Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended September 30, 1997March 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______to_______
Commission File No. 0-22292
CORNERSTONE IMAGING, INC.
(Exact name of registrant as specified in its charter)
A Delaware Corporation 77-0104275
---------------------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1710 Fortune Drive, San Jose, California 95131
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 435-8900
(No Change)
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of September 30, 1997: 7,500,461March 31, 1998: 6,216,299
Part 1. Financial Information
Item 1. Financial Statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
Sept 30, Sept 30,March 31, December 31,
1998 1997
1996
-------- ------------------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $6,948 $18,486.................... $12,138 $12,284
Accounts receivable 15,654 17,181
Inventories 14,881 10,710receivable........................... 2,768 2,946
Deferred income taxes and
other current assets 5,664 4,513
-------- --------assets....................... 5,499 5,521
----------- -----------
Total current assets 43,147 50,890assets........................ 20,405 20,751
Property and equipment, net 2,806 2,859net..................... 900 1,056
Other assets.................................... 424 424
Net assets 597 1,094
-------- --------
Total assets $46,550 $54,843
======== ========related to the
discontinued display division.............. 10,713 15,462
----------- -----------
$32,442 $37,693
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,704 $10,093payable.............................. $374 $463
Deferred revenue 831 761revenue.............................. 783 654
Accrued liabilities 5,454 4,971
-------- --------liabilities........................... 2,310 2,653
----------- -----------
Total current liabilities 10,989 15,825
-------- --------liabilities................... 3,467 3,770
----------- -----------
Stockholders' equity:
Common stock 71 76stock.................................. 63 67
Paid in capital 26,569 30,914capital............................... 22,413 24,747
Retained earnings 8,921 8,028
-------- --------
Total stockholders' equity: 35,561 39,018
-------- --------
Total liabilities and
stockholders' equity $46,550 $54,843
======== ========earnings............................. 6,499 9,109
----------- -----------
Stockholders' equity........................ 28,975 33,923
----------- -----------
$32,442 $37,693
=========== ===========
The accompanying notes are an integral part of these consolidated
condensed financial statements.statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
Nine Months Ende
Sept 30, Sept 30,March 31,
-------------------
-------------------1998 1997
1996 1997 1996
--------- -------- -------- -----------------
Net revenues $21,436 $26,687 $68,693 $67,088from continuing
operations...................... $3,387 $2,519
Cost of revenues 13,882 18,302 44,123 46,460
-------- -------- -------- --------revenues.................. 425 171
--------- ---------
Gross profit 7,554 8,385 24,570 20,6282,962 2,348
Sales and marketing 4,473 4,036 13,717 11,607marketing............... 1,476 1,172
Research and development 1,813 2,491 6,120 7,252development.......... 1,072 1,090
General and administrative 1,320 1,251 4,038 3,973
Restructuring charge -- -- -- 1,404
-------- -------- -------- --------administrative........ 507 509
--------- ---------
Operating income (loss) (52) 605 695 (3,608)
Other income 61 10 677 129
-------- -------- -------- --------loss.................. (93) (423)
Interest income/other............. 143 186
--------- ---------
Income (loss) before
provision
(benefit) for income taxes 9 617 1,372 (3,479)taxes................. 50 (237)
Provision (benefit) for
income taxes 2 185 479 (1,045)
-------- -------- -------- --------taxes................. 15 (81)
--------- ---------
Net income (loss) $7 $432 $893 ($2,434)
======== ======== ======== ========from
continuing operations........ 35 (156)
Discontinued operations:
Income (loss) from operations
of display division (net of
income tax benefit of $143
in 1998 and tax provision
of $623 in 1997)................ (361) 1,211
Estimated net loss on sale of
display division (net of
income tax benefit of $1,522)... (2,284) --
--------- ---------
Net income (loss) per share $0.00 $0.06 $0.12from
display division.............. (2,645) 1,211
--------- ---------
Net income (loss), consolidated. ($0.33)
======== ======== ======== ========2,610) $1,055
========= =========
Basic and diluted EPS:
Income (loss) from
continuing operations........ $0.01 ($0.02)
Income (loss) from
discontinued operations...... (0.06) 0.16
Estimated loss on sale of
display division............. (0.36) --
--------- ---------
Net income (loss)............... ($0.41) $0.14
========= =========
Shares used in per share calculation 7,111 7,558 7,324 7,452
======== ======== ======== ========EPS calculations:
Basic ......................... 6,375 7,508
Diluted........................ 6,394 7,577
========= =========
The accompanying notes are an integral part of these consolidated
condensed financial statements
CORNERSTONE IMAGING, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
NNE MONTHS ENDED
SEPTEMBER 30,Three Months Ended
March 31,
-------------------
1998 1997 1996
--------- ---------
Cash flows from operating activities:
Net income (loss) $893...................................... ($2,434)2,610) $1,055
Adjustments to reconcile net income
