Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended JuneSeptember 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______to_______
Commission File No. 0-22292
CORNERSTONE IMAGING, INC.
(Exact name of registrant as specified in its charter)
A Delaware Corporation 77-0104275
---------------------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1710 Fortune Drive, San Jose, California 95131
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 435-8900
(No Change)
---------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of JuneSeptember 30, 1997: 7,297,7357,500,461
Part 1. Financial Information
Item 1. Financial Statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
JuneSept 30, Dec. 31,Sept 30,
1997 1996
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $16,097$6,948 $18,486
Accounts receivable 12,29915,654 17,181
Inventories 14,77914,881 10,710
Deferred income taxes and other
current assets 5,8945,664 4,513
-------- --------
Total current assets 49,06943,147 50,890
Property and equipment, net 2,8342,806 2,859
Other assets 597 1,094
-------- --------
Total assets $52,500$46,550 $54,843
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $8,579$4,704 $10,093
Deferred revenue 866831 761
Accrued liabilities 5,1565,454 4,971
-------- --------
Total current liabilities 14,60110,989 15,825
-------- --------
Stockholders' equity:
Common stock 7571 76
Paid in capital 28,87126,569 30,914
Retained earnings 8,9538,921 8,028
-------- --------
Total stockholders' equity: 37,89935,561 39,018
-------- --------
Total liabilities and
stockholders' equity $52,500$46,550 $54,843
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CORNERSTONE IMAGING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended SixNine Months Ended
JuneEnde
Sept 30, JuneSept 30,
------------------- -------------------
1997 1996 1997 1996
--------- -------- -------- --------
Net revenues $21,243 $22,569 $47,257 $40,401$21,436 $26,687 $68,693 $67,088
Cost of revenues 13,277 15,704 30,241 28,15813,882 18,302 44,123 46,460
-------- -------- -------- --------
Gross profit 7,966 6,865 17,016 12,2437,554 8,385 24,570 20,628
Sales and marketing 4,838 3,963 9,209 7,5754,473 4,036 13,717 11,607
Research and development 1,902 2,120 4,307 4,7611,813 2,491 6,120 7,252
General and administrative 1,356 1,366 2,718 2,7211,320 1,251 4,038 3,973
Restructuring charge -- -- -- 1,404
-------- -------- -------- --------
Operating income (loss) (130) (584) 782 (4,218)(52) 605 695 (3,608)
Other income (expense) (69) 31 617 8861 10 677 129
-------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes (199) (553) 1,399 (4,130)9 617 1,372 (3,479)
Provision (benefit) for income taxes (68) (166) 474 (1,230)2 185 479 (1,045)
-------- -------- -------- --------
Net income (loss) $7 $432 $893 ($131) ($387) $925 ($2,900)2,434)
======== ======== ======== ========
Net income (loss) per share ($0.02) ($0.05)$0.00 $0.06 $0.12 ($0.39)0.33)
======== ======== ======== ========
Shares used in per share calculation 7,334 7,438 7,464 7,4317,111 7,558 7,324 7,452
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
SIXNNE MONTHS ENDED
JUNESEPTEMBER 30,
-------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income (loss) $925$893 ($2,900)2,434)
Adjustments to reconcile net income
(loss) to net cash provided by (used in
operating activities:
Depreciation and amortization 889 9951,209 1,464
Changes in assets and liabilities:
Accounts receivable 4,882 1,9691,527 3,444
Inventories (4,069) (2,682)(4,171) 4,577
Deferred income taxes and other assets (1,381) 87(654) (35)
Accounts payable (1,514) (2,651)(5,389) (4,791)
Accrued liabilities and deferred revenue 290 (963)553 99
--------- ---------
Net cash provided by (used in)
operating activities 22 (6,145)(6,032) 2,324
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities -- (4,595)(10,698)
Maturities of marketable securities -- 9,1694,565
Property and equipment additions (734) (1,379)
Proceeds from sale(1,156) (816)
Loss on asset to be disposed of property and equipment -- 674400
--------- ---------
Net cash provided by (used in)used in investing activities (734) 3,869(1,156) (6,549)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 440354 472
Repurchase of common stock (2,057)(4,704) --
--------- ---------
Net cash provided by(used in) financing
activities (1,677) 440(4,350) 472
--------- ---------
Net increase (decrease)decrease in cash and
cash equivalents (2,389) (1,836)(11,538) (3,753)
Cash and cash equivalents at beginning
