SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 19971998
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,INPUT SOFTWARE, 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,1299 Parkmoor Avenue, San Jose, CA 9513195126
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 435-8900325-3800
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 Preferred Share Purchase Rights
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, 1998,1999, was to the best of the
Company's knowledge approximately $22,450,000$14,800,000 million (based upon the
February 28, 19981999 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, 1998,1999, approximately 6,257,0004,691,000 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 19981999 Annual
Meeting of Stockholders to be held on June 3, 1998May 27, 1999 are incorporated by
reference into Part III.
[Cover page 2 of 2 pages]
PART I
This Annual reportReport 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 management and
image processing market,markets, 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,resellers, and dependence upon key personnel.
Item 1. Business
The CompanyInput Software, Inc. ("Input Software"or the "Company") develops,
markets, and services hardware and
software products for corporate computing applications.information capture software. The Company iselected
in 1998 to focus solely on its emerging presence as a supplier of display products, and has historically sold mostsoftware supplier.
As a result it announced the sale of its display products division in
April, 1998 and completed such sale to the document image processing ("DIP") market.
Cornerstone's ImageAccel display products,management team in September,
1998. As part of the first generationstrategic change the name of which
was introduced in 1992, consist of controllers, proprietary software
drivers, and large screen, high resolution monitors. In 1994, the Company was
changed from Cornerstone Imaging, Inc. to Input Software, Inc. The
Company's information capture software helps automate and manage the
input of external information into an organization's internal computing
systems. Information capture software is an important first step in
creating productive enterprise-wide information flow. Functioning as a
middleware layer between external information sources and an
enterprise's IT infrastructure, Input Software's products help customers
achieve the next level of efficiency by turning unstructured, external
information into intellectual capital.
Customers use information capture software in two ways--
transaction applications where documents such as order forms, claims
forms, or loan applications are the basis of a business transaction; and
content loading applications where external documents are captured and
uploaded to web sites, CDs, or application servers for subsequent search
and retrieval. Growth drivers for these applications include increasing
Internet usage, widespread use of digital technology and enterprise
applications, increased demands for information in all forms, and
continued increasing paper usage.
InputAccelr , which began providing software toolkits for scanning and DIP
applications. Inshipping in November 1995, is the
Company's flagship product line. With InputAccel, the Company began shipmentshas
established itself as an open systems information capture "platform"
provider. As a result, enterprises of InputAccel;various sizes and volume
requirements can now standardize on a software product designedsingle enterprise information
capture solution, yet customize the system to automatemeet the conversionneeds of documents into electronic images.either a
transaction or content loading operation at any level of input volume.
Input Software toolkitshas attracted such established providers as Adobe,
Documentum, IBM, and InputAccel
together compose the product linesEastman Software as partners to provide complete
solutions for the Company's software division.
Document imageinternal and external information processing which is often used in
conjunction with other computer applications, enables multiple users to electronically capture, file,global
1000 companies 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.
In recent years substantially all of the Company's revenues
have been attributable to sales of display products based on its
ImageAccel technology, though software products contributed 13% of total
revenues for 1997. The ImageAccel family of display products consists of
controller boards and monitors designed to enhance user productivity by
providing excellent legibility and fast image display speeds. ImageAccel
products incorporate a "scale-to-gray" image enhancement algorithm
that significantly improves the legibility of small characters typically
found in business documents. These products, together with existing
and planned software, are expected to account for substantially all of
the Company's future revenues.government agencies.
The Company's second product line is software business has grown more rapidly than
its display business in the past three years. Software tools, which allow
integratorshardware and software developers to save both time and money by offering
stable, supported libraries of software code to drive DIPcertain computer
peripherals rather than having to develop such software themselves.
Most of these tools are based on Cornerstone'sthe Company's Image & Scanner Interface
Specification ("ISIS"ISISr"), an industry standard interface for scanners.
ISIS also provides a key component for InputAccel; a software product
designed to automate the conversion of documents into electronic images.
The Company's display and software products are used by a
diverse set of customers in a wide variety of 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. 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.InputAccel.
Technology and Products
DISPLAY PRODUCTS- Cornerstone offers a range of color and
grayscale monitors and controllers designed primarily for visually
demanding applications such as document image processing. All
controllers are based on Cornerstone's ImageAccel architecture.
ImageAccel, 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 3.0 was introduced in November 1996 and is
built using an industry-standard graphics controller chip.
Cornerstone has been shipping grayscale products since 1987
and color products since 1992. Color products presently represent a
significant portion of display revenues and are expected to represent
substantially all of display revenues in future periods.
SOFTWARE PRODUCTS-
InputAccel is the Company's flagship software product.
InputAccel is 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 the ISIS interface, is a foundation linking
various technologies into an upgradeable system that provides system
management, control, and reporting functions. The integration platform
is an open NT-based server platform that can incorporate/utilize various
software modules from CornerstoneInput Software, as well as products from thirdthird-
parties, including application vendors, scanner manufacturers, and other
providers.
Market Applications
The Company's products are used by a diverse set of
customers in a wide variety of document imaging and other enterprise
related applications. In an increasingly competitive business
environment, many organizations are turning to document image processing
and document management as means of improving quality, service, 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 sales leads for its sales personnel, 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 direct to end-users or
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 1997, one U.S. distributor represented 14% of the
Company's net sales. The Company believes that in the event of the loss
of one of its major distributors, over time, other distributors could
replace the distributor 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 majority of the Company's products are used in connection with a complex
DIPenterprise system that includes important elements supplied by other
vendors. As a result, purchasers of DIPsuch systems typicallyoften rely on system
integrators and VARs 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 and InputAccel sales to
end-users are made through system integrators and value-added resellers.
OEMs
Software tools are generally sold or licensed to such hardware and
software suppliers as Fujitsu, Kodak, Caere, and Filenet.
In 1997,1998, international sales, principally in Europe,
represented approximately 32%26% 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 products 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 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
1998, 1997, 1996, and 19951996 research and development expenses were
$7.9approximately $4.2 million, $9.6$4.0 million and $7.8$3.4 million, respectively.
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,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.third-parties. There can be no
assurance, however, that third partiesthird-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 areis essential for 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
monitors and some important components used in its controller 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.
To address this issue, the Company has, in the past, entered into
significant purchase commitments. 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 either 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 and financial condition.medium.
Competition
DISPLAY PRODUCTS-
The market for displaythe Company's products is highly competitive.
The Company believes the principal competitive factors are price, product
features, availability, quality, service and support, support of industry standards,price, and reputation. Competition for display
products comes from manufacturers of monitors and controller cards such
as NEC, Hitachi, and Matrox; private label resellers such as Viewsonic;
and providers of computers and workstations, such as Compaq and Dell.
SOFTWARE PRODUCTS- In addition to price, service, support,
and reputation, support of the
Company's integration platform by independent software vendors and ease
of product implementation are important competitive factors for
InputAccel, the Company's data capture
product.InputAccel. The Company believes that it currently competes favorably
with respect to these factors.
For both display and software products, theThe 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, 1997,1998, the Company had 223123 employees. The
Company employs 3326 people in finance and administrative functions, 8764 in
marketing, sales, and sales, 30 in operationssupport and 7333 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
are 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 4849 Chairman of the Board of Directors
Kimra Hawley 42 President, Chief Executive Officer
and Director
Matt Albanese 40 Vice President-Implementation and
Consulting Services
Cynthia Anderson 34 Vice President-Operations
Joe Falk 49 Vice President-Sales
John Finegan 4849 Chief Financial Officer, Secretary,
and Secretary
Kimra Hawley 41 Sr.Director
Stephen Francis 37 Vice President & GM, SoftwarePresident-General Manager of Pixel
Division
Michael Parker 40 Vice President-Engineering
Johannes Schmidt 3435 Chief Technical Officer and Director
John Stetak 40 Vice President-Marketing
Thomas T. van Overbeek joined Cornerstonethe Company in 1988 as President in
1988. Mr. van Overbeek was also elected to the Board of Directors in
1988.and
Director. He was electedappointed Chief Executive Officer in July 1990. Prior to
joining Cornerstone,1990 and
became Chairman of the Board of Input Software in September 1998 upon
completion of the sale of the Company's display products division. Mr.
vanVan Overbeek held various positions from March
1984 to May 1988 at Western Digital Corporation-Paradise Systems, most
recently as Presidentis currently CEO of Paradise Systems. Paradise Systems is a
manufacturer of video products for personal computers.
John FineganWavtrace, Inc. in Bellevue, Washington.