(loss) to net cash provided by
(used in
operating activities:
Depreciation and amortization 1,209 1,464
Changesamortization........................ 230 175
Discontinued operations 4,749 2,214
(Increase) decrease in assets and liabilities:
Accounts receivable 1,527 3,444
Inventories (4,171) 4,577receivable................................. 178 130
Deferred income taxes and other assets (654) (35)assets.............. 22 (928)
Accounts payable (5,389) (4,791)payable.................................... (89) 95
Accrued liabilities and deferred revenue 553 99revenue............ (214) 1,659
--------- ---------
Net cash provided by (used in)
operating activities (6,032) 2,324activities........... 2,266 4,400
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities -- (10,698)
Maturities of marketable securities -- 4,565
Property and equipment additions (1,156) (816)
Loss on asset to be disposed of -- 400additions....................... (74) (133)
--------- ---------
Net cash provided used in investing activities (1,156) (6,549)activities............... (74) (133)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 354 472
Repurchase of common stock (4,704) --stock............................. (2,338) (743)
--------- ---------
Net cash provided by(used in)in financing activities (4,350) 472activities............... (2,338) (743)
--------- ---------
Net decrease in cash and cash equivalents (11,538) (3,753)equivalents............... (146) 3,524
Cash and cash equivalents at beginning of periodperiod........ 12,284 18,486 4,671
--------- ---------
Cash and cash equivalents at end of period $6,948 $ 918
========= =========
Unrealized holding (gain) Loss on marketable
securities, net $0 $68period.............. $12,138 $22,010
========= =========
The accompanying notes are an integral part of these consolidated
condensed financial statements.statements
CORNERSTONE IMAGING, INC.
NOTES TO CONSOLIDATED CONDENSED 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,
19961997 balance sheet data was derived from audited financial statements
contained in the Company's 1997 10k report but does not include all
disclosures required by generally accepted accounting principles. In
addition, assets and liabilities related to the pending sale and
discontinuation of the display division have been restated from the
audited balance sheet. The unaudited financial statements for the three
and nine month periods ended September 30,March 31, 1998 and 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 isare 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 andRecent Pronouncements:
As of January 1, 1998 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
amountCompany adopted Statement 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 Pronouncements:
During February 1997, the Financial
Accounting Standards Board issuedNo. 130, "Reporting Comprehensive Income"("SFAS
130"). This statement 128, "Earnings Per Share" (SFAS 128),
which specifies the computation, presentation and disclosureestablishes requirements for earnings per share.disclosure of
comprehensive income and its components; however, the adoption of SFAS
128 will become
effective for the Company's fourth quarter of 1997. The130 had no impact of adopting SFAS 128 on the Company's financial
statements has not yet been determined.net income (loss) or stockholders'
equity.
In June 1997 the FASB issued SFAS No. 130 "Reporting
Comprehensive Income". SFAS No. 130 establishes standards
for the reporting and displayStatement 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 non-
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 SFASFinancial Accounting
Standards No. 131, "Disclosures about Segments"segments of an Enterprise andon
Related Information.Information"("SFAS 131"), which changes the way public
companies report information about operating segments. SFAS No. 131,
requires publicly-held companieswhich is based on the management approach to segment reporting,
establishes requirements to report financialelected segment information quarterly
and other informationto report entity-wide disclosures about key revenue-producing
segmentsproducts and services, major
customers and the major countries in which the entity holds assets and
reports revenues. The Company has not yet evaluated the effects of this
change or its reporting segment information.
As of January 1, 1998 the Company has adopted the provisions of
Statement of Position 97-2, ("SOP 97-2"), "Software Revenue
Recognition, as amended by SOP 98-4 "Deferral of Effective Date of
Certain Provisions of SOP 97-2". This statement establishes
requirements for revenue recognition for software companies. Under SOP
97-2, the Company recognizes product revenues and license fees upon
shipment if a signed contract exists, the fee is fixed and determinable,
collection of resulting receivables is probable and product returns are
reasonably estimable. In addition, for contracts with multiple
obligations (e.g. deliverable and undeliverable products, service, and
maintenance), revenue must be allocated to each component of the
entitycontract based on evidence of its fair value. Revenue allocated to
undelivered products is recognized when the criteria for which such informationproduct and
license revenue set forth above are met. Revenue allocated to
maintenance fees for ongoing customer support and updates is availablerecognized
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 utilized byeffective for
financial statements for fiscal years beginning after December 15, 1998.