of period 18,486 4,671
--------- ---------
Cash and cash equivalents at end of
period $16,097 $2,835$6,948 $ 918
========= =========
Unrealized holding (gain) Loss on marketable
securities, net $29$0 $68
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CORNERSTONE IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Unaudited Financial Information:
(UNAUDITED)
The accompanying interim unaudited
consolidated condensed financial statements have been
prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted
accounting principles may have been condensed or omitted
pursuant to such rules and regulations, although management
believes that the disclosures are adequate to make the
information presented not misleading. The December 31, 1996
balance sheet data was derived from audited financial
statements but does not include all disclosures required by
generally accepted accounting principles. The unaudited
financial statements for the three and sixnine month periods
ended JuneSeptember 30, 1997 and 1996 include, in the opinion of
management, all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial
information set herein. The results of operations for the
interim periods is not necessarily indicative of the results
to be expected for an entire year.
Derivatives:
The company uses forward foreign exchange contracts to hedge
liabilities denominated in Japanese yen. For these
instruments, risk reduction is assessed on a transaction
basis and the instruments are designated as, and effective as
a hedge, and are highly inversely correlated to the hedged
item as required by generally accepted accounting principles.
Gains and losses on these hedges are included in the carrying
amount of the liabilities and are ultimately recognized in
income as part of those carrying amounts. If a hedging
instrument ceases to qualify as a hedge, any subsequent gains
and losses are recognized currently in income. The Company
does not use any derivatives for trading or speculative
purposes. If a derivative ceases to qualify for hedge
accounting, it is accounted for on a mark to market basis.
Recent Accounting PronouncementsPronouncements:
During February 1997, the Financial Accounting Standards
Board issued statement 128, Earnings"Earnings Per ShareShare" (SFAS 128),
which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 will become
effective for the Company's fourth quarter of 1997. The
impact of adopting SFAS 128 on the Company's financial
statements has not yet been determined.
In June 1997, the FASB issued SFAS No. 130 Reporting"Reporting
Comprehensive Income.Income". SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its
components in a full set of general purpose financial
statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from
transactions and other events and circumstances from nonownernon-
owner sources. The impact of adopting SFAS No.130, which is
effective for the Company in 1998, has not been determined.
In June 1997, the FASB issued SFAS No. 131, Disclosures"Disclosures
about SegmentsSegments" of an Enterprise and Related Information.
SFAS No. 131 requires publicly-held companies to report
financial and other information about key revenue-producing
segments of the entity for which such information is
available and is utilized by the chief operation decision
maker. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense
items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements
would be provided. SFAS No. 131 is effective for the Company
in 1998 and the impact of adoption has not been determined.
2. INVENTORIES (in thousands):
Inventory:
JuneINVENTORIES:
Sept 30, 1997 DecemberDec 31, 1996
(unaudited)
--------- ---------
Raw materialsMaterials $ 1,132732 $ 1,645
Work in processprogress 1,206 1,455
Finished goods 12,44112,937 7,610
--------- ---------
$ 14,77914,881 $ 10,710
========= =========
3.
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 and issuance of commercial and standby letters of
credit up to the lesser of $15 million or 75% of eligible
receivables. Borrowings under the agreement bear interest at
the bank's base rate and are collateralized by accounts
receivable, equipment, and inventory of the Company. 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 and quarterly operating results. At
JuneSeptember 30, 1997 there were no borrowings under the line of
credit outstanding, and one letter of credit securing
inventory purchases totalling $6.7 million ($800 million yen)
was outstanding.
