Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended June 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______to_______
Commission File No. 0-22292
CORNERSTONE IMAGING, INC.
(Exact name of registrant as specified in its charter)
A Delaware Corporation 77-0104275
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1710 Fortune Drive, San Jose, California 95131
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 435-8900
(No Change)
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of June 30, 1998: 5,650,313
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................... $13,267 $12,284
Accounts receivable........................... 3,726 2,946
Deferred income taxes and
other current assets....................... 5,365 5,521
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Total current assets........................ 22,358 20,751
Property and equipment, net..................... 901 1,056
Other assets.................................... 427 424
Net assets related to the
discontinued display division.............. 4,611 15,462
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$28,297 $37,693
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $294 $463
Deferred revenue.............................. 1,077 654
Accrued liabilities........................... 1,576 2,653
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Total current liabilities................... 2,947 3,770
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Stockholders' equity:
Common stock.................................. 59 67
Paid in capital............................... 18,608 24,747
Retained earnings............................. 6,683 9,109
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Stockholders' equity........................ 25,350 33,923
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$28,297 $37,693
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements
<PAGE>
CORNERSTONE IMAGING, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues from continuing
operations...................... $4,160 $2,970 $7,547 $5,489
Cost of revenues.................. 391 180 816 351
--------- --------- --------- ---------
Gross profit 3,769 2,790 6,731 5,138
Sales and marketing............... 1,930 1,490 3,406 2,578
Research and development.......... 1,047 882 2,119 2,054
General and administrative........ 628 504 1,136 1,015
--------- --------- --------- ---------
Operating income (loss)......... 164 (86) 70 (509)
Other income...................... 149 217 293 403
--------- --------- --------- ---------
Income (loss) before (benefit)
provision for income taxes... 313 131 363 (106)
Provision (benefit) for
income taxes................. 94 45 109 (36)
--------- --------- --------- ---------
Net income (loss) from
continuing operations........ 219 86 254 (70)
Discontinued operations:
Net Income (loss) from operations
of Discontinued Display
Division........................ -- (217) (361) 995
Estimated net loss on sale of
Display Division................ -- -- (2,284) --
--------- --------- --------- ---------
Net income (loss) from
discontinued operations....... -- (217) (2,645) 995
--------- --------- --------- ---------
Net income (loss)............... $219 ($131) ($2,391) $925
========= ========= ========= =========
Basic and diluted EPS:
Income (loss) from
continuing operations........ $0.04 $0.01 $0.04 ($0.01)
Income (loss) from
discontinued operations...... 0.00 (0.03) (0.43) 0.13
--------- --------- --------- ---------
Net income (loss)............... $0.04 ($0.02) ($0.39) $0.12
========= ========= ========= =========
Shares used in EPS calculations:
Basic ......................... 5,953 7,335 6,163 7,422
Diluted........................ 6,036 7,337 6,216 7,457
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements
<PAGE>
CORNERSTONE IMAGING, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... ($2,391) $925
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........................ 448 350
Discontinued operations 10,851 (602)
(Increase) decrease in assets and liabilities:
Accounts receivable................................. (780) (628)
Deferred income taxes and other assets.............. 153 (864)
Accounts payable.................................... (168) 126
Accrued liabilities and deferred revenue............ (654) 656
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Net cash provided by operating activities........... 7,459 (37)
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Cash flows from investing activities:
Property and equipment additions....................... (293) (308)
--------- ---------
Net cash used in investing activities............... (293) (308)
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Cash flows from financing activities:
Repurchase of common stock............................. (6,630) (2,057)
--------- ---------
Net cash used in financing activities............... (6,630) (2,057)
--------- ---------
Net decrease in cash and cash equivalents............... 983 (2,389)
Cash and cash equivalents at beginning of period........ 12,284 18,486
--------- ---------
Cash and cash equivalents at end of period.............. $13,267 $16,097
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements
<PAGE>
CORNERSTONE IMAGING, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Unaudited Financial Information:
The accompanying interim unaudited consolidated condensed financial
statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. The December 31, 1997 balance
sheet data was derived from audited financial statements contained in
the Company's 1997 Annual Report on Form 10-k but does not include all
disclosures required by generally accepted accounting principles. In
addition, assets and liabilities related to the pending sale and
discontinuation of the display division has been restated from the
audited balance sheet. The unaudited financial statements for the six
month periods ended June 30, 1998 and 1997 include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial information set herein. The
results of operations for the interim periods are not necessarily
indicative of the results to be expected for an entire year and should
not be relied on as such.