Kimra Hawley joined the Company in July 1989 and was elected
Chief Financial Officer 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.
Kimra Hawley joined Cornerstone in February 1992 as the
Product Marketing
Manager andDirector, 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 1989Division in November
1996. She became President and CEO and was elected a Director of Input
Software, Inc. in April 1998. Prior to 1992,joining the Company, Ms. Hawley
was a principal within MarketBound Associates, a marketing consulting firm and from 1983 to
1989 a Product Marketing Manager with Amdahl Corporation.firm.
Ms. Hawley receivedholds a B.S.BS in Psychology from PittsburghPittsburg State University.
Matt Albanese joined the Company as Director of Engineering for
the Software Division in 1995 and was promoted to Vice President,
Implementation and Consulting Services in December 1997. Prior to
joining the Company, Mr. Albanese was the Director of Engineering for
Plexus Software, a Division of Banctec. Mr. Albanese holds a BS in
Computer Science from San Jose National University.
Cynthia Anderson joined the Company as Director of Quality in 1992
and became Vice President of Quality and Information Systems for the
Display Division in 1997. In 1998, she was appointed Vice President of
Operations. Prior to joining the Company, Ms Anderson held quality and
engineering positions at Tandem Computers. Ms. Anderson holds a BS
degree in Electrical Engineering from Michigan Technical University and
an MS in Engineering Management from Santa Clara University.
Joe Falk joined the Company in May 1997 as Vice President of Sales
for the Software Division, and became Vice President of Sales in April
1998. Prior to joining the Company, Mr. Falk was Vice President of
Sales of Constellar Software Corporation and prior to that, Director of
Worldwide Sales at Vantageware Software. Mr. Falk holds a BS in
Marketing from California State University at Northridge.
John Finegan joined the Company in 1989 as Vice President-Finance,
was elected Chief Financial Officer in 1990, Secretary in 1993, and
Director in 1997. Prior to joining the Company he was Vice President
of Finance for the Paradise Systems Division of Western Digital
Corporation. Mr. Finegan holds an MBA from the University of
Massachusetts and a BS in Engineering from Tufts University.
Stephen Francis joined the Company in 1994 as Vice President when
the company he co-founded, Pixel Translations, was acquired. Mr. Francis
became Vice President and General Manager of the Pixel Translations
Division in April 1997. Prior to joining Pixel Translations, Mr.
Francis held engineering and marketing management roles at Calera
Recognition Systems, now part of Caere Corporation. Mr. Francis holds a
BS in Electrical Engineering/Computers from Stanford University.
Michael Parker joined the Company in October 1998 as Vice
President of Engineering. Prior to joining Input Software, Mr. Parker
held the positions at Adobe Systems of Director of Engineering from
October 1997 to October 1998 and Engineering Manager from June 1993 to
October 1997. Mr. Parker holds a BS in Electrical Engineering from the
University of Pennsylvania.
Johannes Schmidt joined Cornerstonethe Company as Vice President of Software
Engineering in June 1994 when the Companycompany he founded, Pixel Translations, was
acquired by Cornerstone. In
1995, Mr. Schmidt assumed the role of Vice President of Software
Development and in November 1996Company. He was appointed Chief Technical Officer.Technology Officer in
1996 and Director in November 1998. Previously, Mr. Schmidt founded Pixel Translations in 1990 and served as President
and CEO. From 1986 to 1990, Mr. Schmidt served as Manager of
Applications Developmentheld
senior engineering positions at Calera Recognition Inc., an OCR company.Systems, which is now
part of Caere Corporation. Mr. Schmidt holds a B.S.BS in Engineering and
Applied Science from the California Institute of Technology.
Risk Factors
Substantially allJohn Stetak joined the Company as Vice President of Marketing in
May 1998. From 1992 to 1998 he served as Director of Marketing for the
Data Management Market Group of Autodesk. Previously Mr. Stetak was
Manager of Product Marketing for EDS.
RISK FACTORS
In addition to the other information in this Report, the following
risk factors should be considered carefully in evaluating the Company
and its business.
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 operating
losses in each quarter from inception through the quarter ending June
30, 1997. As of December 31, 1998, the Company's software operations
had cumulative pre-tax operating losses of approximately $2.7 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
net incomeresearch and development personnel in 1999 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 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 andperiods, there can be no assurance
that the market for DIP
systemsCompany's revenues will continue to grow orin future periods, that they will
grow at historical rates. If the DIP
market fails to growpast rates or grows more slowly thanthat the Company currently
anticipates, its business, operating results and financial condition
would be materially and adversely affected.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 mayare likely to vary significantly in
the future vary significantly depending ondue to a variety of factors, such as seasonality,demand for the Company's
products, the size and timing of significant orders, the number, timing
and significance of product enhancements and new product introductions, product mix,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 suppliers,new products offered by the Company or its competitors,
the ability of the Company to develop, introduce and market acceptance of 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 timingimpact of
significant ordersacquisitions of competitors and relatively long
sales cycles. In addition, a substantial portion ofindirect 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 eachany quarter results fromsubstantially
dependent on orders booked and shipped inthroughout that quarter. TheIn
addition, the Company achieves a significant portion of revenues from
indirect sales channels over which the Company has little control.
Moreover, the Company's expensesexpense levels are based to a significant extent
on the Company's expectations of future revenues and therefore are
relatively fixed in part, on its expected
future revenues. As a result, ifthe short term. 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.
The Company's business has experienced and is expected to continue to
experience seasonality, largely due to customer buying patterns. In
recent periods,years, the Company has experienced significant seasonality. Revenueshad relatively stronger demand for its
products during the quarter ending December 31 and net
income havedemand has been
stronger in the fourth quarter andrelatively weaker in the first
quarter. In eachquarter ending March 31. The Company believes
that this pattern will continue. Based upon all of the past 3 years, first quarter revenues were
lower than the preceding fourth quarter revenues. The Company expects
this trend to continue in 1998. Althoughfactors described
above, the Company was profitablebelieves that its quarterly revenues, expenses and
operating results are likely to vary significantly in the third and fourth quarters of 1997, there can be no assurance that
the Company's revenues will achieve 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 operating results of operations are not
necessarily meaningful and that, in any event, such comparisons should
not be relied onupon as indications of future performance. DueThe Company
has limited ability to all of the forgoing factors,forecast future revenues, and it is likely that
in some future quarters,quarter the Company's operating results will be below the
expectations of public marketsecurities analysts and investors. In such anthe 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 stock mayCommon
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, a significant portionbecause 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 sales
is made through systems integratorscompetitors have longer operating histories,
significantly greater financial, technical, marketing and distributors andother
resources than the Company, relies on certain key suppliers for important components.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 lossCompany 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 major system integrator, distributor,decline in the demand for, or key suppliermarket
acceptance of, the Company's InputAccel products as a result of
competition, technological change or other factors, would not have a
material adverse effect on the Company's business, overoperating results and
financial condition.
Dependence on Continued Growth of the short term, thereby causing fluctuationsMarket for Data Capture and
Document Management Applications
Although demand for document capture software for document management
applications has grown in its
quarterly results.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
DIP industryCompany 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, including emergence of faster microprocessors, frequent new product introductions and
enhancements, uncertain product life cycles, changes in customer demands
and evolving industry standards. The introduction of products embodying
new technologytechnologies 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 onupon its ability to address the increasingly
sophisticated needs of its customers by enhancingcontinue to enhance its current
products and by developingto develop and introducingintroduce new products on a timely basis new products
that keep pace with technological developments and emerging industry
standards. There can be no assurance thatsatisfy increasingly
sophisticated customer requirements. As a result of the Company will be
successfulcomplexities
inherent 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 itsdocument image processing software, new products and product
enhancements will
adequately meet the requirements of the marketplacecan require long development 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.testing periods. 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 1997, international sales represented approximately 32%
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 products from a Japanese manufacturer. Although the
Company's importationgeneral availability of such monitors is not currently affected by
tariffs on Japanese electronic goods, there can be no assurance that
trading policies adopted bynew
releases or significant problems in the United Statesinstallation or Japan will not decrease
the availabilityimplementation
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, whichnew releases 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 usedexperienced delays in itsthe past in the release of new
products including integrated circuits. The
Company also currently has sole sources for the video monitors used in
its products. Business disruptions or financial difficulties of a sole-
source supplier could adversely affectand new product enhancements. There can be no assurance that
the Company by increasing thewill be successful in developing and marketing, on a timely
and cost of goods soldeffective basis, new products or reducing the availability of such components. To
date,new product enhancements that
respond to technological change, evolving industry standards or customer
requirements, that the Company has been able to obtain adequate supplieswill not experience difficulties that
could delay or prevent the successful development, introduction or
marketing of these componentsproducts or that the Company's new products and
monitors; however,product enhancements will achieve market acceptance.