The Company has not yet determined 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 reconciliationimpact, if any, of segment financial
information to amounts reported inthe adoption
of this statement on the financial statements would be provided. SFAS No. 131 is effective forof the Company
in 1998 and the impact of adoption has not been determined.
INVENTORIES:
Sept 30, 1997 Dec 31, 1996
(unaudited)
Raw Materials $ 732 $ 1,645
Work in progress 1,206 1,455
Finished goods 12,937 7,610
$ 14,881 $ 10,710Company.
2. LINE OF CREDIT: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 September 30, 1997 there were no borrowings under the line of
credit outstanding, and one letterMarch 31, 1998 letters of credit securing inventory
purchases totalling $6.7totaling approximately $6.5 million ($800were outstanding under
this agreement.
3. DIVESTITURES:
On April 17, 1998, the Company entered into a non-binding letter
of intent to sell its display division to the current management team
led by John Noellert, General Manager of the display division.
Commensurate with the sale, estimated to be completed on or about June
30, 1998, the Company will be renamed Input Software, Inc. Upon
completion of the sale, the display division will operate as a private
company named Cornerstone Display Technology, Inc. Under the terms of
the letter, the Company will sell certain assets and transfer certain
liabilities associated the display division. In addition, the Company
will retain certain assets, including accounts receivable and certain
inventory. The value of the inventory will be realized by the Company
through the sale, on its behalf, of that inventory by Cornerstone
Display Technology, Inc. The Company estimates it will receive proceeds
of $10.7 million yen)
was outstanding.
4. DIVESTITURE:for receivables and inventory less transaction expenses
and certain display division liabilities. The letter provides that the
Company will also hold a $1.5 million subordinated note, payable over
three years, and a minority equity interest in Cornerstone Display
Technology, Inc. The minority interest may be repurchased in the first
two years by Cornerstone Display Technology, Inc. for $1.5 million. As a
result of the transaction, the Company has recorded a loss of
approximately $2.6 million for the quarter ended March 31, 1998. All
financial statements have been restated to account for the display
division as a discontinued operation.
On February 4, 1997, the Company entered into an agreement to sell
the assets of its Pegasus division.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 iswas 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.
RESTRUCTURING CHARGE:
In the first quarter of 1996, the Company recorded a
one-time $1.4 million restructuring charge related to its
decision to cancel its PrintAccel product line. This amount
includes $1.1 million for prepaid royalties, committed
payments 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.4. INCOME TAXES:
The Company's provision for income taxes reflectsreflect the Company's
estimated 19971998 annualized effective tax rate of 34%30%.
7.5. 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.
OnThis amount was increased to $15 million on September 17, 19971997. 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 it purchases. During the three months ended
March 31, 1998, the Company repurchased 443,500 shares at an average
cost per share of $5.27 bringing the cumulative repurchases since the
inception of the program to 1.45 million shares.
6. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS :
On March 14, 1998, the Company's Board of Directors authorized repurchasesan
increase in the number of shares reserved for issuance under the
Company's 1993 Stock Option/Stock Issuance Plan by 200,000 shares to
2,674,852 shares of common stock for issuance under the Plan. On the
same date the Board also approved 100,000 shares for issuance under the
1998 Employee Stock Purchase Plan. The proposed increases are still
subject to shareholder approval.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Quarterly Report on Form 10-Q may contain forward-looking
statements that involve risks and uncertainties. The Company's actual
results may differ materially from the results discussed in any such
forward-looking statements. Factors that might cause such a difference
include, but are not limited to those discussed below and in the section
captioned RISK FACTORS in the Company's most recent Annual Report on
Form 10-K.
RESULTS OF OPERATIONS:
In recent years the majority of the Company's revenues have been
attributable to sales of display products. However, the Company's
software business has grown more rapidly than its display business in
the past three years and on April 17, 1998 the Company entered into a
letter of intent to sell its display products division. Upon completion
of this sale, the Company will be renamed to Input Software, Inc. and
will exclusively develop, market, and service software products for
enterprise computing applications. In 1994, the Company began providing
software toolkits for scanning and DIP applications. In November 1995,
the Company began shipments of InputAccel-- a software product designed
to automate the conversion of documents into electronic images.
