while increasing 20.4% in 1995 from $27.9 million in
1994. Gross profit margin decreased to 31.7% in 1996 from 36.8% in
1995. The decrease in gross profit and gross profit margin from 1995
to 1996 was due to significant price reductions. In the first and
third quarters of 1996 the Company announced a significant
reduction in the price for most of the Company's display products,
which was partially offset by increased sales of higher margin
software products and decreased component costs. Management expects
gross margins for 1997 to remain relatively consistent with 1996. There
can be no assurance, however, that the Company's gross profit and gross
margins will not continue to decline in future periods.
Sales and Marketing
Sales and marketing expenses increased by 37.0% in 1996 to $16.3
million from $11.9 million in 1995 and by 36.8% in 1995 from $8.7
million in 1994. Sales and marketing expenses increased as a percentage
of revenue from 12.4% in 1994, to 13.0% in 1995 and 16.9% in 1996. The
increases in 1996 and 1995 were primarily attributed to an increase in
staffing associated with an expansion of the Company's sales,
marketing and customer support organizations to support the sales of
new software products together with a 1996 write down of certain trade
show equipment totaling approximately $100,000. The Company expects
sales and marketing expenses will continue to increase in the future
as the Company continues to expand sales and marketing programs related
to these software products.
Research and Development
Research and development expenses increased by 23.1% in 1996 to $9.6
million from $7.8 million in 1995 and by 47.2% in 1995 from $5.3
million in 1994. Research and development expenses have increased as a
percentage of revenue from 7.6% in 1994 to 8.5% in 1995 and 10.0% in
1996. The increase in 1996 was primarily attributed to additional
staffing and technology acquisitions to support the development of
new software products and write-downs of certain engineering
equipment totaling $400,000. The engineering equipment will no longer
be used in the development and production processes. It is
expected this equipment will be disposed of during 1997.
The Company believes that continued investment in research and
development is critical to its future growth and the Company expects
to continue to commit substantial resources to research and
development. As a result, quarterly research and development
expenses are expected to continue to increase in the near term.
General and Administrative
General and administrative expenses increased by 32.5% in 1996 to
$5.3 million from $4.0 million in 1995 and by 14.3% in 1995 from $3.5
million in 1994. The increases in each period were primarily due to
increased staffing and related costs incurred to support the Company's
revenue growth, various internal technology enhancements and
expansion of the software business unit's activities. As a percentage
of revenue, general and administrative expenses decreased slightly
from 5.0% in 1994 to 4.4% in 1995 and increased to 5.5% in 1996. The
Company expects general and administrative expenses to increase
moderately in 1997; however, there can be no assurance that the increases
will not be significant in future periods.
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 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 December 31, 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.
Purchased In-process Technology
The 1995 non-recurring charge of $2.4 million resulted from the
write-off of the purchased technology from the acquisition of
Pegasus Disk Technologies, Inc.
The 1994 non-recurring charge of $2.9 million resulted from the
write-off of the purchased technology from the acquisition of
Pixel Translations, Inc. The acquisition was accounted for as a
purchase transaction and the charge was not deductible for tax purposes.
During February 1997, the Company entered into an agreement to sell its
ownership interest in Pegasus. 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 results.
Interest Income
Interest income decreased by 48.8% in 1996 to $254,000 from $496,000 in
1995 and by 8.5% from $542,000 in 1994. The declines represent lower
balances in cash equivalents and marketable securities.
Provision (benefit) for Income Taxes
The provision (benefit) for income taxes as a percentage of pretax
income (loss) was (29.4)%, 23.3% and 39.7% for 1996, 1995 and 1994,
respectively, after being offset by reductions in the deferred tax
asset valuation allowance of $1.2 million and $713,000 in 1995 and
1994, respectively. The reduction in the valuation allowance was
recognized based on expected earnings in future periods.
In addition, the 1994 charge of $2.9 million for purchased in-process
technology was deducted in determining reported income, but was not
deducted in determining taxable income.
The Company has various net operating loss and tax credit
carryforwards which are subject to an annual limitation of
approximately $467,000.
Recent Pronouncement:
During February 1997, the Financial Accounting Standards Board
issued Statement No.128, Earnings per Share, (SFAS No. 128) which
specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS 128 will become effective for the Company's
1997 fiscal year. The impact of adopting SFAS 128 on the Company's
financial statements has not yet been determined.
Liquidity and Capital Resources
At December 31, 1996, the Company had cash and cash equivalents
of approximately $18.5 million, an increase of $13.8 million from
December 31, 1995, while all marketable securities held at December 31,
1995 matured during 1996. At December 31, 1996, the working capital
totaled $35.1 million, an increase of $502,000 from December 31, 1995.
At December 31, 1996, 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 of credit securing
inventory purchases totaling $6.9 million was outstanding under this
agreement. The agreement expires July 1, 1997.