Risk of Software Defects
Software products as complex as those offered by the Company has had difficulty in
obtaining components from certain sole-sourced suppliers. To address
this issue, themay contain
errors or defects, particularly when first introduced or when new
versions or enhancements are released. The Company has in the past
prepaid fordiscovered software errors in certain of its new products and has
purchased and consigned certain supplier's 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 forafter 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, thereintroduction. There can be no assurance that, continuing difficulties with
certain suppliersdespite testing by the
Company, defects and errors will not be found in current versions, new
versions or a changeenhancements of its products after commencement of
commercial shipments, resulting in suppliers would not resultloss of revenues or delay in significant delays in obtaining adequate supplies of components and
monitors or adversely affect the quality of such supply and as a
consequencemarket
acceptance, which could have a material adverse effect on the Company's
business, operating results and financial condition.
Year 2000 Readiness Disclosure
The following information constitutes a "Year 2000 Readiness Disclosure"
for purposes of the Year 2000 Information and Readiness Disclosure Act.
Many currently installed computer systems are not capable of
distinguishing 21st century dates from 20th century dates. As a result,
in less than one year, computer systems and/or software used by many
companies in a very wide variety of applications will experience
operating difficulties unless they are modified or upgraded to
adequately process information involving, related to or dependent upon
the century change. Significant uncertainty exists concerning the scope
and magnitude of problems associated with the century change.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the Year 2000 problem. The Company's Year 2000
compliance effort has been led since mid-1998 by a committee headed by
its Vice Presidents of Operations and Product Strategy. The effort has
been focused on compliance of the Company's products and the Company's
critical business systems. Non-critical business systems will be
addressed if and when necessary, as the Company currently anticipates
minimal impact to operations and ready availability of replacement goods
or services in this category.
As more fully discussed below, the Company's products make only limited
use of date algorithms and generally are user configurable and/or
dependent on third-party products for date information. As a result, it
is impossible to make definitive statements concerning the compliance of
any particular system, but the Company believes that when properly
installed, its products can be configured in a compliant manner.
As a software developer, the Company is dependent on relatively few
critical suppliers. These tend to be infrastructure vendors rather than
component vendors, most notably including building utilities,
telecommunications and internet service as well as third-party software
suppliers whose products are used for product development, internal
business processes and operating platforms for the Company's products.
Generally these suppliers are well established enterprises which have
provided assurances that they are or will be Year 2000 compliant
sufficiently before January 1 to avoid business disruptions, and the
Company anticipates no significant disruptions from these suppliers.
The Company's flagship product, InputAccel, is a modular, configurable,
enterprise software application that operates on a Microsoft Windows
platform and can export information to one or more third-party software
applications. The product's current revision (2.X) has been subjected
to code inspection testing for Year 2000 compliance by the Company, and
the Company offers no-charge test systems to licensed end-users so that
they may perform compliance testing in their own environments. The
Company warrants to new end-users that the product is capable of
compliant installation and that the Company will take prompt action to
address any Year 2000 defects that may be encountered. However, due to
the product's configurable nature and its interdependence with third-
party products, its warranty is of limited scope in order to avoid
liability for externally introduced Year 2000 problems. At the current
time, the Company has identified an anomaly in third-party code which is
incorporated in InputAccel that may create ambiguities under certain
circumstances in the interpretation of two-digit years. The Company is
taking immediate remedial measures to eliminate the effect of this code
and plans to replace the third-party product before January 1, 2000.
Revisions prior to 2.0 have not been tested for Year 2000 compliance,
and users of earlier versions of InputAccel may encounter Year 2000
defects.
Released versions of PixToolsr development toolkit products and the
PixViewTM image utility application do not represent, store or process
dates, and the Company believes that the Year 2000 compliance issue is
inapplicable to these products alone. It should be noted however, that
the toolkit algorithms are intended to be combined with other program
elements in the course of development, and toolkit users must exercise
care not to introduce Year 2000 problems with those program elements.
The Company's internal information technology systems are comprised of
certain hardware, including computers and telecommunications equipment;
software applications, including sales management, accounting,
electronic mail, word processing, spreadsheets and the Windows operating
system as well as software development platforms. Nearly all of the
above hardware and software applications are commercially available
products from major suppliers. Many of these products have been subject
to upgrade or replacement concurrent with the Company's recent
relocation or as a result of scheduled maintenance, for which there have
been no extraordinary costs.
Critical externally supplied products and services include electricity,
telecommunications, internet service, payroll and shipping. Such
products and services are generally supplied by major providers which
currently represent that they will have no significant Year 2000
problems. In the event any such third-parties cannot provide the
Company with products, services or systems that meet the Year 2000
requirements on a timely basis, or in the event Year 2000 issues prevent
such third-parties from timely delivery of products or services required
by the Company, the Company's results of operations could be materially
adversely affected.
The InputAccel customer base is comprised primarily of large public
and private enterprises which have devoted, or will devote in 1999,
significant efforts to Year 2000 compliance issues. While InputAccel
may enhance the overall efficiency of such a customer's operations, it
is nevertheless not likely to be a material factor in any customer's
Year 2000 compliance effort. To the extent that such customers' MIS
departments are occupied with Year 2000 issues, they may defer
enterprise software acquisitions that are not critical to the Year 2000
effort, such as InputAccel. Such acquisition deferrals could have a
material adverse effect on the Company's business, operating results,
and financial condition.
The Company is dependent on Microsoft products which serve as the
operating system for its products and as the development platform for
those same products. In addition, the Company uses Windows-based
computers and a number of Microsoft applications in the regular conduct
of its business. While the Company regards the possibility of a
significant Year 2000 problem in Microsoft's products to be remote, if
such a problem were to occur in any of the Microsoft products used by
the Company, it could impact the Company's operations or development
efforts negatively.
To date, the Company has made no extraordinary expenditures in its
effort to achieve Year 2000 compliance other than the labor costs
associated with compliance analysis. Replacement products have been
secured, where necessary, in conjunction with scheduled and budgeted
maintenance. The Company does not anticipate that any significant
future expenditures will be required to achieve compliance, and it
believes that any such expenditures will have no material bearing on the
Company's financial performance. Accordingly, the Company has not
adopted any formal contingency plan in the event its Year 2000 project
is not completed in a timely manner.
The Company believes that, as a comparatively small and centralized
business operation, its Year 2000 risks are identifiable, and it
believes that it is already substantially prepared for the Year 2000.
Nevertheless there can be no assurance that all risks have been
identified and will be cured or that no business disruptions will occur
due to Year 2000 problems within the Company or from outside the
Company. The above discussion of compliance efforts, risks and costs
contain forward-looking statements based on the Company's current best
estimates, which estimates are based on currently available information.
Such information may be subject to change, in which case compliance
efforts, risks and costs could vary materially from current estimates
which could have a material adverse affect 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 into a significant partextent upon the continued serviceefforts
of its key management, sales and marketing, technical support and
senior managementresearch and development personnel, none of whom are bound by an
employment agreement.contract. The Company'sloss of key management or technical personnel
could adversely affect the Company. The Company believes that its
future success also depends onwill depend in large part upon its continuing ability to
attract and retain highly qualifiedskilled managerial, sales and marketing,
technical support and managerialresearch and development personnel. CompetitionLike other
software companies, the Company faces intense competition for such
personnel, is intense and therethe Company has at times experienced and continues to
experience difficulty in recruiting qualified personnel. 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 orand retaining other highlyadditional qualified technical and managerial 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.
Item 2. Properties
The Company's principal administrative, sales, marketing and
research and development facility is located in a building of
approximately 86,00046,000 square feet in San Jose, California. This facility
is leased through 1998.February 2004. All Company functions except warehousing of
finished product and certain
sales activities are performed at this facility. Finished products are shipped from a leased warehouse
facility in San Jose and from a contract warehouse facility in Duiven,
The Netherlands. Cornerstone'sInput Software's
European sales activities are conducted from leased facilities near
Munich, Germany and London, England. Certain other sales activities are
conducted from leased facilitiesrented offices in Illinois, Massachusetts, Texas, California, Indiana and Virginia.various states in the U.S. The Company
believes that its facilities are adequate for its current needs.