The Company's software tools allow integrators and software
developers to save both time and money by offering stable, supported
libraries of software code to drive DIP peripherals rather than having
to develop such software themselves. Most of these tools are based on
Cornerstone's Image & Scanner Interface Specification ("ISIS"), an
industry standard interface for scanners. ISIS provides a key component
for InputAccel; a software product designed to automate the conversion
of documents into electronic images. InputAccel , now the Company's
flagship product, is a data capture system that lets organizations
integrate incoming documents-paper, fax, microfilm-with enterprise
workflow and document management systems. InputAccel is a customizable,
open architecture software product that runs under Windows NT.
The Company's products are used by a diverse set of
customers in a wide variety of applications, such as insurance claim
processing, loan application processing, FDA submissions, and the
storage of personnel records and technical manuals. Most often, data
capture systems are used by large, service-oriented companies and
government agencies for which document management or transaction
processing is critical. Data capture, which is often used in
conjunction with document image processing, document management, and
other computer applications, enables multiple users to electronically
capture, file, and retrieve documents. Hence the Company's products are
often sold through or in conjunction with systems integrators and value
added resellers.
RISK FACTORS:
Limited Software Operating History; History of Losses; Future Operating
Results Uncertain
The Company has operated its Software Division since June 1994.
Accordingly, the Company's prospects must be considered in light of the
risks and difficulties frequently encountered by companies in the early
stage of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things,
respond to competitive developments, continue to attract, retain and
motivate qualified personnel and continue to improve its products. For
the past several years, the Company has been investing in its software
business and as a result, on a stand alone basis, the Software Division
has not achieved operating profitability and has incurred net losses in
each quarter from inception through the quarter ending June 30, 1997.
As of March 31, 1998, the Company's Software Division had cumulative
pre-tax operating losses of approximately $3.6 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 organizations. The Company expects to continue to devote
substantial resources to these areas and as a result will need to
recognize significant quarterly revenues to achieve profitability. In
particular, the Company intends to continue to hire additional sales and
research and development personnel in 1998 and beyond, which the Company
believes is required if the Company is to achieve significant revenue
growth in the future. Although the Company's software related revenues
generally have increased in recent periods, there can be no assurance
that the Company's revenues will grow in future periods, that they will
grow at past rates or that the Company will remain profitable on a
quarterly or annual basis in the future.
Operating Results Subject to Significant Fluctuations; Seasonality
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly in
the future due to a variety of factors, such as demand for the Company's
products, the size and timing of significant orders and their
fulfillment, the number, timing and significance of product enhancements
and new product announcements by the Company and its competitors,
changes in pricing policies by the Company or its competitors, customer
order deferrals in anticipation of enhancements or new products offered
by the Company or its competitors, the ability of the Company to
develop, introduce and market new and enhanced versions of its products
on a timely basis, changes in the Company's level of operating expenses,
budgeting cycles of its customers, product life cycles, software defects
and other product quality problems, the Company's ability to attract and
retain qualified personnel, changes in the Company's sales incentive
plans, changes in the mix of domestic and international revenues, the
level of international expansion, foreign currency exchange rate
fluctuations, performance of indirect channel partners, changes in the
mix of indirect channels through which the Company's products are
offered, the impact of acquisitions of competitors and indirect channel
partners, the Company's ability to control costs and general domestic
and international economic and political conditions. The Company
operates with virtually no order backlog because its software products
are shipped shortly after orders are received, which makes product
revenues in any quarter substantially dependent on orders booked and
shipped throughout that quarter. As a result, if orders in the first
month or two of a quarter fall short of expectations, it is unlikely
that the Company will be able to meet its revenue targets for that
quarter. In addition, the Company achieves a significant portion of
revenues from indirect sales channels over which the Company has little
or no control. Moreover, the Company's expense levels are based to a
significant extent on the Company's expectations of future revenues and
therefore are relatively fixed in the short term. If revenue levels are
below expectations, operating results are likely to be adversely and
disproportionately affected because only a small portion of the
Company's expenses vary with its revenues.