Net cash provided by operating activities was $9.0 million in 1996
compared to $2.2 million used in operating activities in 1995.
The increase in net cash provided by operating activities from 1995 to
1996 was due primarily to decreases in inventory balances and increases
in accounts payable as the Company increased its focus on
inventory levels and cash management . 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 cash provided by investing activities was $4.1 million in 1996
compared to $3.1 million provided by investing activities in 1995
and related primarily to the maturities of marketable securities.
Additions to property and equipment were $1.7 million and $2.6
million for 1996 and 1995, respectively.
On February 20, 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 factors. The Company intends to use
cash on hand to fund its purchases.
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 through 1997. 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 changes and competitive factors.
Accordingly, 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 public or private equity or other
sources. There can be no assurances 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.
Item 8. Financial Statements and Supplementary Data.
CORNERSTONE IMAGING, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
ASSETS December 31,
1996 1995
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $18,486 $ 4,671
Marketable securities __ 5,770
Accounts receivable, net of allowance for doubtful
accounts of $750 in 1996 and $698 in 1995 17,181 17,885
Inventories 10,710 14,075
Prepaid expenses and other current
assets 816 2,159
Deferred income taxes 3,697 3,228
------- -------
Total current assets 50,890 47,788
Property and equipment, net 2,859 3,356
Deferred income taxes and other assets 1,094 1,412
------- -------
$54,843 $52,556
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $10,093 $8,825
Accrued compensation and related liabilities 1,066 1,109
Accrued liabilities 2,619 2,077
Accrued warranty 1,286 777
Deferred revenue 761 437
------- ------
Total current liabilities 15,825 13,225
------- ------
Commitments and contingency (note 6)
Common stock, $0.01 par value; authorized: 25,000 shares
Issued and outstanding: 7,558 shares and 7,333 shares
at December 31, 1996 and 1995, respectively 76 73
Additional paid-in capital 30,914 30,097
Unrealized holding loss on marketable securities (30)
Retained earnings 8,028 9,191
------- -------
Stockholders' equity 39,018 39,331
------- -------
$54,843 $52,556
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
--------------------------
1996 1995 1994
-------- ------- --------
Net revenues $96,847 $91,156 $70,248
Cost of revenues 66,147 57,592 42,302
-------- ------- --------
Gross profit 30,700 33,564 27,946
-------- ------- --------
Sales and marketing 16,335 11,877 8,733
Research and development 9,563 7,758 5,335
General and administrative 5,299 3,985 3,521
Restructuring charge 1,404
Non-recurring charge; purchased
in-process technology -- 2,407 2,911
-------- ------- --------
Operating income (loss) (1,901) 7,537 7,446
Interest income 254 496 542
-------- ------- --------
Income (loss) before income tax (1,647) 8,033 7,988
Provision (benefit) for income tax (484) 1,875 3,172
-------- ------- --------
Net income (loss) $(1,163) $ 6,158 $ 4,816
======== ======= ========
Net (loss) income per share $ (0.15) $ 0.81 $ 0.66
======== ======= ========
Shares used in per share calculation 7,548 7,586 7,316
======== ======= ========
The accompanying notes are an integral part of these
consolidated financial statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Unrealized
Additional Loss on Stock-
Common Stock Paid-in Marketable Retained holders'
Shares Amount Capital Securities, Net Earnings Equity
------- ------ -------- --------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 6,685 $ 67 $22,762 $ -- $(1,783) $21,046
Common stock issued under:
Stock option plan 152 1 185 186
Employee Stock Purchase Plan 25 306 306
Common stock issued in
exchange for Pixel
Translations 172 2 2,812 2,814
Unrealized holding loss
on marketable securities, net (140) (140)
Tax benefit from disqualifying
dispositions of common stock 669 669
Net income 4,816 4,816
------- ------ -------- --------------- -------- -------
Balances, December 31, 1994 7,034 70 26,734 (140) 3,033 29,697
Common stock issued under:
Stock option plan 138 2 223 225
Employee Stock Purchase Plan 36 433 433
Common stock issued in
exchange for Pegasus Disk
Technologies 125 1 2,025 2,026
Unrealized holding gain
on marketable securities, net 110 110
Tax benefit from disqualifying
dispositions of common stock 682 682
Net income 6,158 6,158
------- ------ -------- --------------- -------- -------
Balances, December 31, 1995 7,333 73 30,097 (30) 9,191 39,331
Common stock issued under:
Stock option plan 127 2 171 173
Employee Stock Purchase Plan 98 1 600 601
Unrealized holding gain
on marketable securities, net 30 30
Tax benefit from disqualifying
dispositions of common stock 46 46
Net income (loss) (1,163) (1,163)
------- ------ -------- --------------- -------- -------
Balances, December 31, 1996 7,558 $ 76 $30,914 $ -- $8,028 $39,018
======= ====== ======== =============== ======== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($1,163) $ 6,158 $ 4,816
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,708 1,218 817
Loss on asset to be disposed of 496 -- --
Non-recurring charge; purchased in-process
technology -- 2,407 2,911
Deferred income taxes (389) (2,699) (804)