Recent Pronouncements:
As of January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"("SFAS
130"). This statement establishes requirements for disclosure of
comprehensive income and its components; however, the adoption of SFAS
130 had no impact on the Company's net income (loss) or stockholders'
equity.
In June 1997 the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about segments of an Enterprise on
Related Information"("SFAS 131"), which changes the way public companies
report information about operating segments. SFAS No. 131, which is
based on the management approach to segment reporting, establishes
requirements to report elected segment information quarterly and to
report entity-wide disclosures about products and services, major
customers and the major countries in which the entity holds assets and
reports revenues. The Company has not yet evaluated the effects of this
change or its reporting segment information.
As of January 1, 1998 the Company has adopted the provisions of
Statement of Position 97-2, ("SOP 97-2"), "Software Revenue Recognition,
as amended by SOP 98-4 "Deferral of Effective Date of Certain Provisions
of SOP 97-2". This statement establishes requirements for revenue
recognition for software companies. Under SOP 97-2, the Company
recognizes product revenues and license fees upon shipment if a signed
contract exists, the fee is fixed and determinable, collection of
resulting receivables is probable and product returns are reasonably
estimable. In addition, for contracts with multiple obligations (e.g.
deliverable and undeliverable products, service, and maintenance),
revenue must be allocated to each component of the contract based on
evidence of its fair value. Revenue allocated to undelivered products is
recognized when the criteria for product and license revenue set forth
above are met. Revenue allocated to maintenance fees for ongoing
customer support and updates is recognized ratably over the period of
the maintenance contract. Payments for maintenance fees are generally
made in advance and are
non-refundable. Revenue related to other services is recognized as the
related services are performed. Royalty revenues that are contingent
upon sale to an end user by OEMs are recognized upon receipt of a report
of sale by the Company for the OEM.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP 98-1") "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use".
This Statement of Position (SOP) provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The
SOP applies to all nongovernmental entities and is effective for
financial statements for fiscal years beginning after December 15, 1998.
The Company has not yet determined the impact, if any, of the adoption
of this statement on the financial statements of the Company.
2. LINE OF CREDIT
The Company has a line of credit facility with a bank which expires
on July 1, 1999. 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 base rate and are collateralized
by accounts receivable, equipment, and inventory of the Company. As of
June 30, 1998 there were no borrowings under this agreement.
3. DIVESTITURES:
On April 17, 1998, the Company entered into a non-binding letter of
intent to sell its display division to the current management team led
by John Noellert, General Manager of the display division. Upon
completion of the sale, the display division will operate as a private
company named Cornerstone Peripherals Technology, Inc. Under the terms
of the letter and modifications made to it since April 17, the Company
will sell certain assets and transfer certain liabilities associated
with the display division. In addition, the Company will retain certain
assets, including accounts receivable and certain inventory. The value
of the inventory will be realized by the Company through the sale, on
its behalf, of that inventory by Cornerstone Peripherals Technology,
Inc. The Company estimates it will receive, subsequent to June 30, 1998,
proceeds in excess of $3.0 million for receivables and inventory less
transaction expenses and certain display division liabilities. The
letter provides that the Company will also hold a minority equity
interest in Cornerstone Peripherals Technology, Inc. This minority
interest will be carried as an asset on the Company's books at $1.0
million. As a result of the transaction, the Company recorded a loss of
approximately $2.6 million for the quarter ended March 31, 1998. All
financial statements have been restated to account for the display
division as a discontinued operation.