Item 3. Legal Proceedings
Not applicable.applicable
Item 4. Submission of Matters to a Vote of Security holdersHolders
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,
1997.1998. 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,INPUT SOFTWARE, INC.
CONSOLIDATED FINANCIAL INFORMATION
(unaudited - in thousands, except per share data)
Quarter Ended
------------------------------------------
1997 March 31, June 30, Sept. 30, Dec. 31,
- ----------------------------- --------- --------- --------- ---------
Net revenues $26,014 $21,243 $21,436 $23,161
Gross profit 9,050 7,966 7,554 7,936
Operating income (loss) 912 (130) (52) 134
Net income (loss) 1,056 (131) 7 150
Basic and Diluted EPS 0.14 (0.02) 0.00
Quarter Ended
------------------------------------------
1998 March 31, June 30, Sept. 30, Dec. 31,
- ---------------------------------------- --------- --------- --------- ---------
Net revenues from continuing operations $3,387 $4,160 $4,599 $5,263
Gross profit 2,962 3,769 4,198 4,732
Operating income (loss) (93) 164 356 405
Net income from continuing operations 35 219 354 431
Net income (loss) from
discontinued operations (2,645) -- -- 1,294
Basic and Diluted EPS:
For continuring operations 0.01 0.04 0.07 0.09
For discontinued operations (0.42) -- -- 0.26
--------- --------- --------- ---------
Net income (loss) (0.41) 0.04 0.07 0.35
Stock prices:
High 6.63 7.38 8.38 8.13
Low 4.50 5.13 5.50 5.13
1997
- ----------------------------------------
Net revenues from continuing operations $2,519 $2,970 $3,158 $3,593
Gross profit 2,348 2,790 2,918 3,303
Operating income (loss) (423) (86) 144 274
Net income (loss) from continuing
operations (156) 86 168 296
Net income (loss) from
discontinued operations 1,211 (217) (161) (146)
Basic and Diluted EPS:
For continuring operations (0.02) 0.01 0.02 0.04
For discontinued operations 0.16 (0.03) (0.02) (0.02)
--------- --------- --------- ---------
Net income (loss) 0.14 (0.02) -- 0.02
Stock prices:
High 9.88 9.25 8.00 7.00
Low 7.00 6.50 5.00 4.50
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
Basic and Diluted EPS (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
Common stock market price
The Company's common stock is traded on The Nasdaq National Market under
the symbol CRNR.INPT. The Company's common stock began trading in September
1993. There were approximately 168156 stockholders of record and 2,300
beneficial shareholders of record at February 28, 1998.1999.
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.
Year Ended December 31,
-------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Consolidated Statements of
Operations Data:
- ----------------------------
Net revenues $91,854 $96,847 $91,156 $70,248 $43,631$17,409 $12,240 $7,090 $3,384 $1,173
Gross profit 32,508 30,700 33,564 27,946 16,04815,661 11,359 6,768 3,315 1,132
Operating income (loss) 863 (1,901) 7,537 7,446 5,708832 (91) (2,304) (1,037) (131)
Net income (loss) 1,081 (1,163) 6,158 4,816 3,8141,039 394 (1,449) (460) 248
Diluted net income (loss)
per share $0.18 $0.05 ($0.19) ($0.06) $0.03
For discontinued operations:
Net income (loss) ($1,351) $687 $286 $6,618 $4,568
Diluted income (loss) per share ($0.24) $0.10 $0.04 $0.87 $0.63
Net income (loss) ($312) $1,081 ($1,163) $6,158 $4,816
Diluted income (loss) per share ($0.06) $0.15 ($0.15) $0.81 $0.66 $0.61
Shares used in per share
calculations 5,657 7,285 7,548 7,586 7,316 6,206
Consolidated Balance
Sheets Data:
- ----------------------------
Working capital $30,968 $35,065 $34,563 $27,125 $13,919$19,030 $16,981 $22,241 $15,515 $16,880
Total assets 47,760 54,843 52,556 37,035 28,857
Long term obligations -- -- -- -- 25326,877 37,693 41,074 39,929 30,131
Stockholders' equity 21,357 33,923 39,018 39,331 29,697 21,046
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,
--------------------------------
1998 1997 1996 1995
---------- ---------- ----------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 64.6% 68.3% 63.2%10.0% 7.2% 4.5%
---------- ---------- ----------
Gross profit 35.4% 31.7% 36.8%90.0% 92.8% 95.5%
---------- ---------- ----------
Research and development 24.2% 32.7% 48.2%
Sales and marketing 20.0% 16.9% 13.0%
Research and development 8.6% 9.9% 8.5%45.2% 43.1% 58.0%
General and administrative 5.9% 5.5% 4.4%
Restructuring charge -- 1.4% --
Purchased in-process technology -- -- 2.6%15.8% 17.7% 21.8%
---------- ---------- ----------
Operating income (loss) 0.9% -2.0% 8.3%4.8% -0.7% -32.5%
Interest and other income 0.9% 0.3% 0.5%3.9% 5.6% 3.6%
---------- ---------- ----------
Income (loss) before income tax 1.8% -1.7% 8.8%taxes 8.7% 4.9% -28.9%
Provision (benefit) for income tax 0.6% -0.5% 2.0%taxes 2.7% 1.7% -8.5%
---------- ---------- ----------
Net income (loss) 1.2% -1.2% 6.8%6.0% 3.2% -20.4%
========== ========== ==========
Revenues
The Company's revenues decreasedincreased by 5%42% in 19971998 to $91.9$17.4 million from
$96.8$12.2 million in 19961997 and increased by 6%73% in 19961997 from $91.2$7.1 million in
1995.1996. The decreaseincrease in revenue comparedis due primarily to 1996 was attributable to lowerincreased revenues
for display products, with 1997 revenues of $79.6 million
reduced 11% from 1996. This decrease was primarily attributable to lower
prices, though unit shipments in the second half of 1997 were lower than
the same period of 1996. Revenues for software products increased 73%
to $12.3 million in 1997, adjusting for the disposition of the Pegasus
storageInputAccel product line in January, 1997.line.
Gross Profit
Gross profit increased by 6%38% to $32.5$15.7 million in 1998 from $11.4
million in 1997 while increasing 68% in 1997 from $30.7$6.8 million in 1996 while decreasing 9% in 1996 from $33.6 million in 1995.1996.
Gross profit margin increaseddecreased to 35.4%90% in 19971998 from 31.7%93% in 1996.1997. The
increasedecrease in gross profitmargin percent is largely due to the increased
percentage of revenues derived from software maintenance and
gross profit marginprofessional services, which have lower margins than revenues from
1996product licensing. The Company expects revenues from maintenance and
services to 1997 was
due primarilycontinue to increased salesincrease as a percentage of higher margin software products.
While management expects gross margins for 1998 to remain relatively
consistent with 1997, there can be no assurance that the Company's
gross profit and gross margins will not decline in future periods.overall revenues.
Sales and Marketing
Sales and marketing expenses increased by 12%49% in 1998 to $7.9 million
from $5.3 million in 1997 to $18.3 millionand by 28% in 1997 from $16.3$4.1 million in 1996 and by 37% in 1996 from $11.9 million in
1995.1996.
Sales and marketing expenses increaseddecreased as a percentage of revenue from
13.0% in 1995, to 16.9%58% in 1996, and to 20% in 1997. The increases43% in 1997 and 1996 were largely attributedincreased to an increase45% in staffing
associated with an expansion of the Company's sales, marketing and
customer support organizations to support the sales of software
products.1998.
The Company expects that sales and marketing expenses will continue to increase in
the future, in absolute terms, as the Company continues to expand sales
and marketing programs related to software products.programs.
Research and Development
Research and development expenses decreasedincreased by 17%5% in 19971998 to $7.9$4.2
million from $9.6$4.0 million in 19961997 and increased by 23%18% in 19961997 from $7.8$3.4
million in 1995.1996. Research and development expenses have fluctuateddecreased as a
percentage of revenue from 8.6% in 1995 to 9.9%48% in 1996 to 33% in 1997 and to 8.5%24% in
1997. The decrease in 1997 was due to reduced development costs for
display products, partially offset by an increase for software products.
The increase in 1996 was primarily attributed to additional1998.
Current staffing and
technology acquisitions to support the developmentlevels exceed those of new software
products and write-downs of certain display division engineering
equipment totaling $400,000.prior periods. The Company
believes that continued investment in research and development is
critical to its future growth especially for its
software products, and the Company expects towill continue to commit substantial
resources, to research and development.this area. As a result,
quarterly research and development expenses
mayare likely to increase in the near
term.during 1999 and beyond.