The Company's business has experienced and is expected to continue to
experience seasonality, largely due to customer buying patterns. In
recent years, the Company has had relatively stronger demand for its
products during the quarter ending December 31 and demand has been
relatively weaker in the quarter ending March 31. The Company believes
that this pattern will continue. Based upon all of the factors described
above, the Company believes that its quarterly revenues, expenses and
operating results are likely to vary significantly in the future, that
period-to-period comparisons of its operating results are not
necessarily meaningful and that, in any event, such comparisons should
not be relied upon as indications of future performance. The Company
has limited ability to forecast future revenues, and it is likely that
in some future quarter the Company's operating results will be below the
expectations of public securities analysts and investors. In the event
that operating results are below expectations, or in the event that
adverse conditions prevail or are perceived to prevail generally or with
respect to the Company's business, the price of the Company's Common
Stock would likely be materially adversely affected.
Significant Competition
The market for the Company's products is intensely competitive and
subject to rapid change. In addition, because there are relatively low
barriers to entry in the software market, the Company may encounter
additional competition from other established and emerging companies.
Many of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other
resources than the Company, significantly greater name recognition and a
large installed base of customers. As a result, the Company's
competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of competitive
products, than can the Company. There is also a substantial risk that
announcements of competing products by large competitors could result in
the cancellation of customer orders in anticipation of the introduction
of such new products. In addition, current and potential competitors
have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their
products to address customer needs and which may limit the Company's
ability to sell its products through particular reseller partners.
Accordingly, new competitors or alliances among current and new
competitors may emerge and rapidly gain significant market share. The
Company also expects that competition will increase as a result of
software industry consolidation. Increased competition is likely to
result in price reductions, fewer customer orders, reduced margins and
loss of market share, any of which could materially adversely affect the
Company. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that the
competitive pressures faced by the Company will not materially adversely
affect its business, operating results and financial condition.
Product Concentration
The Company currently expects the sale and license of its InputAccel
products, and these products are currently expected to account for
substantially all of the Company's revenues for the foreseeable future.
The Company's future operating results are dependent upon continued
market acceptance of its InputAccel products and enhancements to these
products. Consequently, a decline in the demand for, or market
acceptance of, the Company's InputAccel products as a result of
competition, technological change or other factors, would have a
material adverse effect on the Company's business, operating results and
financial condition.
Dependence on Continued Growth of the Market for Document Management
Applications
Although demand for document capture software for document management
applications has grown in recent years, this market is still emerging
and there can be no assurance that it will continue to grow or that,
even if the market does grow, organizations will continue to adopt the
Company's products. The Company has spent, and intends to continue to
spend, considerable resources educating potential customers about the
Company's software products and the document processing market
generally. However, there can be no assurance that such expenditures
will enable the Company's products to achieve any additional degree of
market acceptance. The rate at which organizations have adopted the
Company's products has varied significantly and the Company expects to
continue to experience such variations in the future. There can be no
assurance that the market for the Company's products will continue to
develop or that the Company's products will be widely accepted. If the
markets for the Company's products fail to develop, or develop more
slowly than the Company currently anticipates, the Company's business,
operating results and financial condition would be materially adversely
affected.
Rapid Technological Change and New Products
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and
enhancements, uncertain product life cycles, changes in customer demands
and evolving industry standards. The introduction of products embodying
new technologies and the emergence of new industry standards can render
existing products obsolete and unmarketable. The Company's future
success will depend upon its ability to continue to enhance its current
products and to develop and introduce new products on a timely basis
that keep pace with technological developments and satisfy increasingly
sophisticated customer requirements. As a result of the complexities
inherent in document image processing software, new products and product
enhancements can require long development and testing periods. As a
result, significant delays in the general availability of such new
releases or significant problems in the installation or implementation
of such new releases could have a material adverse effect on the
Company's business, operating results and financial condition. The
Company has experienced delays in the past in the release of new
products and new product enhancements. There can be no assurance that
the Company will be successful in developing and marketing, on a timely
and cost effective basis, new products or new product enhancements that
respond to technological change, evolving industry standards or customer
requirements, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction or
marketing of these products or that the Company's new products and
product enhancements will achieve market acceptance.
Risk of Software Defects
Software products as complex as those offered by the Company may contain
errors or defects, particularly when first introduced or when new
versions or enhancements are released. The Company has in the past
discovered software errors in certain of its new products after their
introduction. There can be no assurance that, despite testing by the
Company, defects and errors will not be found in current versions, new
versions or enhancements of its products after commencement of
commercial shipments, resulting in loss of revenues or delay in market
acceptance, which could have a material adverse effect on the Company's
business, operating results and financial condition.