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 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 was not
significant.
4. INCOME TAXES:
The Company's provision for income taxes reflect the Company's
estimated 1998 annualized effective tax rate of 30%.
5. STOCK REPURCHASE:
On February 14, 1997, the Company's Board of Directors authorized
the use of up to $5.0 million to repurchase the Company's common stock.
This amount was increased to $15.0 million on September 17, 1997.
Purchases have been, and will continue to 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 it purchases. During the six
months ended June 30, 1998, the Company repurchased 1,053,200 shares at an
average cost per share of $6.30 bringing the cumulative repurchases since the
inception of the program to 2.06 million shares.
6. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS:
On March 14, 1998, 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 200,000 shares to
2,674,852 shares of common stock for issuance under the Plan. On the
same date the Board also approved 100,000 shares for issuance under the
1998 Employee Stock Purchase Plan. The proposed increases were approved
by stockholders on June 3, 1998 at the Company's Annual Stockholder's
Meeting.
<PAGE>
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Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Quarterly Report on Form 10-Q may contain forward-looking
statements that involve risks and uncertainties. The Company's actual
results may differ materially from the results discussed in any such
forward-looking statements. Factors that might cause such a difference
include, but are not limited to those discussed below and in the section
captioned RISK FACTORS in the Company's most recent Annual Report on
Form 10-K.
RESULTS OF OPERATIONS:
In recent years the majority of the Company's revenues have been
attributable to sales of display products. However, the Company's
software business has grown more rapidly than its display business in
the past three years and on April 17, 1998 the Company entered into a
letter of intent to sell its display products division. Accordingly, the
Company will be renamed to Input Software, Inc. and will exclusively
develop, market, and service software products for enterprise computing
applications. In 1994, the Company began providing software toolkits
for scanning and document image processing ("DIP") applications. In
November 1995, the Company began shipments of InputAccel-- a software
product designed to automate the conversion of documents into electronic
images.
The Company's 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 Image & Scanner Interface Specification ("ISIS"), an
industry standard interface for scanners. ISIS provides a key component
for InputAccel. InputAccel is a data capture system that lets
organizations integrate incoming documents-paper, fax, microfilm-with
enterprise workflow and document management systems. InputAccel is a
customizable, open architecture software product that runs under Windows
NT platform.
The Company's products are used by a diverse set of customers
in a wide variety of applications, such as insurance claim processing,
loan application processing, FDA submissions, and the storage of
personnel records and technical manuals. Most often, data capture
systems are used by large, service-oriented companies and government
agencies for which document management or transaction processing is
critical. Data capture, which is often used in conjunction with
document image processing, document management, and other computer
applications, enables multiple users to electronically capture, file,
and retrieve documents. Hence the Company's products are often sold
through, or in conjunction with, systems integrators and value added
resellers.
Net Revenues
The Company's software revenues increased 40% in the second quarter of
1998 to $4.2 million from $3.0 million in the second quarter of 1997.
For the six months ending June 30, 1998, revenues increased 37% to $7.5
million from revenues of $5.5 in the first six months of 1997. The
increase in revenue is due to increased revenues from InputAccel.
Gross Profit
Gross profit increased 35% to $3.8 million for the second quarter of
1998 from $2.8 million for the second quarter of 1997. For the six
months ending June 30, 1998, gross profit increased 31% to $6.7 million
from gross profit of $5.1 in the first six months of 1997. The gross
margin was 91% and 94% for the second quarters of 1998 and 1997,
respectively and was 89% and 93% for the six months ended June 30, 1998
and 1997, respectively. The decrease in gross margin percent for both
periods is largely due to the increased percentage of revenues derived
from software maintenance and professional services, which have lower
margins than revenues from product licensing. The Company expects
revenues from maintenance and services to continue to increase as a
percentage of overall revenues.