General and Administrative
General and administrative expenses increased by 2%27% in 1998 to $2.8
million from $2.2 million in 1997 to $5.4
millionand by 40% in 1997 from $5.3$1.5 million
in 19961996. General and by 32% in 1996 from $4.0 million
in 1995. 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. Asadministrative expenses have decreased as a
percentage of revenue from 22% in 1996 to 18% in 1997 and to 16% in
1998.
The decreases, as a percent to sales, are primarily attributable to
increased revenue levels. Certain general & administrative expenses
have, to date, been absorbed by the recently sold display division.
Accordingly, the Company expects general and administrative expenses increasedto
increase in succeeding future periods.
Divestiture
The sale of the display division resulted in a net loss of $1.4 million,
or 24 cents per share, in 1998. This charge includes a loss from
4.4%display division operations in 1995 to 5.5%
in 1996 and 5.9% in 1997.
Restructuring Charge
In the first quarter of 1996,1998, net of tax
benefit, of $361,000, and an estimated loss of $990,000, net of tax
benefit, on the sale of the net assets of the display division. As a
result of the sale, the Company recordedowns 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 ofminority interest in Cornerstone
Peripherals Technology, Inc., which is reflected as an `other asset' on
the 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.
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.1998 balance sheet.
Interest and Other Income
Interest and other income decreased in 1998 to $675,000 from $688,000 in
1997 and increased in 1997 to $787,000 from $254,000 in 1996 and from $496,000 in 1995. The increase in 1997 resulted from
additional interest earned on larger invested cash balances and exchange
rate gains.1996.
Provision (benefit) for Income Taxes
The provision (benefit) for income taxes as a percentage of pretax
income (loss) was 31%, 34%, and (29)% for 1998, 1997 and 23% for 1997, 1996,
and 1995,
respectively, after being offset by reductions in the deferred tax asset
valuation allowance of $1.2 million in 1995. The reduction in the
valuation allowance was recognized based on expected earnings in future
periods.respectively.
Liquidity and Capital Resources
At December 31, 1997,1998, the Company had cash and cash equivalents of approximately $12.3$14.4
million, a decreasean increase of $6.2$2.2 million from December 31, 1996, while all marketable securities held at December 31, 1996
matured during 1997. At December
31, 1997,1998, the working capital totaled $31.0$19.0 million, a decreasean increase of $4.1$2.0
million from December 31, 1996. At
December 31, 1997, the Company had a line of credit that provides for
the issuance of commercial and standby letters of credit up to $15
million. At December 31, 1997 letters of credit securing inventory
purchases totaling approximately $7.6 million were outstanding under
this agreement. The agreement expires July 1, 1999.1997.
Net cash provided by operating activities was $1.3$15.2 million in 19971998
compared to $9.0 million$253,000 in 1996.1997. The decreaseincrease in net cash provided by
operating activities from 19961997 to 19971998 was due primarily to a decrease
in accounts payable and a slight increaseconversion
to inventory compared to a
significant decrease in 1996. Substantially allcash of various assets from 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.discontinued display operation.
Net cash used for investing activities, was $1.3 million in 1997 compared
to $4.1 million provided by investing activities in 1996, the difference
related primarily to the maturities of marketable securities in 1996.
Additionsexclusively additions to
property and equipment, were $1.3 million and $1.7 million
for 1997 and 1996, respectively.was $821,000 in 1998 compared to $230,000 1997.
On February 20,14, 1997, the Company's Board of Directors authorized the
use of up to $5 million to repurchase the Company's common stock. This
amount was increased to $15 million on Sept 17, 1997.1997, further increased
to $20 million on August 12, 1998, and further increased to $25 million
on February 11, 1999. The repurchased stock is expected to be held by
the Company as treasury stock toand may be used to meet the Company's obligations under its
stock plans and for other corporate purposes. Purchases were 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 arewill be dependent upon
market conditions and other factors. The Company intends to use cash on
hand to fund its purchases. ASince inception of the plan to December 31,
1998, 2.9 million shares have been repurchased for a total of $6.5 million of$19.1
million. 1998 repurchases were made in 1997.totaled $12.6 million.
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 1998.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 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 assurancesassurance 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.
The following consolidated financial statements of the Company and
auditor's report are included in Item 8 and appear following Item 14:
Report of Independent Accountants
Consolidated Balance Sheets - At December 31, 19971998 and
19961997
Consolidated Statements of Operations - Years Ended December
31, 1998, 1997, 1996, and 19951996
Consolidated Statements of Stockholders' Equity - Years
Ended December 31, 1998, 1997, 1996, and 19951996
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997, 1996, and 19951996
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.Diclosure.
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 19971998 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 19981999 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 19981999 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
19981999 Annual Meeting of Stockholders and is incorporated herein by
reference.
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form
10-K8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Financial Statements.Statements
Consolidated Balance Sheets as of December 31,
19971998 and 19961997
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 19971998
Consolidated Statements of Stockholders' Equity for
each of the three years in the period ended
December 31, 19971998
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 31, 19971998
Notes to Consolidated Financial Statements -
Report of Coopers & Lybrand, L.L.P.PricewaterhouseCoopers, LLP
Independent Accountants
2. Financial StatementData Schedule. -- Report of Coopers & Lybrand, L.L.P. Independent
Accountants on Financial StatementForm 10-K
Schedule Schedule VIIIII -- 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.
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.
4.3xx4.3 xx Rights Agreement dated September 9, 1997
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.
21.1+ Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand.PricewaterhouseCoopers, LLP
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)33-
66142), as amended.
++ Incorporated by reference to an exhibit to the Company's 8-K
filed on July 6, 1994.
+++ Incorporated by reference to an exhibit to the Company's 8-K
filed on September 24, 1997.
xx Incorporated by reference to an exhibit to the Company's
Registration Statement on Form 8-A filed on September 10,
1997.
* 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 30, 1998.
CORNERSTONE IMAGING,29, 1999.
INPUT SOFTWARE, INC.