(Increase) decrease in assets and liabilities:
Accounts receivable 704 (7,084) (3,496)
Inventories 3,365 (7,807) (932)
Prepaid expenses and other current assets 1,343 (867) (394)
Other assets 238 (66) (16)
Accounts payable 1,268 4,638 (174)
Accrued compensation and related liabilities (43) 119 298
Accrued liabilities and deferred revenue 1,451 1,812 (437)
------- ------- -------
Net cash provided by (used in) operating
activities 8,978 (2,171) 2,589
------- ------- -------
Cash flows from investing activities:
Purchase of marketable securities (4,595) (21,846) (16,317)
Maturities of marketable securities 10,365 28,155 16,510
Property and equipment additions (1,707) (2,603) (1,404)
Pegasus acquisition, less cash acquired -- (632) --
------- ------- -------
Net cash provided by (used in) investing
activities 4,063 3,074 (1,211)
------- ------- -------
Cash flows from financing activities:
Payment of debt obligations -- -- (514)
Issuance of common stock 774 658 492
------- ------- -------
Net cash provided by (used in) financing
activities 774 658 (22)
------- ------- -------
Net increase in cash and cash equivalents 13,815 1,561 1,356
Cash and cash equivalents at beginning of year 4,671 3,110 1,754
------- ------- -------
Cash and cash equivalents at end of year $18,486 $4,671 $3,110
======= ======= =======
Supplemental cash flow disclosures:
Cash paid during the year for taxes $ 287 $3,247 $5,207
Cash paid during the year for interest $ -- $ 10 $ 67
Common stock issued in connection with the
acquisitions $ -- $2,026 $2,814
Tax benefit from disqualifying dispositions $ 46 $ 682 $ 669
Unrealized holding gain (loss) on marketable
securities, net $ 30 $ 110 $ (140)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business of the Company:
Cornerstone Imaging, Inc. (the Company) develops, markets and
services hardware and software products and toolkits for document
image processing (DIP) display subsystems and input subsystems.
These DIP systems enable multiple users to capture, file and
retrieve images of documents electronically. 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 used in conjunction with
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 products
are expected to account for substantially all of the Company's future
revenues. The majority of the Company's customers comprise a
diverse group of domestic and foreign distributors, which in turn
resell Cornerstone products to value-added resellers, system
integrators and end users.
2. Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Cornerstone Technology
GmbH, and Cornerstone Technology International, Inc. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets
and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ
from those estimates.
Certain Risks and Concentrations:
The Company's products are concentrated in the document
image processing industry which is highly competitive and
rapidly changing. Revenue is concentrated with a relatively limited
number of customers and suppliers for certain components are
concentrated among a few providers. The loss of a major customer or
any reduction in orders by such a customer, the interruption of
certain supplier relationships, significant technological changes in the
industry, including faster microprocessors, changes in customer
requirements, the infringement of proprietary patent, or the
emergence of a major direct competitor could affect operating results
adversely. In addition, a significant portion of the Company's
revenue derives from international sales. Fluctuations of the
U.S. dollar against foreign currencies or local economic
conditions could adversely affect operating results.
Investments:
Marketable securities as of December 31, 1995 are classified
as available-for-sale and are carried at market value. Unrealized
holding gains and losses on securities are reported net of related
taxes as a separate component of stockholders' equity.
Inventories:
Inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market. The Company's inventories
include high technology parts and components that may be
specialized in nature or subject to rapid technological obsolescence.
While the Company has programs to minimize the required inventories on
hand and considers technological obsolescence when estimating required
reserves to reduce recorded amounts to market values, it is possible
that such estimates would change in the near term.
Property and Equipment:
Property and equipment are stated at cost and depreciated
on a straight-line basis over estimated useful lives of three years.
Leasehold improvements are recorded at cost and depreciated on a
straight-line basis over the lesser of their useful lives or the related
lease term.
Accrued Warranty:
The Company provides an accrual for future warranty costs based
on the relationship of sales to actual warranty costs.
Revenue Recognition:
Revenues from hardware and software sales related to the
Company's document imaging products are recognized (except as
noted below) upon shipment if no significant vendor obligations
remain and collection of the resulting receivable is deemed
probable. Software maintenance revenues for supporting and providing
upgrades are deferred and recognized over the maintenance period
which is generally one year. Training, consulting and implementation
services are recognized as such services are performed. Unearned
income on prepaid service contracts is amortized by the straight-line
method over the term of the contracts. Related costs are charged to
expense as incurred.