Sales and Marketing
Sales and marketing expenses increased 30% to $1.9 million in the second
quarter of 1998 from $1.4 million in the second quarter of 1997, and for
the six month period ended June 30, 1998, increased 32% to $3.4 million
from $2.6 million for the first six months of 1997. Sales and marketing
expenses as a percentage of revenue were 46% and 50% for the second
quarter of 1998 and 1997, respectively and was 45% and 47% for the six
months ended June 30, 1998 and 1997, respectively.
The Company expects that sales and marketing expenses will increase in
the future, in absolute terms, as the Company continues to expand sales
and marketing programs related to new software products.
Research and Development
Research and development expenses increased 19% to $1.0 million in the
second quarter of 1998 from $882,000 in the second quarter of 1997 and
for the six month period ended June 30, 1998, remained flat at $2.1
million. The first quarter of 1997 included a non-recurring purchase of
technology of $240,000.
Current staffing levels exceed those of prior periods. The Company
believes that continued investment in research and development is
critical to its future growth and will continue to commit substantial
resources to this area. As a result, quarterly research and development
expenses are likely to increase during 1998 and beyond.
General and Administrative
General and administrative expenses in the second quarter of 1998
increased by 25% to $628,000 from $504,000 in the second quarter of 1997
and for the six month period ended June 30, 1998, increased by 12% to
$1.1 million from $1.0 million in 1997. General and administrative
expenses as a percentage of revenue were 15% and 17% for the second
quarter of 1998 and 1997, respectively and was 15% and 18% for the six
months ended June 30, 1998 and 1997, respectively, the percent decreases
being primarily attributable to increased revenue levels. Certain
general & administrative expenses have, to date, been absorbed by the
display division. Accordingly, the Company expects general and
administrative expenses to increase in succeeding future periods.
Divestiture
The pending sale of the display division resulted in a net loss of $2.6
million, or 43 cents per share. This charge includes a loss from
display division operations in the first six months, net of tax benefit,
of $361,000. In addition, it includes an estimated loss of $2.3 million,
net of tax benefit, on the sale of the net assets of the display
division. This loss includes expenses related to the pending
transaction and a reduction in value of certain inventory, which is not
strategic to the new display business.
Benefit (Provision) for Income Taxes
The benefit (provision) for federal and state income taxes as a
percentage of pretax income from operations was 30% and 34% for the
second quarter and six month ended June 30, 1998 and 1997, respectively.
In addition, a tax benefit reserve of 40% was netted against the
estimated losses on the sale of the display division.
Liquidity and Capital Resources
At June 30, 1998, the Company had cash and cash equivalents of $13.3
million, compared to $12.3 million at December 31, 1997. At June 30,
1998, the Company had a line of credit that provides for the issuance of
commercial and standby letters of credit up to $15.0 million. The
agreement, which expires July 1, 1999, had no borrowings against it as
of June 30, 1998.
Net cash provided by operating activities was $7.5 million in the first
six months of 1998 compared net cash used of $37,000 in the first six
months of 1997.
Net cash used in investing activities, exclusively additions to property
and equipment, was $305,000 for the first six months of 1998, compared
to $308,000 in the first six months of 1997.
On February 14, 1997, the Company's Board of Directors authorized the
use of up to $5.0 million to repurchase the Company's common stock.
This amount was increased to $15.0 million on Sept 17, 1997. 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. During the six month period ended June 30, 1998, the Company
repurchased 1,053,200 shares at an average cost per share of $6.30.
The Company believes that its cash and cash equivalents, together with
cash flows from operations will be sufficient to meet the Company's
liquidity and capital requirements for the next 12 months. The Company
may, however, seek additional equity or debt financing to fund further
expansion. The timing and amount of such capital requirements cannot be
precisely determined at this time and will depend on a number of
factors, including demand for the Company's products, product mix and
competitive factors. 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 assurance that additional
financing will be available at all or that it, if available, will be
obtainable on terms favorable to the Company and would not be dilutive.
RISK FACTORS:
Limited Software Operating History; History of Losses; Future Operating
Results Uncertain
The Company has operated its Software Division since June 1994.