Year 2000 Compliance
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of
ways. Many companies are expending significant resources to correct or
patch their current software systems for Year2000 compliance. These
expenditures may result in reduced funds available to purchase software
products such as those offered by the Company. Potential customers may
also choose to defer purchasing Year 2000 compliant products until they
believe it is absolutely necessary, thus resulting in potentially
stalled market sales within the industry. Conversely, Year 2000 issues
may cause other companies to accelerate purchases, thereby causing an
increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues could
cause a significant number of companies, including current Company
customers, to reevaluate their current software needs, and as a result
switch to other systems or suppliers. Any of the foregoing could result
in a material adverse effect on the Company's business, operating
results and financial condition.
Risks Associated with International Sales and Operations
The Company anticipates that for the foreseeable future a significant
portion of its revenues will be derived from sources outside North
America and the Company intends to continue to expand its sales and
support operations internationally. In order to successfully expand
international sales, the Company must establish additional foreign
operations, expand its international sales channel management and
support organizations, hire additional personnel, customize its products
for local markets, recruit additional international resellers and
increase the productivity of existing international resellers. To the
extent that the Company is unable to do so in a timely and cost-
effective manner, the Company's sales growth internationally, if any,
will be limited, and the Company's business, operating results and
financial condition could be materially adversely affected. Even if the
Company is able to successfully expand its international operations
there can be no assurance that the Company will be able to maintain or
increase international market demand for its products.
The Company's international operations are generally subject to a number
of risks, including costs of customizing products for foreign countries,
protectionist laws and business practices favoring local competition,
dependence on local vendors, compliance with multiple, conflicting and
changing government laws and regulations, longer sales cycles, greater
difficulty or delay in accounts receivable collection, import and export
restrictions and tariffs, difficulties in staffing and managing foreign
operations, foreign currency exchange rate fluctuations, multiple and
conflicting tax laws and regulations and political and economic
instability. To date, a majority of the Company's revenues and costs
have been denominated in U.S. dollars. However, the Company believes
that in the future, an increasing portion of the Company's revenues and
costs will be denominated in foreign currencies. Although the Company
may from time to time undertake foreign exchange hedging transactions to
reduce its foreign currency transaction exposure, the Company does not
currently attempt to eliminate all foreign currency transaction
exposure.
Dependence on Key Personnel
The Company's success depends to a significant extent upon the efforts
of its key management, sales and marketing, technical support and
research and development personnel, none of whom are bound by an
employment contract. The loss of key management or technical personnel
could adversely affect the Company. The Company believes that its
future success will depend in large part upon its continuing ability to
attract and retain highly skilled managerial, sales and marketing,
technical support and research and development personnel. Like other
software companies, the Company faces intense competition for such
personnel, and the Company has at times experienced and continues to
experience difficulty in recruiting qualified personnel. There can be
no assurance that the Company will be successful in attracting,
assimilating and retaining additional qualified personnel in the future.
The loss of the services of one or more of the Company's key
individuals, or the failure to attract and retain additional qualified
personnel, could have a material adverse effect on the Company's
business, operating results and financial condition.
Limited Protection of Proprietary Technology; Risks of Infringement; Use
of Licensed Technology
The Company relies primarily on a combination of copyright, trademark
and trade secret laws, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company licenses its
software products primarily under license agreements. There can be no
assurance that others will not develop technologies that are similar or
superior to the Company's technology or design around the copyrights and
trade secrets owned by the Company. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that
the Company regards as proprietary. Policing unauthorized use of the
Company's products is difficult, and although the Company is unable to
determine the extent to which piracy of its software products exists,
software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the U.S.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties
will not claim infringement by the Company of their intellectual
property rights. The Company expects that software product developers
increasingly will be subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products indifferent 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. 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 which could materially adversely affect the Company's
business, operating results and financial condition.
Product Liability
Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential
product liability claims, it is possible that such limitation of
liability provisions may not be effective as a result of existing or
future laws or unfavorable judicial decisions. The Company has not
experienced any material product liability claims to date; however, the
sale and support of the Company's products may entail the risks of such
claims, which may be substantial in light of the use of the Company's
products in business-critical applications. A successful product
liability claim brought against the Company could have a material
adverse effect on the Company's business, operating results and
financial condition.