Revenue generated from products sold through traditional
channels where the right of return exists is reduced by reserves
for estimated sales returns. Such reserves are based on estimates
developed by management. As unsold products in these distribution
channels are exposed to rapid changes in consumer preferences or
technological obsolescence due to new operating environments,
product updates or competing products, it is possible that these
estimates may change in the near term.
Advertising:
The Company expenses the costs of advertising as the expenses
are incurred. The costs of advertising consist primarily of
magazine advertisements, brochures, other direct production costs,
and cooperative advertising paid to the Company's distributors. Costs
associated with trade shows are charged to expense upon completion of
the trade show. The advertising expense for the years ended December
31, 1996, 1995, and 1994 was $4.2 million, $3.3 million and $2.4
million, respectively.
Income Taxes:
Income taxes are accounted for under the liability method.
Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse.
Computation of Net Income (Loss) Per Common Share:
Net income (loss) per common share is based upon the weighted
average number of common and common equivalent shares outstanding,
when dilutive. Common equivalent shares are included in the per share
calculations where the effect of their inclusion would be dilutive.
Dilutive common equivalent shares consist of stock options.
Recent Pronouncements:
During February 1997 the Financial Accounting Standards Board
issued Statement No. 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 1997 fiscal year. The impact of adopting SFAS 128 on the
Company's financial statements has not yet been determined.
Concentration of Credit Risk:
The Company sells its products primarily in North America and
Europe. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company
maintains reserves for potential credit losses which have been
within management's expectations. At December 31, 1996 and 1995,
accounts receivable from distributors totaled $11.6 million and $13.3
million, respectively. Substantially all cash and cash equivalents
are held by one bank and a financial institution.
Statement of Cash Flows:
The Company considers all highly liquid investments with an
original maturity from date of purchase of three months or less to be
cash equivalents.
Reclassifications:
Certain amounts have been reclassified in the 1995 financial
statements to conform to the presentation at December 31, 1996.
These reclassifications had no impact on previously reported operating
income or net income.
3. Marketable Securities
At December 31, 1995, marketable securities consisted of
municipal securities held by two investment banks, bearing
interest at rates ranging from 3.87% to 9.75% per annum, maturing
during 1996.
4. Balance Sheet Components (in thousands):
Marketable securities: 1995
---------
Fair value of securities $5,770
Amortized cost $5,816
---------
Unrealized holding losses $ 46
Deferred tax benefit (16)
---------
Unrealized holding loss, net $ 30
=========
Inventories: 1996 1995
-------- ---------
Raw materials $ 1,645 $ 2,318
Work in process 1,455 2,123
Finished goods 7,610 9,634
-------- ---------
$10,710 $14,075
======== =========
Property and equipment: 1996 1995
-------- ---------
Office equipment and machinery $5,812 $5,889
Software 606 777
Capitalized Software 126 126
Leasehold improvements 1,317 635
-------- ---------
7,861 7,427
Less accumulated depreciation
and amortization (5,002) (4,071)
-------- ---------
$ 2,859 $3,356
======== =========
In 1996, the Company recorded a loss of approximately $400,000
relating to the write-off of the undepreciated cost of certain assets
which will no longer be used due primarily to changes in production
processes. The loss was recorded as research and development costs.
It is expected this equipment will be disposed of during 1997.
5. 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% 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 collateral except in the ordinary course of business and meet
certain financial ratios, quarterly operating results and minimum
tangible net worth.
6. Commitments and Contingency:
Commitments
The Company has entered into various operating leases for their
facilities and sales offices. Future rental commitments under these
operating leases are as follows (in thousands):
Year ended December 31,
1997 $ 726
1998 696
--------
Total $ 1,422
========
Rent expense was approximately $957,000, $597,000 and $360,000 in
1996, 1995 and 1994, respectively.
Contingency
In 1995, the Company was named as a defendant in three class
action lawsuits alleging that the Company falsely advertised the
size of the viewing area of its computer monitors. The Company was
named together with the majority of companies who manufacture or sell
computer monitors. In April 1996, the Company was dropped as a
defendant and is longer a party to any of the litigation.
7. Stockholders' Equity:
Preferred Stock: The Board of Directors is authorized to
determine the price, rights, preferences, privileges and restrictions
(including voting rights) of preferred stock without any further vote
or action by the stockholders. The Board is also authorized to increase
or decrease the number of shares of any series. At December 31, 1996,
there were 2,000,000 shares of $.01 par value preferred stock
authorized. No preferred shares were issued and outstanding at December
31, 1996 or 1995.