Accordingly, the Company's prospects must be considered in light of the
risks and difficulties frequently encountered by companies in the early
stage of development, particularly companies in new and rapidly evolving
markets. To
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate
qualified personnel and continue to improve its products. For the past
several years, the Company has been investing in its software business
and as a result, on a stand-alone basis, the Software Division has not
achieved operating profitability and has incurred net losses in each
quarter from inception through the quarter ending June 30, 1997. As of
June 30, 1998, the Company's Software Division had cumulative pre-tax
operating losses of approximately $3.4 million. The Company's operating
losses have been due in part to the commitment of significant resources
to the Company's research and development and sales and marketing
departments. The Company expects to continue to devote substantial
resources to these areas and as a result will need to achieve
significant quarterly revenues to achieve profitability. In particular,
the Company intends to continue to hire additional sales and research
and development personnel in 1998 and beyond, which the Company believes
is required if the Company is to achieve significant revenue growth in
the future. Although the Company's software related revenues generally
have increased in recent periods, there can be no assurance that the
Company's revenues will grow in future periods, that they will grow at
past rates or that the Company will remain profitable on a quarterly or
annual basis in the future.
Operating Results Subject to Significant Fluctuations; Seasonality
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly in
the future due to a variety of factors, such as demand for the Company's
products, the size and timing of significant orders and their
fulfillment, the number, timing and significance of product enhancements
and new product announcements by the Company and its competitors,
changes in pricing policies by the Company or its competitors, customer
order deferrals in anticipation of enhancements or new products offered
by the Company or its competitors, the ability of the Company to
develop, introduce and market new and enhanced versions of its products
on a timely basis, changes in the Company's level of operating expenses,
budgeting cycles of its customers, product life cycles, software defects
and other product quality problems, the Company's ability to attract and
retain qualified personnel, changes in the Company's sales incentive
plans, changes in the mix of domestic and international revenues, the
level of international expansion, foreign currency exchange rate
fluctuations, performance of indirect channel partners, changes in the
mix of indirect channels through which the Company's products are
offered, the impact of acquisitions of competitors and indirect channel
partners, the Company's ability to control costs and general domestic
and international economic and political conditions. The Company
operates with virtually no order backlog because its software products
are shipped shortly after orders are received, which makes product
revenues in any quarter substantially dependent on orders booked and
shipped throughout that quarter. As a result, if orders in the first
month or two of a quarter fall short of expectations, it is unlikely
that the Company will be able to meet its revenue targets for that
quarter. In addition, the Company achieves a significant portion of
revenues from indirect sales channels over which the Company has little
or no control. Moreover, the Company's expense levels are based to a
significant extent on the Company's expectations of future revenues and
therefore are relatively fixed in the short term. If revenue levels are
below expectations, operating results are likely to be adversely and
disproportionately affected because only a small portion of the
Company's expenses vary with its revenues.
The Company's business has experienced and is expected to continue to
experience seasonality, largely due to customer buying patterns. In
recent years, the Company has had relatively stronger demand for its
products during the quarter ending December 31 and demand has been
relatively weaker in the quarter ending March 31. The Company believes
that this pattern will continue. Based upon all of the factors described
above, the Company believes that its quarterly revenues, expenses and
operating results are likely to vary significantly in the future, that
period-to-period comparisons of its operating results are not
necessarily meaningful and that, in any event, such comparisons should
not be relied upon as indications of future performance. The Company
has limited ability to forecast future revenues, and it is likely that
in some future quarter the Company's operating results will be below the
expectations of public securities analysts and investors. In the event
that operating results are below expectations, or in the event that
adverse conditions prevail or are perceived to prevail generally or with
respect to the Company's business, the price of the Company's Common
Stock would likely be materially adversely affected.
Significant Competition
The market for the Company's products is intensely competitive and
subject to rapid change. In addition, because there are relatively low
barriers to entry in the software market, the Company may encounter
additional competition from other established and emerging companies.