Net Revenues
The Company's software revenues increased 34% in the first quarter of
1998 to $3.4 million from $2.5 million in the first quarter of 1997, and
decreased 6% from $3.6 million in the fourth quarter of 1997. The
increase in revenue growth in 1998 compared to 1997 is due to increased
revenues from InputAccel. The decrease compared to fourth quarter of
1997 is attributed primarily to seasonality.
Gross Profit
Gross profit of $3 million for the first quarter of 1998 is up 26% from
$2.3 million for the first quarter of 1997 and down 10% from $3.3
million in the fourth quarter of 1997. The differences are primarily due
to revenue fluctuations, though gross margin for the most recent quarter
of 87% is down from 93% for the same period last year largely due to the
percentage of revenues derived from software maintenance and
professional services, which have lower margins than revenues from
product licensing. The Company expects revenues from maintenance and
services to continue to increase as a percentage of overall revenues
Sales and Marketing
Sales and marketing expenses increased 36% to $1.5 million in the first
quarter of 1998 from $1.1 million in the first quarter of 1997. The
Company expects that sales and marketing expenses will increase in the
future, in absolute terms, as the Company continues to expand sales and
marketing programs related to new software products.
Research and Development
Research and development expenses decreased 9% to $1.1 million in the
first quarter of 1998 from $1.2 million in the first quarter of 1997.
The decrease in spending from 1997 is attributable to a non-recurring
purchase of technology of $240,000 in the first quarter of 1997. Current
staffing levels exceed those of prior periods. The Company believes
that continued investment in research and development is critical to its
future growth and will continue to commit substantial resources to this
area. As a result, quarterly research and development expenses are
likely to increase during 1998.
General and Administrative
General and administrative expenses in the first quarter of 1998 were
essentially unchanged from the first quarter in 1997 at $509,000.
General and administrative expenses have decreased as a percentage of
revenues from 20% in the first quarter of 1997 to 15% in the first
quarter of 1998, the decrease being primarily attributable to increased
revenue levels. Certain G&A expenses have, to date, been absorbed by the
display division. Accordingly, the Company expects general and
administrative expenses to increase in succeeding future periods.
Divestiture
The pending sale of the display division resulted in a net loss of $2.6
million, or 41 cents per share. This charge includes a loss from
display division operations in the first quarter, net of tax benefit, of
$361,000. In addition, it includes an estimated loss of $2.3 million,
net of tax benefit, on the sale of the net assets of the display
division. This loss includes expenses related to the pending
transaction and a reduction in value of certain inventory which is not
strategic to the new display business.
Benefit (Provision) for Income Taxes
The benefit (provision) for federal and state income taxes as a
percentage of pretax income from operations was 30% and 34% for the
first quarter of 1998 and 1997, respectively. In addition, a tax benefit
related of 40% was netted against the estimated losses on the sale of
the display division.
Liquidity and Capital Resources
At March 31, 1998, the Company had cash and cash equivalents of $12.1
million, compared to $12.3 million at December 31, 1997. At March 31,
1998, the Company had a line of credit that provides for the issuance of
commercial and standby letters of credit up to $15 million. At March
31, 1997, one such letter credit securing inventory purchases totaling
$6.5 million was outstanding under this agreement. The agreement
expires July 1, 1999.
Net cash provided by operating activities was $2.1 million in the first
quarter of 1998 compared to $4.7 million in the first quarter of 1997.
Net cash used in investing activities, exclusively additions to property
and equipment, was $54,000 for the first quarter of 1998, compared to
$435,000 in the first quarter of 1997.
On February 14, 1997, the Company's Board of Directors authorized the
use of up to $5 million.million to repurchase the Company's common stock. This
amount was increased to $15 million on Sept 17, 1997. The repurchased
stock is expected to be held by the Company as treasury stock to be used
to meet the Company's obligations under its stock plans and for other
corporate purposes. Purchases will be made from time-to-time on the
open market or in privately negotiated transactions. The timing and
volume of purchases will be dependent upon market conditions and other
factors. The Company intends to use cash on hand to fund its purchases.
During the ninethree month period ended September 30, 1997,March 31, 1998, the Company
repurchased 617,800443,500 shares at an average cost per share of $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.
9. 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 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 statements 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-
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, 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 1997 revenues were lower
than fourth quarter 1996 revenues. The Company expects this
trend to 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-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 market for the Company's display subsystems has become
very competitive in recent quarters and 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 19.7% to $21.4 million
in the third quarter of 1997 from $26.7 million in the third
quarter of 1996. For the nine months ended September 30,
1997, net revenues increased 2.4% to $68.7 million over
revenues of $67.1 million in the nine months ended 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 decreased 9.9% to $7.6 million in the third
quarter of 1997 from $8.4 million in the third quarter of
1996. For the nine months ended September 30, 1997 gross
profit increased 19.1% to $24.6 million from gross profit of
$20.6 million for the nine months ended September 30, 1996.