Employee-Stock Purchase Plan: The Board of Directors has
reserved 200,000 shares of common stock for issuance under the 1993
Employee Stock Purchase Plan. Employees may elect to have the
Company withhold up to 10% of their compensation for the purchase of
the Company's common stock. The amounts withheld are used to purchase
the Company's common stock at a price equal to 85% of the fair
market value of the stock on the first day of a two-year offering or
the last day of a six-month purchase period, whichever is lower. The
number of shares employees may purchase is subject to certain
limitations.
Stock-Option Plan: The Company has established the 1993 Stock
Option/Stock Issuance Plan. As amended, the Plan authorizes the issuance
of up to 2,074,852 shares of common stock over the term of the Plan,
pursuant to the grant of incentive stock and non-qualified stock
options and the direct issuance of shares to eligible employees,
independent consultants and non-employee directors.
Under the Plan, the exercise price per share is determined
by the Compensation Committee. The exercise price of an incentive
option cannot be less than 100% of the fair market value of the common
stock on the grant date and the exercise price of a non-qualified
option cannot be less than 85% of such fair market value. Options
generally vest over four years and are exercisable for a term of ten
years. In May 1996, the Company's Board of Directors approved the grant
of new 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 are exercisable at the fair
value of the Company's common stock at the date of the grant and will
vest over periods up to four years based in part on the original
vesting commencement date.
Activity during the years ended December 31, 1996, 1995, and
1994 is as follows (in thousands except the per share amounts):
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------
Shares Weighted
Available Number Price Average
for of Per Exercise
Grant Shares Share Amount Price
--------- ------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 142 676 $ 0.40-$13.50 2,778 $ 4.11
Plan Amendment 417
Options granted (424) 424 $12.25-$26.00 6,880 6.23
Options canceled 20 (20) $ 0.40-$24.50 (163) 8.15
Options exercised (144) $ 0.40-$13.50 (186) 1.29
--------- ------- ------------ ------- --------
Balance, December 31, 1994 155 936 $ 0.40-$26.00 9,309 9.94
--------- ------- -------
Plan Amendment 350
Options granted (643) 643 $13.00-$25.25 10,012 15.57
Options canceled 165 (165) $ 0.40-$26.00 (2,448) 14.83
Options exercised (138) $ 0.40-$18.75 (225) 1.63
--------- ------- ------------ ------- --------
Balance, December 31, 1995 27 1,276 $ 0.40-$25.25 16,648 13.04
--------- ------- -------
Plan Amendment 500
Options granted (1,358) 1,358 $ 5.50-$18.00 11,977 8.82
Options canceled 951 (951) $ 1.60-$25.25 (14,184) 14.91
Options exercised (127) $ 0.40-$ 8.63 (173) 1.36
Options expired 161 (161) $ 0.40-$20.25 (2,436) 15.13
--------- ------- ------------ ------- --------
Balance, December 31, 1996 281 1,395 $ 0.40-$16.25 $11,832 8.48
========= ======= =======
</TABLE>
During 1995, the Financial Accounting Standards Board issued
Statement No. 123, Accounting for Stock-Based Compensation (SFAS No.
123). This standard, which establishes a fair value-based method for
stock-based compensation plans, also permits an election to continue
following the requirements of APB Opinion No. 25, Accounting for Stock
Issued to Employees, with disclosures of pro-forma net income and
earnings per share under the new method. The Company continues to
follow the requirements of APB Opinion No. 25, with disclosure of
pro-forma information concerning its stock option and employee stock
purchase plans in accordance with SFAS No. 123.
The following table summarizes information with respect to stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Life (Years) Price at 12/31/96 Price
- --------------- ----------- ------------ --------- ----------- --------
(000s) (000s)
<S> <C> <C> <C> <C> <C>
$ 0.40-$ 1.60 38 3.4 $ 0.91 38 $ 0.91
$ 3.00-$ 3.00 4 1.0 $ 3.00 4 $ 3.00
$ 4.40-$ 5.94 72 2.1 $ 5.43 55 $ 5.41
$ 6.00-$ 7.83 113 9.5 $ 7.22 3 $ 7.20
$ 8.00-$ 9.50 1,079 8.9 $ 8.61 181 $ 8.57
$13.50-$ 13.50 36 7.2 $ 13.50 22 $ 13.50
$14.25-$ 15.75 52 7.7 $ 15.15 28 $ 15.06
$16.25-$ 16.25 1 9.1 $ 16.25 -- --
----------- ----------- --------
1,395 8.3 $ 8.48 331 $ 7.98
=========== =========== ========
</TABLE>
Fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1996 and 1995:
Group A Group B
----------- ---------
Risk-free interest rates 6.17% 6.14%
Expected life 4 years 3.5 years
Volatility 66% 66%
Dividend yield -- --
The weighted average expected life was calculated based on the
exercise behavior of each group. Group A represents officers and
directors who are a smaller group holding a greater average number of
options than other option holders and who tend to exercise later in the
vesting period. Group B represents all other option holders, virtually
all of whom are employees. This group tends to exercise earlier in the
vesting period.