Many of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other
resources than the Company, significantly greater name recognition and a
large installed base of customers. As a result, the Company's
competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of competitive
products, than can the Company. There is also a substantial risk that
announcements of competing products by large competitors could result in
the cancellation of customer orders in anticipation of the introduction
of such new products. In addition, current and potential competitors
have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their
products to address customer needs and which may limit the Company's
ability to sell its products through particular reseller partners.
Accordingly, new competitors or alliances among current and new
competitors may emerge and rapidly gain significant market share. The
Company also expects that competition will increase as a result of
software industry consolidation. Increased competition is likely to
result in price reductions, fewer customer orders, reduced margins and
loss of market share, any of 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 the
competitive pressures faced by the Company will not materially adversely
affect its business, operating results and financial condition.
Product Concentration
The Company currently expects the sale and license of its InputAccel
products and software tools to account for substantially all of the
Company's revenues for the foreseeable future. The Company's future
operating results are, therefore, heavily dependent upon continued
market acceptance of its InputAccel products and enhancements to these
products. Consequently, a decline in the demand for, or market
acceptance of, the Company's InputAccel products as a result of
competition, technological change or other factors, would have a
material adverse effect on the Company's business, operating results and
financial condition.
Dependence on Continued Growth of the Market for Document Management
Applications
Although demand for document capture software for document management
applications has grown in recent years, this market is still emerging
and there can be no assurance that it will continue to grow or that
organizations will continue to adopt the Company's products. The
Company has spent, and intends to continue to spend, considerable
resources educating potential customers about the Company's software
products and the document processing market generally. However, there
can be no assurance that such expenditures will enable the Company's
products to achieve any additional degree of market acceptance. The
rate at which organizations have adopted the Company's products has
varied significantly and the Company expects to continue to experience
such variations in the future. There can be no assurance that the
markets for the Company's products will continue to develop or that the
Company's products will be accepted within such markets. If the markets
for the Company's products fail to develop, or develop more slowly than
the Company currently anticipates, the Company's business, operating
results and financial condition would be materially adversely affected.
Rapid Technological Change and New Products
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and
enhancements, uncertain product life cycles, changes in customer demands
and evolving industry standards. The introduction of products embodying
new technologies and the emergence of new industry standards can render
existing products obsolete and unmarketable. The Company's future
success will depend upon its ability to continue to enhance its current
products and to develop and introduce new products on a timely basis
that keep pace with technological developments and satisfy increasingly
sophisticated customer requirements. As a result of the complexities
inherent in document image processing software, new products and product
enhancements can require long development and testing periods. As a
result, significant delays in the general availability of such new
releases or significant problems in the installation or implementation
of such new releases could have a material adverse effect on the
Company's business, operating results and financial condition. The
Company has experienced delays in the past in the release of new
products and new product enhancements. There can be no assurance that
the Company will be successful in developing and marketing, on a timely
and cost effective basis, new products or new product enhancements that
respond to technological change, evolving industry standards or customer
requirements, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction or
marketing of these products or that the Company's new products and
product enhancements will achieve market acceptance.
Risk of Software Defects
Software products as complex as those offered by the Company may contain
errors or defects, particularly when first introduced or when new
versions or enhancements are released. The Company has in the past
discovered software errors in certain of its new products after their
introduction. There can be no assurance that, despite testing by the
Company, defects and errors will not be found in current versions, new
versions or enhancements of its products after commencement of
commercial shipments, resulting in loss of revenues or delay in market
acceptance, which could have a material adverse effect on the Company's
business, operating results and financial condition.
Year 2000 Compliance
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of
ways. Many companies are expending significant resources to correct or
patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software
products such as those offered by the Company. Potential customers may
also choose to defer purchasing Year 2000 compliant products until they
believe it is absolutely necessary, thus resulting in potentially
stalled market sales within the industry. Conversely, Year 2000 issues
may cause other companies to accelerate purchases, thereby causing an
increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues could
cause a significant number of companies, including current Company
customers, to reevaluate their current software needs, and as a result
switch to other systems or suppliers. Any of the foregoing could result
in a material adverse effect on the Company's business, operating
results and financial condition.