By: /s/ Thomas T. van Overbeek
-----------------------------
Thomas T. van OverbeekKimra Hawley
Kimra Hawley
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-effectivepost-
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-factattorneys-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:
Signature Title Date
- -------------------------- ----------------------------------- -------------
/s/ Thomas T. van OverbeekKimra Hawley President, Chief Executive March 30, 19981999
- -------------------------- Officer and Director
Thomas T. van OverbeekKimra Hawley (Principal Executive Officer)
/s/ John Finegan Vice President, Finance andChief Financial Officer, March 30, 19981999
- -------------------------- Administration and CFO
John Finegan (Principal Financial and Accounting
John Finegan Officer)
/s/ E. David CrockettThomas T. van Overbeek Chairman of the Board March 30, 19981999
- -------------------------- of Directors
E. David CrockettThomas T. van Overbeek
/s/ Stephen J. SheaforJohannes Schmidt Director March 30, 19981999
- --------------------------
Stephen J. SheaforJohannes Schmidt
/s/ James E. Crawford III Director March 30, 19981999
- --------------------------
James E. Crawford III
/s/ Daniel D. Tompkins Director March 30, 19981999
- --------------------------
Daniel D. Tompkins
/s/ Bruce Silver Director March 30, 19981999
- --------------------------
Bruce Silver
CORNERSTONE IMAGING,INPUT SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31,
----------------------
1998 1997 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $14,447 $12,284 $18,486
Marketable securities --
Accounts receivable, net of allowance for doubtful
accounts of $960$559 in 1998 and $409 in 1997 and $750 in 1996 15,887 17,181
Inventories 10,933 10,7104,490 2,946
Prepaid expenses and other current
assets 1,122 816934 942
Deferred income taxes 4,679 4,579 3,697
---------- ----------
Total current assets 44,805 50,89024,550 20,751
Property and equipment, net 2,516 2,8591,208 1,056
Deferred income taxes and other assets 439 1,094943 424
Net assets related to the discontinued Display Division 176 15,462
---------- ----------
$47,760 $54,843$26,877 $37,693
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,609 $10,093$652 $463
Accrued compensation and related liabilities 1,071 1,066
Accrued liabilities 3,212 2,619
Accrued warranty 1,931 1,286969 463
Deferred revenue 1014 7611,694 654
Other accrued liabilities 2,205 2,190
---------- ----------
Total current liabilities 13,837 15,8255,520 3,770
---------- ----------
Commitments and contingency (note 6)
Common stock, $0.01 par value; authorized: 25,000
shares; issued and outstanding: 6,6604,808 shares
and 7,5586660 shares at December 31, 1998 and
1997, and
1996, respectively 48 67 76
Additional paid-in capital 12,512 24,747 30,914
Retained earnings 8,797 9,109 8,028
---------- ----------
Stockholders' equity 21,357 33,923 39,018
---------- ----------
$47,760 $54,843$26,877 $37,693
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
CORNERSTONE IMAGING,INPUT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
--------------------------------
1998 1997 1996 1995
---------- ---------- ----------
Net revenues $91,854 $96,847 $91,156$17,409 $12,240 $7,090
Cost of revenues 59,346 66,147 57,5921,748 881 322
---------- ---------- ----------
Gross profit 32,508 30,700 33,56415,661 11,359 6,768
---------- ---------- ----------
Research and development 4,212 4,016 3,413
Sales and marketing 18,341 16,335 11,877
Research and development 7,888 9,563 7,7587863 5270 4111
General and administrative 5,416 5,299 3,985
Restructuring charge -- 1,404 --
Purchased in-process technology -- -- 2,4072,754 2,164 1,548
---------- ---------- ----------
Operating income (loss) 863 (1,901) 7,537832 (91) (2,304)
Interest and other income 787675 688 254 496
---------- ---------- ----------
Income (loss) before income tax 1,650 (1,647) 8,033taxes 1,507 597 (2,050)
Provision (benefit) for income tax 569 (484) 1,875taxes 468 203 (601)
---------- ---------- ----------
Net income (loss) from continuing operations $1,039 $394 ($1,449)
Discontinued operations:
Net income (loss) from operations of
Discontinued Display Division ($361) $687 $286
Estimated net loss on the sale of Display Division ($990) $0 $0
---------- ---------- ----------
Net income (loss) form discontinued operations ($1,351) $687 $286
Net income (loss) ($312) $1,081 ($1,163) $6,158
========== ========== ==========
Basic EPSand diluted EPS:
For continuing operations $0.18 $0.05 ($0.19)
For discontinued Display Division ($0.24) $0.10 $0.04
Net income (loss) ($0.06) $0.15 ($0.15) $0.86
========== ========== ==========
Diluted EPS $0.15 ($0.15) $0.81
========== ========== ==========
Shares used in Basic EPS calculation 5,657 7,248 7,548 7,202
========== ========== ==========
Shares used in Diluted EPS calculation 5,731 7,285 7,548 7,5867,598
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
CORNERSTONE IMAGING,INPUT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Unrealized
Loss on Total
Common Stock Additional Marketable Stock-
------------------ Paid-in Securities, Retained holders'
Shares Amount Capital Net Earnings Equity
--------- -------- ------------ ----------- ---------- ----------
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 (loss)loss -- -- -- -- (1,163) (1,163)
--------- -------- ------------ ----------- ---------- ----------
Balances, December 31, 1996 7,558 76 30,914 -- 8,028 39,018
Common stock issued under:
Stock option plan 53 -- 116 -- -- 116
Employee Stock Purchase Plan 91 1 447 -- -- 448
Common stock repurchased (1,007) (10) (6,447) (6,457)
Common stock received for Pegasus (35) -- (332) -- -- (332)
Tax benefit from disqualifying
dispositions of common stock -- -- 49 -- -- 49
Net income (loss) -- -- -- -- 1,081 1,081
--------- -------- ------------ ----------- ---------- ----------
Balances, December 31, 1997 6,660 $67 $24,747 $ -- $9,109 $33,923
Common stock issued under:
Stock option plan 2 -- 12 -- -- 12
Employee Stock Purchase Plan 78 1 357 -- -- 358
Common stock repurchased (1,932) (20) (12,604) (12,624)
Net loss -- -- -- -- (312) (312)
--------- -------- ------------ ----------- ---------- ----------
Balances, December 31, 1998 $4,808 $48 $12,512 $0 $8,797 $21,357
========= ======== ============ =========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
CORNERSTONE IMAGING,INPUT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------
1998 1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) ($312) $1,081 ($1,163) $6,158
Adjustments to reconcile net income
(loss) to net cash provided by (used
in)used in operating
activities:
Depreciation and amortization 1,668 1,708 1,218
Loss on asset to be disposed of -- 496 --
Non-recurring charge; purchased
in-process technology -- -- 2,407669 383 259
Discontinued operations 15,286 (988) 7,366
Deferred income taxes (28) (353) (389) (2,699)
(Increase) decrease in assets and
liabilities:
Accounts receivable 1,294 704 (7,084)
Inventories (223) 3,365 (7,807)
Prepaid expenses and other current
assets (306) 1,343 (867)(1,544) (1,318) (1,013)
Other assets 126 238 (66)(583) (315) 1,581
Accounts payable (3,487) 1,268 4,638189 160 161
Accrued compensation and related
liabilities 5 (43) 119506 171 218
Accrued liabilities and deferred
revenue 1,542 1,451 1,8121,055 1,432 1,319
---------- ---------- ----------
Net cash provided by (used
in) operating activities 1,347 8,978 (2,171)15,238 253 8,339
---------- ---------- ----------
Cash flows from investing activities:
Purchase of marketable securities -- -- (4,595) (21,846)
Maturities of marketable securities -- -- 10,365 28,155
Property and equipment additions (1,324) (1,707) (2,603)
Pegasus acquisition, less cash acquired -- -- (632)(821) (230) (1,068)
---------- ---------- ----------
Net cash provided by (used in)
investing activities (1,324) 4,063 3,074(821) (230) 4,702
---------- ---------- ----------
Cash flows from financing activities:
Common stock received from Pegasus sale -- (332) -- --
Repurchase of common stock (12,624) (6,457) --
--
IssuanceNet proceeds from issuance of common stock 370 564 774 658
---------- ---------- ----------
Net cash provided by (used
in) financing activities (12,254) (6,225) 774 658
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 2,163 (6,202) 13,815 1,561
Cash and cash equivalents at beginning of year 12,284 18,486 4,671 3,110
---------- ---------- ----------
Cash and cash equivalents at end of year $14,447 $12,284 $18,486 $4,671
========== ========== ==========
Supplemental cash flow disclosures:
Cash paid during the year for taxes ($997) $1,203 $287 $3,247
Cash paid during the year for interest $ -- $ -- $10
Common stock issued in connection with the
acquisitions $ -- $ -- $2,026
Tax benefit from disqualifying dispositions -- $49 $46 $682
Unrealized holding gain (loss) on marketable
securities, net $ -- $ -- $30 $110
The accompanying notes are an integral part of these
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business of the Company:
Cornerstone Imaging,Input Software, Inc. and subsidiaries (the Company)"Company") develops,
markets, and services information capture software that helps automate
and manage the input of external information into an organization's
internal computing systems. On September 8, 1998 the Company sold its
display productsdivision to its management (see note 3). Accordingly, the
operating results and software products for document image
processing (DIP) and related applications. Substantially allnet assets of the Company's revenues in recent yearsdisplay division have been
attributable to salessegregated from continuing operations and reported as separate line
items on the statements of display products based on its ImageAccel technology, though software
products represented 13% of revenues for 1997operations and have increased at
faster rates than display products in recent years. The ImageAccel
family of graphics controller cards and monitors are used in conjunction
with personal computers and are designed to enhance user productivity by
providing high document legibility and fast image display speeds.balance sheets.
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 TechnologyInput Software GmbH, Cornerstone ImagingInput
Software (UK) Ltd, and Cornerstone Technology International, Inc. All
significant intercompany accounts and transactions have been eliminated.
Restatement and Reclassifications:
The financial statements have been restated for the effects of the
discontinued operations of the display division (see note 3). Certain
reclassifications have been made to prior years financial statements to
conform with the 1998 presentation.
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 data capture and
document image
processingmanagement 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,
significantSignificant technological changes in the industry, including
faster
microprocessors,changes in computing platforms, 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.
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:
RevenuesRevenue is generated from hardwarefour primary sources: licensing of
product, royalties, software maintenance, and software areprofessional services.
Product licensing and royalty revenue is recognized (except as
noted below) upon shipment if no significant vendor obligations remaina
signed agreement exists, the fee is fixed and determinable, collection
of the resulting receivableinvoice amounts are probable, and product returns are reasonably
estimable. Maintenance revenue for ongoing customer support and product
updates is deemed probable. Software
maintenance revenues for supporting and providing upgrades are deferred
and recognized ratably over the period of the maintenance
period whichcontract. Payments for such are generally made in advance and are non-
refundable. Professional service revenue is generally one year.