4. DIVESTITURE:
On February 4, 1997, the Company entered into an
agreement to sell the assets of its Pegasus division. Under
the terms of the agreement, the Company received 35,000
shares of Cornerstone's common stock and a note receivable
totaling approximately $200,000. The impact of this
transaction on the financial position of the Company is not
significant. In addition, the results of operations of
Pegasus for the years ended December 31, 1996 and 1995 are
not material in relation to the Company's consolidated
financial statements.
5. RESTRUCTURING CHARGE:
In the first quarter of 1996, the Company recorded a
one-
timeone-time $1.4 million restructuring charge related to its
decision to cancel its PrintACCELPrintAccel product line. This amount
includes $1.1 million for prepaid royalties, committed
payments for exclusivity rights , engineering services, and a
$270,000 write-down of PrintACCELPrintAccel inventory. During 1996,
the Company had completed making such committed payments,
terminated all sales and marketing efforts, and disposed of
all inventory related to this product line.
6.
INCOME TAXES:
The Company's provision for income taxes reflects the
Company's estimated 1997 annualized effective tax rate of
34%.
7. STOCK REPURCHASE:
On February 14, 1997, the Company's Board of Directors
authorized the use of up to $5 million to repurchase the
Company's common stock. On September 17, 1997 the Board of
Directors authorized repurchases of an additional $5 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 will be made from time-to-time on the
open market or in privately negotiated transactions. The
timing and volume of purchases will be dependent upon market
conditions and other factors. The Company intends to use
cash on hand to fund its purchases. During the sixnine month
period ended JuneSeptember 30, 1997, the Company repurchased
241,300617,800 shares at an average cost per share of $8.52.
8.$6.51.
STOCK OPTION PLAN:
On February 14, 1997, the Company's Board of Directors
authorized an increase in the number of shares reserved for
issuance under the Company's 1993 Stock Option/Stock Issuance
Plan by 400,000 shares to 2,474,852 shares of common stock
for issuance under the Plan. The increase was approved by
stockholders on June 4, 1997.
Item 2 - Management's Discussion9. STOCKHOLDER RIGHTS PLAN:
On September 9, 1997, the Board of Directors of Cornerstone
Imaging, Inc. adopted a Stockholder Rights Plan that is
intended to protect current stockholders' interests in the
event of coercive takeover tactics.
The Plan provides for a dividend distribution of rights to
purchase shares of a newly created Series A Junior
Participating Preferred Stock. Under certain circumstances,
the rights become exercisable to purchase shares of the
common stock of the Company, or securities of an acquiring
entity, at one-half market value. Shareholders of record on
September 9, 1997 were issued one right for each share of
common stock owned.
The issuance of the Rights has no dilutive effect, will not
affect reported earnings per share and Analysis of Financial
Condition and Results of Operations.is not taxable to the
Company or to the stockholder. Stockholders may, under
certain circumstances, recognize taxable income if the Rights
become exercisable.
CORNERSTONE IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS Continued
(UNAUDITED)
This report contains forward looking statementstatements that involve
risks and uncertainties. The statements contained in this
report that are not purely historical are forward looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including
without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the
future. All forward looking statements included in this
report are based on information available to the Company on
the date hereof, and the Company assumes no obligation to
update any such forward looking statements. The Company's
actual results could differ materially from those anticipated
in these forward looking statements as a result of certain
factors.
Factors that might cause such a difference include, but are
not limited to those discussed below and in the section
captioned RISK FACTORS in the Company's most recent Annual
Report on Form 10-K as well as the following: the emergence
of the document image processing market, 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, inherent risks
associated with international sales and international sources
of supply, limited sources of supply and reliance upon third-partythird-
party manufacturers and distributors, and dependence upon key
personnel.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS:
__________________________________________________________________
__________
The Company develops, markets and services hardware and
software products for document image processing (DIP) display
and related applications. In the U.S., the Company is a
leading supplier of display subsystems for DIP systems.