The gross margin was 35.2% and 31.4% for the third quarter of
1997 and 1996, respectively, and was 35.8% and 30.8% for the
nine months ended September 30, 1997 and 1996, respectively.
The increase in gross profit for the first nine months of
1997 relates primarily to increased software revenues. Sales
of higher margin software products and decreased display
component costs caused an increase in the gross margin in
1997. Management expects gross margins to decline somewhat
compared with the first nine months of 1997.
Sales and Marketing
Sales and marketing expenses increased 12.5% to $4.5 million
in the third quarter of 1997 from $4.0 million in the third
quarter of 1996 and for the nine months ended September 30,
1997, increased 18.2% to $13.7 million over $11.6 million for
the nine months ended September 30, 1996. Sales and marketing
expenses have increased as a percentage of revenue from 17.3%
for the nine months ended September 30, 1996 to 20.0% for the
same period in 1997. The increase in 1997 as a percentage of
revenue is attributable to an increase in staffing associated
with an expansion of the Company's software division sales
organization and increased marketing and promotional expenses
for the display division.
The Company expects that sales and marketing expenses will
continue to increase in the future, as the Company continues
to expand programs related to it's software products.
Research and Development
Research and development expenses decreased 27.2% to $1.8
million in the third quarter of 1997 from $2.5 million in the
third quarter of 1996 and for the nine months ended September
30, 1997, decreased 15.6% to $6.1 million from $7.3 million
for the nine months ended September 30, 1996. The decreases
were primarily due to staffing reductions in the display
engineering group related to a change in product design
processes.
The Company believes that continued investment in research
and development is critical to its future growth and will
continue to commit substantial resources to this area.
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 nine months ended September
30, 1997, increased 1.6% to $4.0 million from $4.0 million
for the nine months ended September 30, 1996. General and
administrative expenses increased as a percentage of revenues
from 4.7% in the third quarter of 1996 to 6.1% in the third
quarter of 1997.
Restructuring Charge
In the first quarter of 1996 the company recorded a one-time
$1.4 million restructuring charge related to its decision to
cancel its PrintAccel product line. This amount includes
$1.1 million for prepaid royalties, committed payment 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 was $61,000 in the third quarter of 1997,
compared to $10,000 in the third quarter of 1996. Other
income for the nine month period ended September 30, 1997
increased 424.8% to $677,000 from $129,000 for the nine month
period ended September 30, 1997. The increase is the result
of net foreign exchange gains in 1997 of approximately $.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.
Provision (Benefit) for Income Taxes
The Company's effective income tax rate as a percentage of
pretax income was 34.9% and 30.0% for the nine month periods
ended September 30, 1996 and 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
Comprehensive 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 non-
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 Resources
At September 30, 1997, the Company had cash and marketable
securities of approximately $6.9 million, a decrease from
$18.5 million at December 31, 1996, and working capital
totaling $32.1 million, and decrease of $2.9 million since
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 September 30, 1997, the company 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 September 30,1997, one such letter of credit
securing inventory purchases totaling approximately $6.7
million
(800 million yen) was outstanding under the agreement.
Additions to property and equipment were $1.2 million and
$816,000 for the first nine months of 1997 and 1996,
respectively. Net cash used in investing activities was $1.2
million for the first nine months of 1997, compared to $6.5
million in the first nine 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 nine month
period ended September 30, 1997, the Company repurchased
617,800 shares at an average cost per share of $6.51.$5.27.
The Company believes that its cash and cash equivalents, together with
cash flows from operations will be sufficient to meet the Company's
liquidity and capital requirements for the next 12 months. The Company
may, however, seek additional equity or debt financing to fund further
expansion. The timing and amount of such capital requirements cannot be
precisely determined at this time and will depend on a number of
factors, including demand for the Company '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 wouldwill be available at all or that it, if available, such financing wouldwill be
availableobtainable on terms favorable to the Company.Company and would not be dilutive.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -
Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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: November 11,1997May 15,1998 /s/ John Finegan
------------------------------
John Finegan
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Description
- - --------- ------------------------------------------------------------
11.1 Statement of Computation of Earnings per Share
27 Financial Data Schedule