The weighted average fair value of those options granted in
1996 and 1995 was $2.80 and $7.80, respectively.
The Company has also estimated the fair value for the purchase
rights issued under the Company's Employee Stock Purchase Plan, under
the Black-Scholes valuation model using the following assumptions for
1996 and 1995:
1996 1995
----------- -----------
Risk-free interest rates 5.46% 6.77%
Expected life 0.50 years 0.90 years
Volatility 66% 66%
Dividend yield -- --
The weighted average fair value of those purchase rights
granted in 1996 and 1995 was $2.58 and $5.58, respectively.
The following pro forma income information has been prepared
following the provisions of SFAS No. 123 (in thousands except per
share data):
1996 1995
------- -------
Net income (loss) - pro forma $(4,036) $5,441
Net income (loss) - per share - pro forma $ (0.53) $ 0.72
The above pro forma effects on income may not be
representative of the effects on net income for future years as option
grants typically vest over several years and additional options are
generally granted each year.
8. Significant Customers:
For the years ended December 31 1996, 1995, and 1994, one
customer accounted for 12%, 12%, and 11%, respectively, of the Company's
revenues. For the year ended December 31, 1994 a second customer
accounted for 17%
Export revenues, principally to Europe, as a percentage of total
revenues were 29%, 29%, and 20% for the years ended December 31, 1996,
1995, and 1994, respectively. Income and assets of the Company's
foreign subsidiaries were not significant.
9. Restructuring Charge:
During 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
December 31, 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.
10. Acquisitions:
On July 6, 1995, the Company acquired the assets and liabilities
of Pegasus Disk Technologies, Inc. ("Pegasus"), a supplier of software
products used in document image processing to manage data stored on
optical disk drives and jukeboxes. Under the terms of the agreement,
the Company paid $550,000 and issued 124,800 shares of its common stock
in exchange for the assets and liabilities of Pegasus. The amount
allocated to purchased in-process technology totaling $2,407,000 was
expensed on the acquisition date as the technology had not reached
technological feasibility and had no alternative future use. The
acquisition was accounted for under the purchase method and the
results of operations of Pegasus were included with those of the Company
from the acquisition date (see note 13).
In June 1994, the Company acquired Pixel Translations, Inc.
("Pixel"), a developer of software tools used by OEMs and integrators of
document image processing systems. Under the terms of the agreement,
the Company issued 172,268 shares of its common stock in exchange
for all the outstanding shares of Pixel stock and granted options to
purchase 16,845 shares of the Company's common stock in exchange
for all outstanding options to purchase Pixel stock. The
acquisition has been accounted for under the purchase method and the
results of operations of Pixel were included with those of the
Company from the acquisition date.
11. Income Taxes:
Income tax expense(benefit) consists of (in thousands):
1996 1995 1994
-------- ------- -------
Current:
Federal $(247) $3,589 $3,307
State and local 985 669
Foreign 152 -- --
-------- ------- -------
$ (95) $4,574 $3,976
-------- ------- -------
Deferred:
Federal $(185) $(2,249) $ (669)
State and local (204) (450) (135)
-------- ------- -------
$(389) $(2,699) $ (804)
-------- ------- -------
Total:
Federal $(432) $1,340 $2,638
State and local (204) 535 534
Foreign 152 -- --
-------- ------- -------
$(484) $1,875 $3,172
======== ======= =======
The Company's effective tax rate differs from the statutory
federal income tax rate as shown in the following schedule:
1996 1995 1994
------- ------ ------
Statutory federal income tax rate (34.0)% 34.0% 34.0%
State taxes (6.1) 6.8 6.1
Foreign taxes 9.2 -- --
Purchased in-process technology -- -- 14.6
Research and development credits -- (3.1) (6.0)
Foreign sales corporation -- (2.2) (0.8)
Tax exempt interest (2.2) (1.7) (1.5)
Change in valuation allowance -- (15.4) (8.3)
Other, net 3.7 4.9 1.6
------- ------ ------
(29.4)% 23.3% 39.7%
======= ====== ======
The components of the deferred tax asset (in thousands):
1996 1995
------- -------
Deferred tax assets:
Provision for doubtful accounts $ 676 $ 520
Inventory reserves 1,001 1,100
State taxes -- 253
Accrued liabilities 1,257 601
Depreciation and basis differences 1,142 1,033
Net operating loss carryforwards 460 613
Research & development tax
credit carryforwards 115 142
------- -------
Total deferred tax asset $4,651 $4,262
======= =======
At December 31,1996, the Company had approximately $2,486,000 of
net operating losses and $90,000 of research and development tax credits
available to offset future U.S. federal income tax. These carryforwards
expire between 2002 and 2008. For California franchise tax purposes,
the Company has net operating loss carryforwards of $2,930,000 and
research and development credit carryforwards for $25,000. The
California carryforwards expire between 1997 and 2001.