Training, consulting and implementationrecognized as 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.provided.
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. Costs
associated with trade shows are charged to expense upon completion of
the trade show. The advertising and related promotional expense for the
years ended December 31, 1998, 1997, and 1996 was $722,000, $634,000,
and 1995 was $5.3million, $4.2 million, and $3.3
million,$479,000 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:
The Company hadhas adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earning Per Share (SFAS 128), effective
with the year ended December 31, 1997. SFAS 128which
requires the presentation of basic and diluted EPS. Basic EPS is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for that period.
Diluted EPS is computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential
common shares consist of incremental common shares issuable upon
exercise of stock options, warrants and convertible securities for all
periods.
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows:
Year Ended December 31,
--------------------------------
1998 1997 1996 1995
---------- ---------- ----------
Net income (loss) ($312) $1,081 ($1,163) $6,158
(numerator)
Shares used in basic EPS calculations
(denominator) 5,657 7,248 7,548 7,202
Dilutive effect of stock options -- 37 -- 384
Shares used in diluted EPS calculations 5,657 7,285 7,548
7,586
Basic EPS ($0.06) $0.15 ($0.15)
$0.86
Diluted EPS ($0.06) $0.15 ($0.15) $0.81
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, 1997 and 1996, accounts
receivable from distributors totaled $12.5 million and $11.6 million,
respectively. Substantially all cash and cash
equivalents are held by one bank.
Concentration of Credit Risk:
In accordance with Statement of Financial Accounting Standard No.
52, "Foreign Currency Translation", the assets and liabilities
denominated in foreign currency are translated into U.S. dollars at the
current rate of exchange existing at period end. Gains and losses
resulting from foreign exchange transactions are included in results of
operations.
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.
Recent Pronouncement:
During June 1997,As of January 1, 1998 the Financial Accounting Standards Board issuedCompany adopted Statement of
Financial Accounting Standards No. 130, (""Reporting Comprehensive
Income"("SFAS 130"),
"Reporting Comprehensive Income.". This statement establishes requirements for
disclosure of comprehensive income and becomesits components; however, the
adoption of SFAS 130 had no impact on the Company's net income (loss) or
stockholders' equity.
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
the Companyfinancial statements for fiscal years beginning after December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all
changes in stockholders' equity except those resulting from investments
or contributions by stockholders.1998.
The Company is evaluating alternative
formats for presenting this information, but does not expect that the adoption of this pronouncement to materially impact the Company's results of operations.statement will
have a material impact.
In June 1997,of 1998, the FASBFinancial Accounting Standards Board issued
SFAStatement of Financial Standards No. 131, Disclosures about
segments133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of an Enterprise on Related Information, 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 quarterlyfinancial position 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.measure those instruments at fair
value. The Company has not yet evaluated the effects of this change oron
its reporting segment information.
During October 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-2 ("SOP 97-2"), "Software
Revenue Recognition." This statement establishes requirements for
revenue recognition for software companies for fiscal years beginning
after December 15, 1997.operations. The Company is currently evaluatingwill adopt SFAS 133 as required for its
first quarterly filing of the impactfiscal year 2000.
3. Discontinued Operations
On September 8, 1998 the Company sold its display division to its
current management team. The business now operates as a private company
named Cornerstone Peripherals Technology, Inc. ("CPT") Under the terms
of SOP 97-2the sale the Company sold certain assets and has not determinedtransferred certain
liabilities associated with the result, if any,display division. The Company retained
certain assets, primarily accounts receivable and some inventory, which
were substantially converted to cash by December 31, 1998. The Company
holds a minority equity interest in CPT. Accordingly, the operating
results and net assets of the display division have been segregated from
continuing operations and reported separately on the Company's
financial position, results of operations or cash flows.
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.(see note 6).
4. Balance Sheet Components (in thousands):
Inventories: 1997 1996
--------- ---------
Raw materials $483 $1,645
Work in process 856 1,455
Finished goods 9,594 7,610
--------- ---------
$10,933 $10,710
========= =========
Property and equipment: 1998 1997 1996
--------- ---------
Office equipment and machinery $6,718 $5,812$1,832 $1,541
Software 760 606
Capitalized Software -- 126188 70
Leasehold improvements 1,707 1,317444 1,710
--------- ---------
9,185 7,8612,464 3,321
Less accumulated depreciation
and amortization (6,669) (5,002)(1,256) (2,265)
--------- ---------
$2,516 $2,859$1,208 $1,056
========= =========
4. 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 primeDepreciation expense was approximately $669,000, $383,000, and
are
collateralized by accounts receivable, equipment$259,000 in 1998, 1997, 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. At December 31, 1997
letters of credit securing inventory purchases totaling $7.6 were
outstanding under this agreement.1996 respectively
5. 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,
1998 $ 1,049
1999 214
-------$1,103
2000 988
2001 1,028
2002 1,069
2003 1,112
Subsequent years 192
---------
Total $ 1,263
=======$5,492
=========
Rent expense was approximately $920,000, $957,000,$409,000, $204,000, and $597,000$209,000 in
1998, 1997, 1996, and 1995,1996, respectively.
6. Financial Information for the Display Division
Operating results of the discontinued display division are as follows:
Year Ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Revenue $16,510 $79,614 $89,757
Net income (loss) (361) 687 286
Assets and liabilities:
1998 1997
--------- ---------
Accounts receivable -- $12,941
Inventory -- $10,933
Equipment -- $1,460
Other Assets $1,138 $195
--------- ---------
Total assets $1,138 $25,529
Accounts payable -- $6,146
Accrued Warranty -- $1,931
Deferred revenue -- $360
Accrued Liabilities $962 $1,630
--------- ---------
Total liabilities $962 $10,067
Net Assets $176 $15,462
========= =========
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, 1996,1998,
there were 2,000,000 shares of $.01 par value preferred stock
authorized. No preferred shares were issued and outstanding at December
31, 19961998, 1997, or 1995.1996.
Employee-Stock Purchase Plan: The Board of Directors has reserved
200,000330,000 shares of common stock for issuance under the 1993 Employee
Stock Purchase Plan.Plan and 100,000 shares for issuance under the 1998
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 2,474,8522,674,852 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, 1998, 1997, 1996, and
19951996 is as follows (in thousands except the per share amounts):
Options Outstanding
-------------------------------------------
Shares Weighted-
Available Number average
for of Exercise
Grant Shares Price Per Share Amount Price
-------- ------- ---------------- --------- --------
Balance, December 31, 1994 163 927 $0.40 - $26.00 $9,236 $9.96
Plan Amendment 350
Options granted (646) 646 $13.00 - $25.25 10,047 15.57
Options canceled 157 (157) $0.40 - $26.00 (2,467) 15.71
Options exercised (138) $0.40 - $18.75 (225) 1.63
-------- ------- ---------
Balance, December 31, 1995 24 1,278 $0.40 - $25.25 16,591 12.99
Plan Amendment 500
Options granted (1,396) 1,396 $5.50 - $18.00 12,300 8.81
Options canceled 978 (978) $1.60 - $25.20 (14,476) 14.80
Options exercised (127) $0.40 - $8.63 (173) 1.37
Options expired 174 (174) $1.60 - $20.25 (2,642) 15.14
-------- ------- ---------
Balance, December 31, 1996 280 1,395 $0.40 - $18.50 11,600 8.32
Plan Amendment 400
Options granted (1,068) 1,068 $4.63 - $9.25 7,325 6.86
Options canceled 427 (427) $5.60 - $15.25 (3,554) 8.31
Options exercised (53) $0.40 - $8.63 (115) 2.18
Options expired 88 (88) $3.00 - $15.25 (759) 8.66
-------- ------- ---------
Balance, December 31, 1997 127 1,895 $0.40 - $16.25 $14,497 7.65
Plan Amendment 200
Options granted (523) 523 $4.69 - $7.75 3,471 6.64
Options canceled 540 (540) $1.60 - $15.25 (4,096) 7.59
Options exercised (2) $1.39 - $5.94 (12) 5.42
-------- ------- ---------
Balance, December 31, 1998 344 1,876 $1.39 - $15.75 $13,860 7.39
======== ======= =========
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. 123.123 .