Cornerstone's ImageACCEL subsystems, the first generation of
which was introduced in 1992, consist of controllers,
proprietary software drivers and large screen, high
resolution monitors. In 1994, the Company began providing
DIP software toolkits. In November 1995, the Company began
shipments of InputACCEL, a software product designed to
automate the conversion of documents into electronic images.
Document image processing, which is often used in conjunction
with other computer applications, enables multiple users to
electronically capture, file and retrieve documents. DIP
systems allow users quick access to the actual document
images, require little physical storage space and reduce the
risk of misfiling, theft and accidental loss or destruction
of documents. DIP systems can store any document image,
including photographs, diagrams, letterhead, handwriting, and
other graphic formats.
Substantially all of the Company's revenues in recent years
have been attributable to sales of display subsystems based
on its ImageACCEL technology.technology, though software products
contributed 15% of total revenue in the quarter ended
September 30, 1997. The ImageACCEL family of products are
controller boards and monitors installed on personal
computers and are designed to enhance user productivity by
providing high document legibility and fast image display
speeds. These products, together with existing and planned
software, are expected to account for substantially all of
the Company's future revenues.
The Company's quarterly operating results have in the past
and may in the future vary significantly depending on factors
such as the timing of new product introductions, product mix,
references from DIP systems integrators, changes in pricing
policies by the Company, its competitors or suppliers, market
acceptance of current and new versions of the Company's
products, forecasting of future sales levels, timing of
significant orders, seasonality, relatively long sales cycles
and color monitor lead times. In addition, a
substantial portion of the Company's revenues in each quarter
results from orders booked and shipped in that quarter.
The Company's expenses are based, in part, on its expected
future revenues. As a result, if revenue levels are below
expectations, operating results will likely be adversely
affected because only a small portion of the Company's
expenses vary with its revenues. In recent periods, the
Company has experienced significant seasonality. Revenues
and net income have been stronger in the fourth quarter and
weaker in the first quarter. In 1996, 31% of the Company's
revenues were recognized in the Company's quarter ended
December 31, 1996, and first quarter 19961997 revenues were lower
than fourth quarter 19951996 revenues. The Company expects this
trend to continue in 1997 and 1998.continue. In recent years, the Company has
experienced quarterly income and losses. There can be no
assurance that the Company's revenues will grow in future
periods, or that the Company will achieve profitability on a
quarterly or annual basis. As a result, the Company believes
that period-to-
periodperiod-to-period comparisons of its results of
operations are not necessarily meaningful and should not be
relied on as indications of future performance. Due to all
of the foregoing factors, it is likely that in some future
quarters, the Company's operating results will be below the
expectations of public market analysts and investors. In
such an event, the price of the Company's common stock would
likely be materially adversely affected.
The Company currently sells both colormarket for the Company's display subsystems has become
very competitive in recent quarters and grayscale display
subsystems. The Company expects the sale of lower margin color
subsystems to continue to represent an increasing percentage of
total revenues and at some future date, perhaps all display
revenues.as a result, margins
have declined. There can be no assurance that the Company's
current gross margins will not decline in future periods. In
addition, a significant portion of the Company's sales are
made through systems integrators and distributors and the
Company relies on certain key suppliers for important
components of both color and grayscale displays. There can
be no assurance that the loss of a major system integrator,
distributor, or key supplier would not have a material
adverse effect on the Company's business or results of
operations over the short term, thereby causing fluctuations
in its quarterly results.