Risks Associated with International Sales and Operations
The Company anticipates that for the foreseeable future a significant
portion of its revenues will be derived from sources outside North
America and the Company intends to continue to expand its sales and
support operations internationally. In order to successfully expand
international sales, the Company must establish additional foreign
operations, expand its international sales channel management and
support organizations, hire additional personnel, customize its products
for local markets, recruit additional international resellers and
increase the productivity of existing international resellers. To the
extent that the Company is unable to do so in a timely and cost-
effective manner, the Company's sales growth internationally, if any,
will be limited, and the Company's business, operating results and
financial condition could be materially adversely affected. Even if the
Company is able to successfully expand its international operations
there can be no assurance that the Company will be able to maintain or
increase international market demand for its products.
The Company's international operations are generally subject to a number
of risks, including costs of customizing products for foreign countries,
protectionist laws and business practices favoring local competition,
dependence on local vendors, compliance with multiple, conflicting and
changing government laws and regulations, longer sales cycles, greater
difficulty or delay in accounts receivable collection, import and export
restrictions and tariffs, difficulties in staffing and managing foreign
operations, foreign currency exchange rate fluctuations, multiple and
conflicting tax laws and regulations and political and economic
instability. To date, a majority of the Company's revenues and costs
have been denominated in U.S. dollars. However, the Company believes
that in the future, an increasing portion of the Company's revenues and
costs will be denominated in foreign currencies. Although the Company
may from time to time undertake foreign exchange hedging transactions to
reduce its foreign currency transaction exposure, the Company does not
currently attempt to eliminate all foreign currency transaction
exposure.
Dependence on Key Personnel
The Company's success depends to a significant extent upon the efforts
of its key management, sales and marketing, technical support and
research and development personnel, none of whom are bound by an
employment contract. The loss of key management or technical personnel
could adversely affect the Company. The Company believes that its
future success will depend in large part upon its continuing ability to
attract and retain highly skilled managerial, sales and marketing,
technical support and research and development personnel. Like other
software companies, the Company faces intense competition for such
personnel, and the Company has at times experienced and continues to
experience difficulty in recruiting qualified personnel. There can be
no assurance that the Company will be successful in attracting,
assimilating and retaining additional qualified personnel in the future.
The loss of the services of one or more of the Company's key
individuals, or the failure to attract and retain additional qualified
personnel, could have a material adverse effect on the Company's
business, operating results and financial condition.
Limited Protection of Proprietary Technology; Risks of Infringement; Use
of Licensed Technology
The Company relies primarily on a combination of copyright, trademark
and trade secret laws, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company licenses its
software products primarily under license agreements. There can be no
assurance that others will not develop technologies that are similar or
superior to the Company's technology or design around the copyrights and
trade secrets owned by the Company. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that
the Company regards as proprietary. Policing unauthorized use of the
Company's products is difficult, and although the Company is unable to
determine the extent to which piracy of its software products exists,
software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the U.S.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties
will not claim infringement by the Company of their intellectual
property rights. The Company expects that software product developers
increasingly will be subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any
such claims, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and
resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, if at all. In the event of a successful claim of product
infringement against the Company and failure or inability of the Company
to either license the infringed or similar technology or develop
alternative technology on a timely basis, the Company's business,
operating results and financial condition could be materially adversely
affected.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's
internally developed software and used in its products to perform key
functions. There can be no assurance that these third-party software
licenses will continue to be available to the Company on commercially
reasonable terms, if at all. The loss of or inability to maintain any
such software licenses could result in shipment delays or reductions
until equivalent software could be developed, identified, licensed and
integrated such delays would materially adversely affect the Company's
business, operating results and financial condition.