The following table summarizes information with respect toabout the Company's stock
options outstanding at December 31, 1997:1998:
Options Oustanding Options Exercisable
---------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of as of Contractual Exercise as of Exercise
Exercise Prices 12/31/9798 Life (Years) Price 12/31/9798 Price
- ---------------- ----------- ----------- ---------- ------------ ----------
(000s) (000s)
$1.39 - $1.39 3 6.5 $1.39 3 $1.39
$3.00$5.00 309 8.8 $4.97 108 $4.91
$5.06 - $6.88 544 8.9 5.40 57 5.63$6.00 171 8.5 5.66 34 5.65
$6.13 - $7.00 176 9.4 6.59 9 6.80
$7.06 - $8.00 474 8.8 7.55 94 7.84
$8.25 - $9.50 1,298 8.5 8.36 371 8.50711 7.5 8.61 449 8.61
$13.50 - $18.50 50 6.4 14.20 37 14.12$15.75 35 5.5 14.14 27 14.11
----------- ------------
1,895 8.5 $7.65 468 $8.561,876 8.3 $7.39 721 $8.01
=========== ============
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 1998, 1997, and 1996:
1998 1997 1996
and 1995:
Group A Group B--------- --------- ---------
Risk-free interest rates 6.09% 6.14%5.17% 6.12% 6.15%
Expected life 3.23.5 years 3.93.8 years 3.6 years
Volatility 66% 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 1998, 1997,
1996 was $3.36, $3.53 and 1995 was $3.53, $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 PurchaseSto
Plan, under the Black-Scholes valuationvalustion model using the following assumptions
for1997, and 1996:
1998 1997 1996 and 1995:
1997 1996 1995
--------- --------- ---------
Risk-free interest rates 5.17% 5.32% 5.46%
6.77%
Expected life 0.50.50 years 0.50.50 years 0.90.50 years
Volatility 66% 66% 66%
Dividend yield -- -- --
The weighted average fair value of those purchase rights
granted in 1998, 1997 and 1996 was $2.51, $6.11 and 1995 was $6.11, $2.58, and $5.58, respectivelyrespectively.
The following pro forma income information has been prepared
following the provisions of SFAS No. 123 (in thousands except per
share data):
1998 1997 1996 1995
--------- --------- ---------
Net income (loss)- proforma ($1,864) ($1,238) ($4,036) $5,441
Basic EPS - proforma ($0.33) ($0.17) ($0.53) $0.76
Diluted EPS - proforma ($0.33) ($0.17) ($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.
7.8. Significant Customers and Export Revenues:
For theThe Company has adopted SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information, " effective for fiscal years
endedbeginning after December 31 1997, 1996,15, 1997. SFAS No. 131 supercedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", SFAS No.
131 changes current practice under SFAS No. 14 by establishing a new
framework on which to base segment reporting and 1995 one customer
accountedintroduces requirements
for 14%, 12%, and 12%, respectively,interim reporting of segment information.
The Company has determined that it has a single reportable segment
consisting of the Company's
revenues.
Export revenues, principally to Europe, as a percentagedevelopment, marketing and servicing of total
revenues were 32%, 29%,information
capture software. Management uses one measurement of profitability and
29%does not disaggregate its business for internal reporting. Operations
outside the United States primarily consist of sales offices in United
Kingdom and Germany, responsible for the years ended December 31, 1997,
1996,sales activities to foreign
customers, invoiced by the Company's headquarters in the United
States. The foreign subsidiaries do not carry any significant
long-live assets, and 1995, respectively. Incomeincome and assets of the Company's foreign
subsidiaries were not significant. 8. Restructuring Charge:
During 1996,Revenue from external customers by
geographic area for each of 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. Asthree fiscal periods:
1998 1997 1996
--------- --------- ---------
US $12,866 $9,768 $6,077
% of total 74% 80% 86%
International 4,543 2,472 1,013
% of total 26% 20% 14%
For the years ended December 31 1998, 1997, and 1996 no customer
accounted for more than 10% of the Company had completed making such committed payments, terminated all
sales and marketing efforts, and disposed of all inventory related to
this product line.Company's revenues.
9. Acquisitions & Divestitures:
On February 4, 1997, the Company entered into an agreement to sell its
ownership interest in Pegasus.the Pegasus product line. Under the terms of the
agreement the Company received 35,000 shares of the Cornerstone'sInput Software'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.
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.
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.
10. Income Taxes:
Income tax expense (benefit)expense(benefit) consists of (in thousands):
1998 1997 1996 1995
--------- --------- ---------
Current:
Federal -- $444 ($247) $3,589
State and local 2 414 --
985
Foreign -- 47 152 --
--------- --------- ---------
$2 $905 ($95) $4,574
--------- --------- ---------
Deferred:
Federal $160 ($193) ($185)
($2,249)
State and local 58 (143) (204) (450)
--------- --------- ---------
$218 ($336) ($389) ($2,699)
--------- --------- ---------
Total:
Federal $160 $251 ($432) $1,340
State and local 60 271 (204)
535
Foreign -- 47 152 --
--------- --------- ---------
$220 $569 ($484) $1,875
========= ========= =========
The Company's effective tax rate differs from the statutory
federal income tax rate as shown in the following schedule:
1998 1997 1996 1995
--------- --------- ---------
Statutory federal income tax rate 34.0% 34.0% -34.0% 34.0%
State taxes 5.7% 5.8% -6.1% 6.8%
Foreign taxes -- -- 9.2% --
Research and development credits -3.7% -- -- -3.1%
Foreign sales corporation -- -- -2.2%--
Tax exempt interest -- -1.0% -2.2% -1.7%
Change in valuation allowance -- -- -15.4%--
Other, net -4.9% -4.2% 3.7% 4.9%
--------- --------- ---------
31.1% 34.6% -29.4% 23.3%
========= ========= =========
The components of the deferred tax asset (in thousands):
1998 1997 1996
--------- ---------
Deferred tax assets:
Provision for doubtful accounts $223 $362 $676
Inventory reserves -- 1,144 1,001
State taxes -- 104 --
Accrued liabilities 483 1,354 1,257
Depreciation and basis differences 949 950 1,142
Net operating loss carryforwards 2,344 -- 460
Research & development tax
credit carryforwards 770 1,073 115
--------- ---------
Total deferred tax asset $4,769 $4,987 $4,651
========= =========
At December 31, 1997,1998, the Company had $315,497$653,521 of research and
development tax credits and $418,000 of AMT credits available to offset future U.S. federal income
tax. These carryforwards expire in 2012.2013. For California franchise tax
purposes, the Company has research and development credit carryforwards
for $178,712.$384,232.
11. 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 $157,000, $168,000, and $156,000
during 1998, 1997, and $117,000
during 1997, 1996, and 1995, respectively.
12. Stock Repurchases
OnSince February 14, 1997 through February, 1999, the Company's Board
of Directors has authorized the use of up to $5$25 million to repurchase
the Company's common stock. This amount was increased to $15Through December 31, 1998 the Company has
repurchased 2.9 million on September 17, 1997. The
Company repurchased 1 million shares of stock for a total of $6.5
million in 1997.$19.1 million. 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 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 its purchases.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cornerstone Imaging,Input Software Inc.
We have auditedIn our opinion, the accompanying consolidated balance sheetsfinancial statements listed in the
index appearing under Item 14 (a)(1) present fairly, in all material
respects, the financial position of Cornerstone Imaging,Input Software Inc. and its
subsidiaries as ofat December 31, 1998 and 1997, and 1996,the results of their
operations and the related consolidated statements of operations ,
stockholders' equity andtheir cash flows for each of the three years in the
period ended December 31, 1997.1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14 (a) (2)
present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedules are the responsibility of the Company's management. Ourmanagement; our
responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits. We conducted our
audits of these statements in accordance with generally accepted
auditing standards. Those standards which require that we plan and perform the auditsaudit 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 includesstatements, assessing the accounting principles used and significant
estimates made by management, as well asand evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In ourthe 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, 1997 and
1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 31, 1998Calfornia
February 11, 1999
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 21.
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, 1998
CORNERSTONE IMAGING,INPUT SOFTWARE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
Balance at Charged to Balance
beginning costs and at end
Description of year expenses DeductionsWrite-Offs of year
- ---------------------------- ---------- ---------- ---------- ----------
Year ended December 31, 19951998
Allowance for bad debt $491 $254$409 $207 ($47) $698
Inventory reserve $1,149 $29057) $559
Year ended December 31, 1997
Allowance for bad debt $175 $249 ($140) $1,29915) $409
Year ended December 31, 1996
Allowance for bad debt $698 $258$50 $135 ($206) $750
Inventory reserve $1,299 $904 ($813) $1,390
Year ended December 31, 1997
Allowance for bad debt $750 $248 ($38) $960
Inventory reserve $1,390 $1,180 ($845) $1,72510) $175