In 1991, the Company experienced a "change in ownership",
as defined by the Internal Revenue Code. This event created a
limitation on the amount of federal and California net operating loss
and tax credit carryforwards that can be utilized to offset future
taxable income for tax reporting purposes. Under this provision, the
amount of the net operating loss which can be used in any one year
is limited to approximately $467,000.
12. Employee Benefit Plan
The Company provides a 401(K) Plan to its employees providing tax
deferred salary deductions for eligible employees. Participants may
make voluntary contributions between 1% and 20% of their compensation
subject to certain annual maximums. The Company matches 50% of
employee contributions with a maximum of $1,000 per employee. The
Plan provides for additional Company contributions at its discretion.
Total contributions made by the Company were $156,000, $117,000, and
$89,000 during 1996, 1995, and 1994, respectively.
13. Subsequent Events
Divestiture
On February 4, 1997, the Company entered into an
agreement to sell its ownership interest in Pegasus.
Under the terms of the agreement the Company will receive
35,000 shares of the 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.
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. The Company intends to use cash on hand
to fund its purchases.
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Cornerstone Imaging, Inc.
We have audited the accompanying consolidated balance sheets
of Cornerstone Imaging, Inc. and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements
of operations , stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996.
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 audits 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Cornerstone Imaging, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 31, 1997, except for note 13 as to which the date is
February 14, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Cornerstone Imaging, Inc.
Our report on the consolidated financial statements of
Cornerstone Imaging, Inc., is included on page 41 of this
Form 10K. In connection with our audits of such financial
statements we have also audited the related financial
statement schedule listed in the index on page 22.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND, L.L.P.
San Jose, California
January 31, 1997, except note 13 as to which the date is
February 14, 1997
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Officers of the Registrant.
The information required by this item relating to the
Company's directors and nominees and disclosure relating to compliance
with Section 16(a) of the Securities Exchange Act of 1934 is included
under the captions "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the
Company's Proxy Statement for the 1996 Annual Meeting of Stockholders
and is incorporated herein by reference. The information required by
this item relating to the Company's executive officers and key
employees is included under the caption "Executive Officers and Key
Employees" in Part I of this Form 10-K Annual Report.
Item 11. Executive Compensation.
The information required by this item is included under the
caption "Executive Compensation and Related Information" in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The information required by this item is included under the
caption "Ownership of Securities" in the Company's Proxy Statement for
the 1997 Annual Meeting of Stockholders and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is included under the
caption "Certain Transactions" in the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders and is incorporated herein by
reference.
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form 10-K
(a) The following documents are filed as part of this Annual
Report on Form 10-K:
1. Financial Statements.
Page Number
Consolidated Balance Sheets as of December 31,
1996 and 1995 27
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1996 28
Consolidated Statements of Stockholders' Equity for
each of the three years in the period ended
December 31, 1996 29
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 31, 1996 30
Notes to Consolidated Financial Statements 31 - 40
Report of Coopers & Lybrand, L.L.P. Independent Accountants 41
2. Financial Statement Schedule.
The following consolidated financial statement schedule is filed
as part of this report and should be read in conjunction with the
consolidated financial statements:
Schedule
II Valuation and Qualifying Accounts
Schedules, other than those listed above, have been omitted
since they are either not required, are not applicable, or the required
information is shown in the financial statements and related notes.
CORNERSTONE IMAGING, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Balance
Beginning Charged to Write- at End
Description of Year Expenses Offs of Year
- ----------------- --------- --------- ------- --------
Year ended December 31, 1994
Allowance for bad debt $ 229 $ 303 $ (41) $ 491
Inventory reserve $ 530 $1,262 $ (643) $ 1,149
Year ended December 31, 1995
Allowance for bad debt $ 491 $ 254 $ (47) $ 698
Inventory reserve $ 1,149 $ 290 $ (140) $ 1,299
Year ended December 31, 1996
Allowance for bad debt $ 698 $ 258 $ (206) $ 750
Inventory reserve $ 1,299 $ 904 $ (813) $ 1,390
3. (a) See Exhibit List below
(b) No reports on Form 8-K were filed during the
last quarter of the fiscal year covered by this
Form 10-K Annual Report.
Exhibit List
Number Description
2.1++ Agreement and Plan of Reorganization April 15, 1994
among the Company, Pixel Translations, Inc., and
Cornerstone Acquisition Corporation.
3.1+ Amended and Restated Certificate of Incorporation of
the Company.
3.2+ Bylaws of the Company
4.1+ Reference is made to Exhibits 3.1 and 3.2
4.2+ Form of Investor Rights Agreement dated August 27, 1993
by and among the Company and the investors identified herein.
10.1+ Form of Indemnity Agreement entered into between the Company
and its directors and officer.