Product Liability
Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential
product liability claims, it is possible that such limitation of
liability provisions may not be effective as a result of existing or
future laws or unfavorable judicial decisions. The Company has not
experienced any material product liability claims to date; however, the
sale and support of the Company's products may entail the risks of such
claims, which may be substantial in light of the use of the Company's
products in business-critical applications. A successful product
liability claim brought against the Company could have a material
adverse effect on the Company's business, operating results and
financial condition.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On June 3, 1998, the Company held its Annual Meeting of
Stockholders at the Company's headquarters in San Jose, California. At
the meeting, the stockholders were asked to: (1) elect Thomas T. van
Overbeek, James Crawford III, E. David Crockett, Stephen J. Sheafor,
Bruce Silver, Daniel D. Tompkins, and John Finegan as members of the
Board of Directors for 1998; (2) approve an amendment to the company's
Stock Option/Stock Issuance Plan to increase the number of shares of
Common Stock for issuance thereunder by 200,000 shares; (3) approve the
Company's 1998 Employee Stock Purchase Plan; and (4) ratify the
selection of Coopers & Lybrand as the Company's independent auditors for
fiscal year 1998.
As of the April 14, 1998 record date established for the annual
meeting, there were 7,666,676 shares of common stock issued and
outstanding, all of which were entitled to vote. Present in person or
by proxy at the meeting were stockholders representing 6,819,153 shares.
Such shares represented 88%, a quorum, of the total number of shares
outstanding and entitled to vote. All of the proposals, and all of the
nominees to the board of directors, were approved by the stockholders.
6,338,202 shares voted for the approval of the nominees to the board of
directors, 475,738 withheld, and 5,213 instructed. 5,962,274 shares
voted for the approval of the amendment to the company's 1993 Stock
Option/Stock Issuance Plan, 832,079 voted against, and 24,800 shares
abstained. 6,629,265 shares voted for the approval of the 1998 Employee
Stock Purchase Plan, 172,960 shares voted against, and 16,928 shares
abstained. 6,792,949 shares voted for ratification of the selection of
Cooper & Lybrand as the Company's independent auditors, 15,394 shares
voted against, and 10,810 shares abstained.
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K - Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNERSTONE IMAGING, INC.
------------------------------
Registrant
Date: August 14, 1998 /s/ John Finegan
------------------------------
John Finegan
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Description
- --------- ------------------------------------------------------------
11.1 Statement of Computation of Earnings per Share
27 Financial Data Schedule
[ARTICLE] 5
[MULTIPLIER] 1,000
Part II. Other information, Item 6a.
Exhibit 11.1
CORNERSTONE IMAGING, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss)........... $219 ($131) ($2,391) $925
========= ========= ========= =========
Shares used in basic EPS
calculation................ 5,953 7,335 6,163 7,422
Dilutive effect of stock
options.................... 83 2 53 35
--------- --------- --------- ---------
Shares used in diluted EPS
calculation................ 6,036 7,337 6,216 7,457
========= ========= ========= =========
Basic EPS................... $0.04 ($0.02) ($0.39) $0.12
Diluted EPS................. $0.04 ($0.02) ($0.39) $0.12
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1998, THE
CONSOLIDATED STATEMENTS OF OPERATIONS, THE CONSOLIDATED
STATEMENTS OF CASH FLOW AND THE RELATED NOTES FOR THE THREE
MONTH PERIOD THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,267
<SECURITIES> 0
<RECEIVABLES> 4,162
<ALLOWANCES> 436
<INVENTORY> 0
<CURRENT-ASSETS> 22,358
<PP&E> 3,406
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,297
<CURRENT-LIABILITIES> 2,947
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 25,291
<TOTAL-LIABILITY-AND-EQUITY> 28,297
<SALES> 7,547
<TOTAL-REVENUES> 7,547
<CGS> 816
<TOTAL-COSTS> 816
<OTHER-EXPENSES> 6,661
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 363
<INCOME-TAX> 109
<INCOME-CONTINUING> 254
<DISCONTINUED> (2,645)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,391)
<EPS-PRIMARY> ($0.39)
<EPS-DILUTED> ($0.39)
</TABLE>