The DIP industry is characterized by rapid technological
change, including emergence of faster microprocessors,
frequent new product introductions, and evolving industry
standards. The introduction of products embodying new
technology and the emergence of new industry standards can
create downward price pressure and render existing products
obsolete and unmarketable. Price decreases over the past six
quarters were due, in part, to changing technology that led
to increased competition. The Company's future success will
depend upon its ability to address the increasingly
sophisticated needs of its customers by enhancing its current
products and by developing and introducing on a timely basis
new products that keep pace with technological developments
and emerging industry standards. There can be no assurance
that the Company will be successful in developing and
marketing product enhancements or new products that respond
to technological change or evolving industry standards, that
the Company will not experience difficulties that could delay
or prevent the successful development, introduction, and sale
of these products, or that its new products and product
enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is
unable, for technological or any other reason, to develop,
introduce, and sell its products in a timely manner, the
Company's business, operating results, and financial
condition will be materially adversely affected.
Net Revenues
The Company's net revenues decreased 6.2%19.7% to $21.2$21.4 million
in the secondthird quarter of 1997 from $22.6$26.7 million in the secondthird
quarter of 1996. The decline in revenues was due in large part to slower
than anticipated growth in the market for production document
imaging systems. For the sixnine months ending Juneended September 30,
1997, net revenues increased 17.1%2.4% to $47.3$68.7 million over
revenues of $40.4$67.1 million in the first sixnine months ofended September
30, 1996. The increase in revenue in 1997 compared to 1996 is
due to increased InputAccel software and software tools sales
and higher display unit shipments partially offset by lower
display unit prices. The decline in the third quarter
revenues is due to a decline in unit volumes and average
sales prices of the display product line.
Gross Profit
Gross profit increased 15.9%decreased 9.9% to $8.0$7.6 million in the secondthird
quarter of 1997 from $6.9$8.4 million in the secondthird quarter of
1996. For the sixnine months ended JuneSeptember 30, 1997 gross
profit increased 39.3%19.1% to $17.0$24.6 million from gross profit of
$12.2$20.6 million for the first sixnine months ofended September 30, 1996.
The gross margin was 37.5%35.2% and 30.4%31.4% for the secondthird quarter of
1997 and 1996, respectively, and was 36.0%35.8% and 30.3%30.8% for the
sixnine months ended JuneSeptember 30, 1997 and 1996, respectively.
At the end of the first quarter of 1996 and again at
the beginning of the second quarter of 1997, the Company announced
a significant reduction in the price for most of the Company's
display products. The increase in gross profit infor the first nine months of
1997 relates primarily to higher unit sales and at lower prices per unit together with a
continuing increase in color display subsystems sales.increased software revenues. Sales
of higher margin software products and decreased display
component costs causecaused an increase in the gross margin in
1997. Management expects gross margins for the second half of 1997 to decline somewhat
compared with the first halfnine months of 1997.
Sales and Marketing
Sales and marketing expenses increased 20.0%12.5% to $4.8$4.5 million
in the secondthird quarter of 1997 from $4.0 million in the secondthird
quarter of 1996 and for the six month periodnine months ended JuneSeptember 30,
1997, increased 21.1%18.2% to $9.2$13.7 million over $7.6$11.6 million for
the first
sixnine months ofended September 30, 1996. Sales and marketing
expenses have increased as a percentage of revenue from 18.8%17.3%
for the first sixnine months ofended September 30, 1996 to 19.5%20.0% for the
same period in 1997. The increase in 1997 as a percentage of
revenue is primarily attributable to an increase in staffing associated
with an expansion of the Company's Software
Divisionsoftware division sales
organization and increased marketing and customer support organizations.promotional expenses
for the display division.
The Company expects that sales and marketing expenses will
continue to increase in the future, in absolute terms, as the Company continues
to expand programs related to itsit's software products.
Research and Development
Research and development expenses decreased 9.5%27.2% to $1.9$1.8
million in the secondthird quarter of 1997 from $2.1$2.5 million in the
secondthird quarter of 1996 and for the six month periodnine months ended JuneSeptember
30, 1997, decreased 8.5%15.6% to $4.3$6.1 million from $4.7$7.3 million
for the first sixnine months ofended September 30, 1996. The decreases
were primarily due to staffing reductions in the display
engineering group related to a change in product design
processes, and restructuring of the software
engineering service group.processes.