10.2+ Form of the Company's 1993 Stock Option/Stock Issuance Plan.
10.3+ 1989 Employee Stock Option Plan.
10.4+ Key Employee Stock Purchase Plan.
10.5+ Form of Employee Stock Purchase Plan.
10.6+ Real Estate Lease between the Company and First Interstate
Bank of California, as Corporate Trustee for Northern
California Retail Clerks Union and Food Employers Joint
Pension Trust Fund; Bank of America N.T. & S.A., as
Corporate Trustee for Southern California United Food and
Commercial Worker Unions and Food Employers Joint Pension
Trust Fund; and Imperial Trust Company as Corporate
Co-Trustee for California Butchers Pension Trust Fund,
dated as of June 1, 1989.
10.7+* License Agreement between the Company and Cadtrak
Corporation, dated December 15, 1992.
10.8+* Distribution Agreement between the Company and Micro D.,
Inc., dated as of July 11, 1988.
10.9+* Distributor Agreement between the Company and Law Cypress
Distributing Company, dated as of May 2, 1990.
10.10+* OEM Sales Agreement between the Company and NEC Technologies,
Inc., dated as of December 11, 1992.
10.11+* Systems Integrator Purchase Agreement between the Company
and PRC, Inc., dated as of September 10, 1991.
10.12+* Systems Integrator Purchase Agreement between the Company
and DST Systems, Inc., dated as of June 14, 1990.
10.13+* Display Technologies, Inc. Pricing Terms and Conditions.
10.14 Intentionally left blank.
10.15+ Loan and Security Agreement, between the Company and Plaza
Bank of Commerce dated as of August 7, 1992.
10.16+ Loan and Security Agreement between the Company and Comerica
Bank-California, dated as of August 1, 1993.
10.17+ Loan and Security Agreement, between the Company and LB
Credit Corporation, dated as of October 21, 1992, as amended.
10.18* Product Support and Marketing Agreement between the Company
and IBM, dated as of February 16, 1994.
11.1 Statement of Computation of Per Share Earnings.
21.1+ Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand.
24.1 Power of Attorney (see page 24).
27 Financial Data Schedule
+ Incorporated by reference to an exhibit to the Company's
Registration Statement of Form S-1 (Registration No. 33-66142),
as amended.
++ Incorporated by reference to an exhibit to the Company's 8-K filed
on July 6, 1994.
* Confidential Treatment has been granted for the deleted portions of
this document.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 28, 1997.
CORNERSTONE IMAGING, INC.
By: /s/ Thomas T. van Overbeek
-----------------------------
Thomas T. van Overbeek
President, Chief Executive
Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints jointly and
severally, Thomas T. van Overbeek and John Finegan and each one of
them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any and all amendments
(including post- effective amendments) to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated
/s/ Thomas T. van Overbeek President, Chief Executive
Thomas T. van Overbeek Officer and Director
(Principal Executive Officer)
/s/ John Finegan Vice President, Finance and
John Finegan Administration and CFO
(Principal Financial and Accounting Officer)
/s/ E. David Crockett Chairman of the Board
E. David Crockett of Directors
/s/ Stephen J. Sheafor Director
Stephen J. Sheafor
/s/ James E. Crawford III Director
James E. Crawford III
/s/ Daniel D. Tompkins Director
Daniel D. Tompkins
/s/ Bruce Silver Director
Bruce Silver
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
EXHIBIT 11.1
CORNERSTONE IMAGING, INC.
COMPUTATION OF NET INCOME(LOSS) PER SHARE (1)
(in thousands, except per share amount)
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Weighted average common shares
outstanding 7,548 7,202 6,864
Common equivalent shares assuming
conversion of stock options -- 384 452
------ ------ ------
Shares used in per share calculation 7,548 7,586 7,316
====== ====== ======
Net income (loss) $(1,163) $6,158 $4,816
====== ====== ======
Net income (loss) per share $ (0.15) $ 0.81 $ 0.66
====== ====== ======
</TABLE>
(1) There is no material difference between primary and
fully diluted net income per share for any period presented.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statement of Cornerstone Imaging, Inc., on Form
S-8 (File No. 33-09727) of our reports dated January 31,
1997 (except for note 13 as to which the date is February
14, 1997) on our audits of the consolidated financial
statements and financial statement schedule of Cornerstone
Imaging, Inc., as of December 31, 1996 and 1995 and each of
the three years in the period ended December 31, 1996, which
reports are included in the Annual Report on Form 10-K on
page 41 and II-1.
COOPERS & LYBRAND, L.L.P.
San Jose, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996.
THE CONSOLIDATED INCOME STATEMENTS, THE CONSOLIDATED STATEMENTS
OF CASH FLOW AND THE RELATED NOTES FOR THE YEAR THEN ENDED, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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