The Company believes that continued investment in research
and development is critical to its future growth and will
continue to commit substantial resources to this area.
As a result, quarterly
research and development expenses are expected to increase in the
second half of 1997, as compared with the first half of 1997.
General and Administrative
General and administrative expenses increased 5.5% to $1.3
million in the third quarter of 1997 from $1.3 million in the
third quarter of 1996 and for the second quarter andnine months ended September
30, 1997, increased 1.6% to $4.0 million from $4.0 million
for the first sixnine months of 1997 were unchanged from the same periods in
1996 at $1.4 million and $2.7 million respectively. Geberalended September 30, 1996. General and
administrative expenses increased as a percentage of revenues
from 6.2 %4.7% in the secondthird quarter of 1996 to 6.4%6.1% in the secondthird
quarter of 1997.
Restructuring Charge
In the first quarter of 1996 the Companycompany recorded a one-time
$1.4 million restructuring charge related to its decision to
cancel its PrintAccel product line. This amount includes
$1.1 million for prepaid royalties, committed paymentspayment for
exclusivity rights, engineering services, and a $270,000
write-down of PrintAccel inventory. During 1996, the Company
had completed making such committed payments, terminated all
sales and marketing efforts, and disposed of all inventory
related to this product line.
Other Income
Other income (loss)was ($69,000)$61,000 in the secondthird quarter of 1997,
compared to income of $31,000$10,000 in the secondthird quarter of 1996. Other
income for the sixnine month period ended JuneSeptember 30, 1997
increased 601.1%424.8% to $617,000$677,000 from $88,000$129,000 for the sixnine month
period ended JuneSeptember 30, 1996.1997. The increase is the result
of net foreign exchange gains in 1997 of approximately $238,000$.5
million related to inventory purchased from Japanese
suppliers together with increased interest from higher
investing levels. Foreign exchange gains in 1996 were not
significant. The Company earned interest income primarily as
a result of funds invested in debt securities.
Benefit (Provision)Provision (Benefit) for Income Taxes
The Company's effective income tax rate as a percentage of
pretax income was 34%34.9% and 30%30.0% for the second quarter of 1997nine month periods
ended September 30, 1996 and 1996,
respectively, and 34% and 29.8% for the six month period ended
June 30, 1997 and 1996 respectively.1997.
Recent Accounting Pronouncements
During February 1997, the Financial Accounting Standards
Board issued statement 128, Earnings Per Share (SFAS 128),
which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 will become
effective for the Company's fourth quarter of 1997. The
impact of adopting SFAS 128 on the Company's financial
statements has not yet been determined.
In June 1997, the FASB issued SFAS No. 130 Reporting"Reporting
Comprehensive Income.Income". SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its
components in a full set of general purpose financial
statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from
transactions and other events and circumstances from nonownernon-
owner sources. The impact of adopting SFAS No.130, which is
effective for the Company in 1998, has not been determined.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No.
131 requires publicly-held companies to report financial and
other information about key revenue-producing segments of the
entity for which such information is available and is
utilized by the chief operation decision maker. Specific
information to be reported for individual segments includes
profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment financial information to
amounts reported in the financial statements would be
provided. SFAS No. 131 is effective for the Company in 1998
and the impact of adoption has not been determined.
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
At JuneSeptember 30, 1997, the Company had cash and marketable
securities of approximately $16.1$6.9 million, a decrease from
$18.5 million at December 31, 1996, and working capital
totaling $34.5$32.1 million, aand decrease from $35.1of $2.9 million atsince
December 31, 1996. Net cash used in operating activities was
$6.0 million in the first nine months of 1997 compared to
$2.3 million for the first nine months of 1996. The decrease
in the cash provided by operating activities for the nine
months ended September 30, 1997 results primarily from
increased inventory levels and reduced accounts payable.
At JuneSeptember 30, 1997, the Companycompany had a line of credit that
provides for the issuance of commercial and standby letters
of credit up to the lesser of $15 million or 75% of eligible
receivables. At June 30,
1997,September 30,1997, one such letter of credit
securing inventory purchases totaling approximately $7.0$6.7
million
(800 million yen) was outstanding under thisthe agreement. Net cash provided by operating
activities was $22,000 in the first six months of 1997 compared to
net cash used in operating activities of $6.1 million for the
first six months of 1996. Substantially, all of the Company's
sales are made to distributors, system integrators, and OEMs and
the Company believes that significant levels of inventory and
receivables are needed to provide ready availability of its
products to its distribution channels.
Additions to property and equipment were $734,000$1.2 million and
$1.4 million$816,000 for the first sixnine months of 1997 and 1996,
respectively. Net cash used in investing activities was $734,000$1.2
million for the first sixnine months of 1997, compared to net cash provided of $3.9$6.5
million in the first sixnine months of 1996. Cash provided by
investing activities is related primarily to maturities of
short term investments.
On February 14, 1997, the Company's Board of Directors
authorized the use of up to $5.0 million to repurchase the
Company's common stock. On September 17, 1997 the Board of
Directors authorized repurchase of an additional $5 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 will be made from time-to-time on the
open market or in privately negotiated transactions. The
timing and volume of purchases will be dependent upon market
conditions and other factors. The Company intends to use
cash on hand to fund its purchases. During the sixnine month
period ended JuneSeptember 30, 1997, the Company repurchased
241,300617,800 shares at an average cost per share of $8.52.$6.51.
The Company believes that its cash and cash equivalents
together with cash flows from operations, and the existing line of credit will be sufficient
to meet the Company's liquidity and capital requirements for
the next 12 months. The Company may, however, seek
additional equity or debt financing to fund further
expansion. The timing and amount of such capital
requirements cannot be precisely determined at this time and
will depend on a number of factors, including demand for the
Company'sCompany '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 assurance that additional financing would be available
or that, if available, such financing would be available on
terms favorable to the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On June 4, 1997, the Company held its 1996 Annual
Meeting of Stockholders at the Company's headquarters in San Jose,
California. At the meeting, the stockholders were asked to: (I)
elect Thomas T. van Overbeek, James Crawford III, E. David
Crockett, Stephen J. Sheafor, Bruce Silver and Daniel D. Tompkins
as the members of the Board of Directors for 1997; (ii) approve an
amendment to the Company's 1993 Stock Option/Stock Issuance Plan
to increase the number of shares of Common Stock for issuance
thereunder by 400,000 shares to 2,474,852 shares; and (iii) ratify
the selection of Coopers & Lybrand as the Company's independent
auditors for fiscal year 1997.
As of the April 15 1997 record date established for
the annual meeting, there were 7,554,505 shares of Common Stock
issued and outstanding, all of which were entitled to vote.
Present in person or by proxy at the meeting were stockholders
representing 6,244,660 shares. Such shares represented 82.7%, a
quorum, of the total number of shares outstanding and entitled to
vote. All of the proposals, and all nominees to the board of
directors, were approved by the stockholders. 5,713,888 shares
voted for approval of the nominees to the board of directors,
527,972 shares against, 1,722,568 shares voted for approval of the
amendment to the Company's 1993 Stock Option/Stock Issuance Plan,
996,608 shares voted against, 34,155 shares abstained and there
were 3,491,329 broker nonvotes. 6,200,853 shares voted for
ratification of the selection of Coopers & Lybrand as the
Company's independent auditors, 17,135 shares voted against,
26,672 shares abstained and there were zero broker nonvotes.
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K - Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNERSTONE IMAGING, INC.
------------------------------
Registrant
Date: August 8, 1997November 11,1997 /s/ John Finegan
------------------------------
John Finegan
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Description
- - --------- ------------------------------------------------------------
11.1 Statement of Computation of Earnings per Share
27 Financial Data Schedule